If the UK leaves the EU without a deal, the way that interest, royalties and dividends are paid between UK and EU companies may change, HMRC has warned.
Under UK domestic law and existing double taxation agreements with EU member states, firms may be able to claim full or partial exemption, or claim back some or all of the tax paid. The EU Interest and Royalties Directive (IRD) allows EU companies to make certain interest and royalties payments to associated companies and permanent establishments within the EU without needing to deduct tax from them.
However If the UK leaves the EU without a deal, from 11pm on 29 March 2019, the IRD will no longer apply to the UK, said HMRC.
If the UK leaves the EU without a deal, some EU member states may start to deduct tax from interest and royalty payments that used to be exempt under the IRD. The amount of tax deducted will depend on the double taxation agreement (DTA) between the UK and the EU member state.
HMRC advised firms to check the terms of the DTA between the UK and the EU country where the person paying the interest or royalties is resident.
The government department also warned of changes to payments from the UK.
UK companies, and EU companies that have a permanent establishment in the UK, who make payments of interest and royalties to associated companies in the EU will not need to start deducting tax from these payments.
This is because sections 757 to 767 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) allows an exemption for these payments. This legislation will continue to apply if the UK leaves the EU without a deal.
For payments of interest this exemption is not automatic. A person receiving interest payments will need to apply for the exemption by filling in an EU Interest and Royalties form.
Additionally it added UK companies that pay royalties will still be able to make these payments without deducting tax from the m if they reasonably believe that the payment is exempt under section 758 ITTOIA.
For a full list of changes visit the HMRC website.