Relocation to other EU member states is a key Brexit question for companies and employees, particularly in the banking, financial and insurance sectors. In these and other highly regulated sectors, Brexit will end the automatic right of UK-based operators to distribute products and services freely across the EU.
Relocation is taking place both physically and legally. UK-based employees are in the process of transferring their residence to countries where they are entitled to operate, such as Germany, France, Luxembourg, Belgium or Ireland. At the same time, UK company branches established in European countries are being converted into branches of companies domiciled in EU member states other than the UK. This means employees located in these branches will move from one legal entity to another, while remaining resident of the same country.
These ongoing movements raise two types of tax issues.
1. How to qualify legally the transfer of employees from an entity to another. Should it be considered for tax purposes as the sale of the UK business, which would involve a price to be paid to the UK company?
2. Which is the right country to establish, from a tax standpoint?
Tax attractiveness is a key factor in Brexit relocation.
France, Germany and Luxembourg are often considered as potential post-Brexit locations, and each country has taken steps to appeal to UK companies in the banking, financial and insurance sectors.
Germany’s tax rates are not particularly low. Its attractiveness from a tax standpoint therefore lies in the various allowances available to reduce the tax basis. For companies, the business profits tax rate ranges between 30% and 32%, depending on the municipality where the company pays its trade tax (Gewerbesteuer).
But this high tax rate may only apply to a small portion of a company’s profit, and the tax basis can be reduced through various allowances, including:
For individuals, Germany’s tax rates are relatively high, with a progressively increasing tax rate that reaches around 47.5 % (including the solidarity surcharge). This scale is comparable to French rates and, as in France, financial income (income, dividends, capital gains) benefits from flat rate taxation of around 26.4%. Unlike France, however, Germany has no incentive regime for inpatriates.
Germany’s tax attractiveness is not based on its taxation rates. Its advantages lie in the security and the stability of its rules, and various possibilities for companies to reduce their tax basis, particularly in the financial and insurance industries.