The immediate impact of Brexit to United States businesses with United Kingdom operations has been a large drop in the global equity markets and an approximate 12% devaluation of the British Pound sterling against the U.S. dollar. However, from a tax perspective, the impact of Brexit remains very uncertain and will take a longer period for U.S. businesses to see the impact, as there will be at least a two-year process for the U.K. to fully exit the European Union.
One of the EU’s primary functions is to serve as a free trade zone for its member nations. Now that the U.K. is set to leave, companies importing and exporting in and out of the U.K. to other EU members could see increased customs and duties, since the U.K. is no longer a member of the EU. During the transition period, the U.K. could enter into new free trade agreements that could soften this impact, but nothing is guaranteed in regards to this. U.S. companies with existing U.K. distribution entities, or ones contemplating such structures, should watch closely as these issues are addressed.
From an income tax perspective, Brexit could bring both benefits and costs to U.S. businesses with U.K. operations.
From an income tax perspective, Brexit could bring both benefits and costs to U.S. businesses with U.K. operations. One potential benefit of Brexit is that the U.K. will no longer be bound by EU regulations when putting new tax legislation in place. While it was a member of the EU, the U.K. was required to amend its group relief rules and controlled foreign company rules, as they were deemed to be noncompliant by the Court of Justice of the European Union. Now, the U.K. could look to revise its tax law in an effort to make its tax system even more competitive to generate additional foreign investment. Such revisions could apply to corporate tax structures as well as incentivize wealthy individuals to take up U.K. tax residency. This, in turn, could reduce a U.S. business’s global tax expense if the U.K. were to make its tax system friendlier.
U.S. businesses with a U.K. holding company structure could find some significant costs as a result of Brexit. When the U.K. was a member of the EU, companies residing there could rely on the EU parent-subsidiary directive to mitigate local country withholding tax on dividends from companies resident in other EU member countries. Now, with Brexit, this directive cannot be used, thus U.K. companies could face increased local country withholding tax on distributions from subsidiaries in EU member countries. Similar to the potential for new free trade agreements, the U.K. could look to revise its treaties with former EU members to achieve lower withholding rates, but that also remains to be seen.
The only certainty with Brexit is that the U.K. will no longer be part of the EU. Whether the U.K. looks to enter in free trade agreements and new income tax treaties with its former EU members should be continually monitored by U.S. businesses to gauge the tax impact of Brexit. With all of this uncertainty, it’s important for U.S. businesses with U.K. operations to review their tax structure and transaction flows to understand how these various changes could impact their bottom line and begin planning for the change.