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Spotlight On: Brexit changes to loans and dividends between the UK and EU

Do you need to review any loans with EU group companies, or consider paying dividends from EU subsidiaries, as a result of Brexit? Our Corporate Tax partner, Heather Self, summarises the key points to watch out for.

Interest and dividends between EU and UK companies can usually be paid without any withholding tax costs, under an EU directive. This will cease to apply on 1 January 2021 when the UK’s transitional period ends, following Brexit.

Payments within a UK/EU group may therefore suffer tax after this date. This will usually be a timing difference on interest payments (as generally the withholding tax can be reclaimed by the recipient) but for dividends paid to a UK parent, it will be a permanent additional tax cost in most cases.

There are two relevant cases:

  1. Loan from the UK to an EU group company: the EU company may have to withhold tax from interest payments.
  2. Dividends from an EU subsidiary to a UK parent: there may be a withholding tax cost from 1 January 2021.

For payments by a UK company, there is no withholding tax on dividends regardless of the location of the recipient. For interest payments, a UK company can continue to make interest payments to EU group companies without withholding tax, provided HM Revenue & Customs (HMRC) have given clearance on the loan.

What should you do next?

If you have loans to or from the EU, you should establish if a Treaty claim is required to reduce or eliminate withholding taxes after 1 January 2021. A Treaty application can take time to process so it may be necessary to defer payments of interest in 2021 until the clearance has been granted.

If you have EU subsidiaries which have sufficient surplus profits to pay a dividend to the UK parent before 31 December 2020, then doing so may result in a tax saving. It will be important to consider the local company law to ensure the distribution can be made by the subsidiary.

Would you like to know more?

If you would like to discuss any of the above guidance, please get in touch with your usual Blick Rothenberg contact or with Heather using the contact details on this page.