As of 1 January 2021, the UK leaves the EU/EEA and becomes a third state instead of a Member State. Brexit will certainly have a significant impact on Belgian companies who regularly do business with counterparts in the UK. Most importantly, the UK will no longer apply the EU Directives once the transition period under the Withdrawal Agreement comes to an end but the Belgium-UK double tax treaty (DTT) continues to apply. However, the treatment of dividend, interest and royalty payments will ultimately depend on the existing domestic UK and Belgium tax law. Hereinafter, we will list the key tax implications of Brexit for Belgian income tax law.
When a Belgian subsidiary pays a dividend to its UK parent company, the Belgian withholding tax (WHT) exemption on dividend distributions will continue to apply if the cumulative conditions of a minimum holding period of one year and the minimum shareholding of 10% are met. Post-Brexit, the UK will no longer be able to apply the Parent-Subsidiary Directive. In transposing the Parent-Subsidiary Directive into its national law, Belgium extended the application to the Belgium-UK DTT which includes a clause for the exchange of information. Therefore, dividends distribution from Belgium to the UK should still be eligible for the 100% Belgian dividend participation exemption (assuming that the conditions are met).
Conversely, when the dividend is distributed by a UK subsidiary to its Belgian parent company, the impact is also non-existent since there is (currently) no dividend WHT in the UK. According to Belgian tax law, a 100% participation exemption (DRD deduction) generally applies to dividends paid by a UK subsidiary to its Belgian parent company. The distribution is not required to be from an EEA/EU company. However, it is important to consider that when dividends are received from the UK (as a non-EEA country), the DRD regime can still be applied on the taxable profits, but not on so-called disallowed expenses listed exhaustively in Article 205, § 2 ITC (e.g. restaurant costs, non-deductible gifts, fines, costs relating to capital losses on vehicles, reception costs, etc). The portion of the DRD that is subject to the deduction restriction can be added to the amount of the transferable DRD to subsequent tax periods.
Interest and royalty payments
Unlike the Parent-Subsidiary Directive, the Interest-Royalty Directive – when transposed into Belgian law – was not extended to a conditional exemption for treaty countries (outside the EU). If the DTT does not provide exemptions, either a 30% Belgian WHT or a 20% UK WHT will, in principle, be levied at source. However, in many cases, a reduced WHT according to the Belgium-UK DTT may apply. For instance, a reduced 10% WHT of the gross amount of the interest may apply if the beneficial owner of the interest payments is a resident of the UK (article 11(2) of the Belgium-UK DTT). Moreover, royalties distributed by a UK company to a Belgian company may only be taxed in Belgium. This implies that even after Brexit, a WHT exemption can still be applied to royalty payments, even if there is a WHT in the UK under internal law. Consequently, as the DDT continues to apply post-Brexit, the taxation of interest or royalties granted from the UK will not change.
Brexit does not affect the tax treatment of capital gains realised by UK residents on shareholdings in Belgian companies. Also, the 100% exemption on capital gains from the sale of shares in UK resident companies made by Belgian resident companies should, in principle, continue as long as the Belgian dividend participation exemption conditions are satisfied (assuming that the UK does not become a low-tax jurisdiction).
The UK will be considered an EU Member State for the relevant transactions and transfers that are published no later than 31 December 2020 in the Belgian Official Gazette. Post-Brexit, it will be impossible to invoke the legal framework in view of a tax-neutral restructuring in the Merger Directive for cross-border reorganisations (e.g. mergers, other reorganisations, transfers of residence, etc) when a UK company is involved. For incoming transactions (from the UK to Belgium), the UK’s national legislation remains in principle unchanged. Transactions and transfers involving a UK company relocating to Belgium, which are announced in the Belgian Official Gazette by 31 December 2020 at the latest, are tax exempt. For outgoing transactions (from Belgium to the UK), the exemption from an exit tax on capital gains will in principle no longer be applicable. The tax neutral regime in Belgium only applies to interactions with intra-European companies (i.e. every company of an EU Member State). The transfer of residence and other similar transactions (transfer of assets from branch to foreign head office, etc) to the UK implies the immediate levy of an exit tax. Consequently, the relocation of a registered office from Belgium to the UK cancels the facility to defer taxation, and an immediate levy may occur.
Other relevant tax implications
The qualification of the UK as a non-EU/EEA Member State will result in the following implications:
1. UK parent companies with Belgian subsidiaries/permanent establishments will in principle no longer make use of the group contribution regime between its subsidiaries/permanent establishments because the parent (UK company) is no longer part of the EEA. Group contributions are only possible between affiliated companies, i.e., between parent companies and subsidiaries with a direct participation of at least 90% or between sisters with the same parent company established in Belgium or the EEA and where the parent company has a direct participation of at least 90% in the capital of both sisters. The qualification of the UK as a non-EU/EEA Member State might determine an interruption of the existing fiscal units with potential adverse consequences for the companies involved. However, based on a recent answer of the Belgian minister of Finance, the application can be extended to non-EEA parent companies if the parent company is located in a country with which Belgium has a double taxation treaty with a non-discrimination clause, like is the case of the UK-Belgian double taxation treaty.
2. A Belgian company with a permanent establishment in the UK will no longer be eligible to make the final offset of losses in Belgium.
The non-EEA/EU membership of the UK may also be important for other tax provisions; for instance, the deferred tax regime and the conditions of applications of the tax shelter regime.
Finally, it is worthwhile noting that the Belgian law of 21 February 2020 contains various specific and useful transitional provisions, but also a flexibility in terms of future Brexit developments and agreements until 31 December 2020.