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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?

Key contacts

Contact
Sylvie Le Tanneur
Sylvie Le Tanneur
Counsel
T +33 1 47 38 55 00
Tobias Schneider
Tobias Schneider, Dipl.-Finanzwirt (FH)
Partner
Tax Adviser
T +49 711 9764 885

Potential impact of Brexit on the EU’s domestic tax laws

The UK’s withdrawal from the EU has multiple consequences for domestic tax rules, depending on the location of a person, a legal entity or an investment. For now, however, it is impossible to assess all these consequences, country by country.

Given ongoing uncertainty over the exact timing of Brexit and the content of the withdrawal deal, only a few European countries have passed legal provisions to temporarily deal with the consequences of a possible no-deal Brexit. In Belgium, a Brexit Act was passed on 28 March 2019 containing measures in various fields, including economic, social and environmental. On tax, it provides that the UK will be assimilated until 31 December 2019 as a member state of the European Union. EU Directives will therefore remain applicable until that date. In France, several measures included in the Finance Act for 2019 provide for this assimilation for an interim period. But that is the extent of the provisions for now.

On VAT, the EU member states have made some progress. On 27 March 2019, the European Commission VAT Committee issued a working paper describing interim measures for the application of VAT, that should apply in the event of a no-deal withdrawal by the UK. The EC indicated that the 28 EU member states “almost unanimously” agreed to these measures.

Income taxes are a different story. For the time being, it appears that each member state would rather play its own game. In that context, a general overview of the current situation of several EU countries – in terms of corporate income tax, personal income tax and patrimonial taxation – is helpful in identifying the pros and cons of a relocation choice.

This analysis shows that while there is tax competition between the member states, there is a tendency towards the convergence of tax rates.

Tax competitivity for employers and employees chart

The chart compares France, Germany, Luxembourg, Belgium, the Netherlands, Italy and Spain against four general tax-related decision-making criteria for companies: CIT rates; specific taxation of financial income; the possibility of deducting amortisation of goodwill; and the existence of a large tax consolidation regime, including the possibility to form a fiscal unity between sister companies when their ultimate parent company is established in an EU member state.

Key observations include:

  • on CIT, there is a general trend to reduce the rate towards a standard level of around 25 %. Luxembourg, Belgium and Spain are leading the way.
  • financial income is basically taxed in the same manner in each country.
  • amortisation is allowed in all the countries except France, but at very variable rates.
  • tax consolidation exists in all countries. However, in Germany, it is only open to groups with a vertical holding chain, whereas in the other countries, it includes the possibility of horizontal ones, i.e. between sister companies held by the same parent company located in another EU member state

This analysis shows that while there is tax competition between the member states, there is a tendency towards the convergence of tax rates.

[The chart] shows that there are still some disparities between countries. All the countries have quite a high level of taxation for individuals. 

Tax competitivity for employers and employees chart

The second chart provides an overview of the taxation of individuals under four important tax criteria: the personal income tax rate; the existence of a wealth tax; the specific taxation of financial income; and the existence of an incentive regime for inpatriates.

It shows that there are still some disparities between countries. All the countries have quite a high level of taxation for individuals. France has the highest rate because social contributions at the flat rate of 17.2% are added to the progressive rate of taxation.

Most of the countries have abolished wealth tax. It still applies in France – on real estate property – and in Spain, but not in all the autonomous regions.

Financial incomes often benefit from a reduced rate of taxation or from specific exemptions.

An incentive inpatriate regime exists in almost all the countries, except Germany. The content of these regimes varies from a country to country. A common feature is the exemption of foreign-source income for a certain period.

Key contacts

Sylvie Le Tanneur
Sylvie Le Tanneur
Counsel
T +33 1 47 38 55 00
Tobias Schneider
Tobias Schneider, Dipl.-Finanzwirt (FH)
Partner
Tax Adviser
T +49 711 9764 885