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BREXIT: EU exit would have tax implications for UK businesses with German operations, says expert

Out-Law Analysis | 07 Jul 2016 | 12:39 pm | 1 min. read

FOCUS: There are several tax implications to the UK leaving the EU that could lead to increased costs for UK groups operating in Germany. 

This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.

The Parent-Subsidiary Directive currently allows a German subsidiary to pay dividends to a UK parent without paying the 25% withholding tax that Germany imposes on the payment of dividends.

Once the UK leaves the EU, however, UK groups operating in Germany will need to rely on the UK / German double tax treaty that reduces the tax to 5% if the beneficial owner is a company that directly holds at least 10% of the company paying the dividend.

Since dividends paid by a German subsidiary to a UK parent are currently exempt, this would bring an extra cost after Brexit.

On the plus side, the double tax treaty covers all interest and royalties. This will prevent any extra costs due to the fact that the EU Interest and Royalties Directive will not apply after the UK leaves the EU.

UK limited partnerships and limited liability partnerships that have their 'place of management' in Germany may no longer be recognised as valid corporate vehicles in the country, and may be hit with an exit tax.

Exit taxes are also applied when a German individual moves their tax residence to the UK. At the moment this is deferred because the UK is a member of the EU, but if the UK leaves then Germany may withdraw this. Past migrants could be asked to pay their deferred exit taxes immediately, and no deferral will be available for post-Brexit moves.

The UK currently qualifies as a 'low tax' region under the German Foreign Tax Act. If the UK leaves the EU, UK investments could lose tax privileges, and German parents of UK subsidiaries would see their 'passive' income taxed as a direct investment.

Finally, leaving the EU would also mean that UK companies are unable to take advantage of the EU Merger Directive and the German Reorganisation Tax Act. This could lead to a partial claw back of tax from UK parent companies in relation to previously tax exempt merger activities that took place in the seven years before the UK left the EU.

The last four issues mentioned above would not arise if the UK, after leaving the EU, seamlessly became a member of the European Economic Area.

Werner Geisselmeier is a German tax expert with Pinsent Masons, the law firm behind Out-Law.com.