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.
Luxembourg has a well-established reputation as a leading financial centre and is therefore a natural candidate for financial companies weighing their Brexit options. The jurisdiction offers advantageous tax measures to financial companies and their employees.
At around 25%, the global CIT (corporate interest tax) rate is already quite low compared to other countries. The tax basis includes several exemptions and tax deductions, specifically for financial companies. For example, financial institutions may deduct provisions to cover the risk of default on certain categories of assets, or against loans where no specific or foreseeable risk – other than credit risk – is involved. Goodwill can be amortised over a relatively short period of 10 years.
Another significant example is that Luxembourg decided to exclude financial institutions and insurance companies from the scope of the rule limiting interest deductibility following transposition into domestic law of the EU Anti-tax Avoidance Directive (ATAD). This is not the case for France or Germany.
As in other EU jurisdictions, income tax applies at progressive rates up to a maximum of 42%. However, exemptions apply to financial income. Up to half the value of dividends are exempt under certain conditions. Capital gains on non-substantial participation are exempt, if held for more than six months.
For individuals moving to Luxembourg, advantageous provisions allow the employer to bear a large range of the employee’s relocation costs without any tax impact. These costs – which include moving costs, housing, travel and children’s education – are not considered to be taxable income for the employee. The regime applies only to “highly skilled and qualified workers” which requires the employee to have a higher education diploma or a minimum of five years’ specialist work experience.
Overall, Luxembourg’s tax offer is quite attractive for financial institutions seeking a post-Brexit location.