The effect of Brexit on the application of the EU direct tax directives by Paolo Arginelli

Paolo Arginelli, contributing author to Bloomsbury Professional’s forthcoming Tax Implications of Brexit, looks at the possible consequences of UK companies losing the right to benefit from EU direct tax directives.

One of the main achievements of the EU, from a direct tax perspective, has been the adoption of the Parent-Subsidiary Directive (Council Directive 2011/96/EU of 30 November 2011), the Interest and Royalty Directive (Council Directive 2003/49/EC of 3 June 2003) and, although to a lesser extent, the Merger Directive (Council Directive 2009/133/EC of 19 October 2009).

In particular, the first two directives allow the inter-company payment of dividends, interest and royalties without source taxation and, in the case of the Parent-Subsidiary Directive, the elimination of economic double taxation at the level of the parent company. These directives permit multinational groups operating in Europe to plan a tax-efficient inter-company cash flow, so that profits and cash can be moved upstream to the top holding (or finance) company of the EU (sub)group, without bearing an excessive tax burden, and be reinvested in the other EU companies requiring financial resources to carry on their businesses. The cash in excess, at the level of the EU (sub)group, may be paid to the non-EU companies of the group, or distributed to the shareholders. In this respect, the location of EU (sub)group top-holding (or finance) companies is generally selected on the basis of a plurality of factors, among which two relevant tax features are:

(a) the access to the benefits of the above-mentioned EU direct tax directives, and

(b) the possibility to pay dividends, interest and royalties to non-EU resident persons with no, or low, withholding tax at source, either under domestic law or through the application of tax treaties.

For the United Kingdom, Brexit is expected to change this pattern, in particular with regard to (a) above. Indeed, the EU direct tax directives apply only to ‘companies of a Member State’, a technical term defined by the directives as referring to companies which:

(i)         take one of the forms listed in the relevant directive

(ii)        according to the tax laws of a Member State are considered to be resident in that Member State for tax purposes and, under the terms of a double taxation agreement concluded with a third State, is not considered to be resident for tax purposes outside the Union, and

(iii)       are subject to one of the taxes listed in the relevant directive, without the possibility of an option or of being exempt.

It is likely that, as a consequence of Brexit and unless a special arrangement is reached between the United Kingdom and the EU, the form lists ((i) above) and the tax lists ((iii) above) of the directives will be amended to expunge the UK forms and taxes. Furthermore, UK companies will not qualify in any case as ‘companies of a Member State’ as they will no longer be considered resident of a Member State for tax purposes. Thus, as a result of the Brexit, UK companies will probably lose the right to benefit from the EU direct tax directives. The practical effect could be a migration, in the next few years, of a number of top-holding (and finance) companies of European (sub)groups from the United Kingdom to other Member States.

The negative impact of losing the right to benefit from the EU direct tax directives will be lessened by the applicability erga omnes of the free movement of capital guaranteed by the Treaty on the Functioning of the European Union (TFEU), which, however, is subject to two caveats. On the one hand, the free movement of capital does not apply to transactions with third countries (ie non-EU Member States) where the relevant national (tax) legislation is intended to apply only to those shareholdings which enable the holder to exert a definite influence on a company’s decisions and to determine its activities. This is because such transactions fall within the scope of the freedom of establishment, which does not extend to third countries (see CJEU, 13 November 2012, case C-35/11, FII, p. 91). On the other hand, under article 64 of the TFEU, the free movement of capital is without prejudice to the application to third countries of any restrictions which existed on 31 December 1993 under national or Union law, adopted in respect of the movement of capital to or from third countries, involving direct investment establishment, the provision of financial services or the admission of securities to capital markets. In this respect, it will be necessary to establish how the latter exception applies to the unique case of a third country that, on 31 December 1993, was still a Member State.

Watch this space for more information about our forthcoming title ‘Tax Implications of Brexit’; General Editor: Nicola Saccardo, Partner at Maisto e Associati (London), an independent Italian law firm specialising in tax law ( Nicola can be contacted at

Written by Paolo Arginelli

Paulo Arginelli is Professor of European Union Tax Law and Corporate Tax Law, Università Cattolica del Sacro Cuore, Italy; Adjunct Postdoctoral Research Fellow, IBFD; of counsel, Maisto e Associati, Milan. He can be contacted at

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