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How can U.S. businesses begin preparing for the impact of Brexit?

June 29, 2016 Blog 2 min read

The immediate impact of Brexit to US businesses with UK operations has been a large drop in the global equity markets and an approximately 12 percent devaluation of the British Pound sterling against the US dollar.  From a tax perspective, however, the impact of Brexit remains very uncertain and will take a longer period for US businesses to see the impact as there will be at least a two-year process for the UK to fully exit the EU.

One of the European Union’s primary functions is to serve as a free trade zone for its member nations.  Now that the UK is set to leave, companies importing and exporting in and out of the UK to other EU members could see increased customs and duties since the UK is no longer a member of the EU.   During the transition period, the UK could enter into new free trade agreements that could soften this impact, but nothing is guaranteed in regards to this.  US companies with existing UK distribution entities, or contemplating such structures, should watch closely as these issues are addressed.

From an income tax perspective, Brexit could bring both benefits and costs to US businesses with UK operations.  One potential benefit of Brexit is that the UK will no longer be bound by EU regulations when putting in place new tax legislation.  While a member of the EU, the UK was required to amend its group relief rules and controlled foreign company rules as they were deemed to be non-compliant by the Court of Justice of the European Union.  The UK could now look to revise its tax law in an effort to make its tax system even more competitive in order to generate additional foreign investment.  Such revisions could apply to corporate tax structures as well as to incentivize wealthy individuals to take up UK tax residency.  This, in turn, could reduce a US business’ global tax expense if the UK were to make its tax system friendlier.

US businesses with a UK holding company structure could find some significant costs as a result of Brexit.  When the UK 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 UK companies could face increased local country withholding tax on distributions from subsidiaries in EU member countries.  Similarly to the potential for new free trade agreements, the UK could look to revise its treaties with its former EU members to achieve lower withholding rates, but that also remains to be seen.

The only certainty with Brexit is that the UK will no longer be part of the EU.  Whether the UK looks to enter in free trade agreements and new income tax treaties with its former EU members should be continually monitored by US businesses to gauge the tax impact of Brexit.  With all of this uncertainty, it is important for US businesses with UK 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.

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