On June 23, the United Kingdom (England, Scotland, Wales and Northern Ireland) held a referendum on whether to stay or leave the European Union. The majority of voters opted to leave, i.e., for Brexit. As a result, although there is no precedent about the mechanism for leaving the EU (Article 50 of the Treaty on European Union), some conclusions can be drawn to highlight the implications in the field of direct taxation for UK businesses carried-out in Italy.
A pillar of tax policy, in the form of secondary legislation, are European Directives. As a general rule, they are not directly applicable on the domestic legislation. However, each Member State is required to achieve results and objectives stated by these Directives, being free to decide how to implement the legislative tool. Brexit could lead to a quick erosion of their effects, as the application of Directives would no longer be required. As a result, the following would cease to be applicable:
On January 28, the European Commission published an anti-tax avoidance package to address certain 'base erosion and profit shifting' issues, to boost tax transparency and to create a level playing field for all businesses in the EU. Political agreement on the proposed directive was reached during the ECOFIN held on June 17, and formally approved on June 20 (subject to a 'silence procedure'). Consequently, on July 19 the Council Directive 2016/1164 of 12 July 2016 was published in the Official Journal of the EU. The Directive contains legally binding measures to fight tax avoidance and tackle harmful tax practices in the following areas: interest deduction, exit taxation, general anti-abuse rule, CFC legislation and hybrid mismatches. Specific rules shall be implemented by Member States before 31 December 2018. As a result of Brexit, the UK may decide to not implement the aforementioned measures into its domestic legislation, assuming that, by 2018, the withdrawal process is completed. Nonetheless, it will be regarded as a third country by the EU, unless some other agreement is reached. However, the UK could still be affected from such initiatives, given the broad and general Scope of the Directive "(…) including permanent establishments in one or more Member States of entities resident for tax purposes in a third country".
Withdrawal from the European Union would also affect UK entities with subsidiaries or permanent establishments in Italy, considering that several (and favourable) domestic rules are applicable only to EU Member States and EEA (European Economic Area) countries (these include the EU Member States plus Iceland, Liechtenstein and Norway). In case of UK entities without a permanent establishment in Italy, business income such as dividends, interest or royalties paid from an Italian entity would be subject to a final withholding tax, possibly reduced by treaty provisions. In case of UK entities with a permanent establishment in Italy, business income paid by an Italian company would be subject to (corporate income) tax in Italy as if it would have been paid to a resident company.
3.1 International aspects - following a summary on the main tax consequences by comparing the situation before and after the British exit from the European Union.
3.2 Horizontal tax unit regime - qualifying resident companies (as well as Italian permanent establishments of EU and EEA qualifying entities) may enter into a fiscal unit regime if they are held by a common parent company established in any EU Member State or qualifying EEA countries that have concluded an exchange of information agreement with Italy. As a result of Brexit, and in absence of further information about the possible association to the EEA, Italian subsidiaries (or Italian permanent establishments) of UK entities would no longer be allowed to opt for such preferential tax regime;
3.3 CFC legislation - CFC rules do not apply for foreign entities resident in EU Member States or qualifying EEA countries that have concluded an exchange of information agreement with Italy. As a result of Brexit, UK entities would no longer be automatically exempt from the Italian CFC legislation, given that the conditions set by law to third countries may apply;
3.4 Exit taxation - in compliance with EU tax law, resident companies may transfer their tax residence to others EU Member States or qualifying EEA countries, deferring the exit taxation until the underlying capital gain is realised. As a result of Brexit, the UK would no longer be a 'friendly' jurisdiction where to transfer tax residence, since no tax deferral or neutralization would be possible.
Brexit would have no direct impact on the tax treaties signed by the UK, since they are not based on EU membership. Italy entered into a Double Tax Convention with the UK (and Northern Ireland) to avoid double taxation on income and property. Treaty benefits are granted only to persons who are resident in Italy and/or in the UK (article 1) and taxes covered therein refer to personal and corporate income taxes (article 2). Further, a preventive determination of the 'residence state' of the person is requested for the purposes of the allocation of taxing rights between Italy and the UK (article 4).
Accordingly, given that a company (article 3) resident in the UK is entitled to treaty benefits, conventional withholding tax rates may apply if lower than domestic rates.
4.1 Treaty withholding tax rates and allocation of taxing rights - following a summary of the withholding tax rates applicable to items of income, such as dividends (article 10), interest (article 11) and royalties (art. 12), for payments made by Italian companies to UK entities doing business in Italy.
4.2 Allocation of taxing rights for other items of corporate income - as general information, the following summary provides an overview on the allocation rules between Italy and the UK, with reference to other relevant items of corporate income:
Transfer pricing adjustments are commonly made in respect of commercial and financial transactions, which differ from those which would be made between independent enterprises. Accordingly, under the current framework, to resolve disputes that may occur in relation to double taxation as a result of an upward adjustment of profits made by a tax administration ('Agenzia delle Entrate' in Italy or 'HM Revenue & Custom' in the UK), taxpayers may invoke:
As a result of Brexit, the UK would no longer be bound by the Code of Conduct for the implementation of the Arbitration Convention, which deals with "[...] EU transactions involved in triangular cases among Member States". Moreover, it is not clear whether the referendum result might lead to a prior termination of UK's adhesion to the EU Arbitral Convention, and, therefore, the potential consequences in case of dispute resolutions between taxpayers and tax administrations.
Consequences of the British exit from the European Union are highly uncertain. As many commentators have pointed-out, lots of different scenarios are possible depending on the status of the UK after the negotiations (and before its effective withdrawal) and on what the post-Brexit relationship between the UK and the EU would look like. For instance, is might create an important push for the independence of Scotland, Wales and/or Northern Ireland, which might decide to take advantage of the referendum result to declare independence from the UK and re-join the EU. Certainly, leaving the European Union will result in the disintegration of many rights and obligations imposed under the EU laws. In the field of direct taxation, the exemption to UK businesses on cross-border transactions (granted, under certain conditions, by secondary EU law) would automatically cease to apply. Consequently, the outcome of such transactions would be burdensome for UK businesses, given that the application of bilateral tax treaties rates may result in a less favourable treatment due to higher withholding taxes at source or even the complete absence of some protections (e.g. for mergers or exit taxation deferral), since the EU laws cover a much wider range of topics than bilateral treaties usually do.Back to Articles
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
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