On June 23, 2016, the British voted in a referendum on the United Kingdom’s exit from the European Union (EU) and ratified the famous “Brexit”. Although the official exit of the United Kingdom was recorded on January 31, 2020, European law continued to apply in the United Kingdom during the transition period which ended on December 31, 2020 following the conclusion of an exit agreement.
We briefly outline the main tax consequences for companies below.
Effects on the funding of Research and Development
Research expenditure subcontracted to an approved British research organization is no longer eligible for the research tax credit (CIR) since 1 January 2021. Indeed, since its release, the United Kingdom has been assimilated to a third country. However, to be taken into account in the calculation of the CIR, the subcontracting expenses must have been incurred by public or private service providers established in France, in the EU or in the European Economic Area (EEA).
Consequences of exiting the Single Market in terms of customs and VAT
The achievement of the Single Market implies in particular, from a fiscal point of view, the disappearance of fiscal borders within the EU.
If under the terms of the Exit Agreement customs duties are prohibited on goods originating in the EU or the UK, formalities will have to be completed by companies trading with the UK.
Indeed, transactions carried out with British companies will be considered as being carried out with a third country. Consequently, they will no longer be intra-Community transactions but imports or exports. This change involves in practice filing declarations with French customs.
On export, it will be necessary to justify the exemption of French VAT;
On importation, French VAT should be calculated and paid.
As such, British companies without a permanent establishment in France will not be required to appoint a tax representative to perform their obligations, which will be managed by the non-resident service.
Companies coming under the French VAT mini-counter
The VAT mini-counter (MOSS) system concerns taxable persons who provide electronic services, telecommunication services and radio and television broadcasting services within the EU to private customers. As these services are subject to VAT in the Member State where the consumer is established, the mini-counter has been set up to allow service providers not to register for VAT in each Member State of consumption.
Companies using the mini-counter will therefore have to declare and pay VAT on services taxable in the United Kingdom carried out from 1 January 2021. VAT due on services provided before December 31, 2020 had to be declared via the French MOSS before January 20, 2021..
Steps with the British authorities
French businesses carrying out transactions subject to VAT in the UK will need to register with the UK tax authorities in order to declare and pay VAT. These procedures will require having an agent on site in charge of VAT declarations or having a minimum presence to carry them out. French companies will have to be careful to limit their presence and not make any significant changes to their business plan so as not to constitute a permanent establishment taxable in the United Kingdom.
Modification of the tax regime for distributed dividends …
… From the United Kingdom to France…
A French company can benefit from the so-called “mother-daughter” regime which provides for the exemption of dividends received from its subsidiaries, subject to taxation of a share of costs and charges equal to 5% of the amount of dividends received. This system makes it possible to tax a dividend at a reduced effective rate (1.4% in 2020 and 1.325% in 2021).
As this regime is not conditional on the establishment of the distributing subsidiary in the EU, French parent companies are not deprived of the exemption due to Brexit. However, this share is reduced at the rate of 1% when the distributing subsidiary is established in the EU and subject to a tax equivalent to French corporation tax and if the parent and the subsidiary meet the conditions which would allow them to be consolidated for tax purposes if the subsidiary was established in France.
Due to Brexit, dividends paid by a UK company will be deemed to come from a company not established in the EU and will no longer be able to benefit from the reduction in the quota.
… And from France to the United Kingdom
French law provides for an exemption from withholding tax on dividends from French sources when a beneficiary entity established in the EU or EEA holds 10% of a French distributing company. The exemption can also be obtained when the beneficiary company owns 5% of the distributor and is unable to charge the withholding tax in its State of residence, which is very frequent. Before Brexit, this exemption applied to distributions of dividends from French sources to the United Kingdom, subject to meeting these threshold conditions, since the United Kingdom was located in the EU.
When the exemption could not be obtained, it was advisable to rely on the tax treaty concluded between France and the United Kingdom which provides that if the French distributor company is owned directly or indirectly at less than 10% by the company British, the rate of withholding may not exceed 15%. The agreement also provides that if the French distributor company is owned directly or indirectly more than 10% by the British company, withholding tax is not applicable. Consequently, whether under French law or under the convention, holding 10% made it possible to obtain an exemption from withholding tax.
The advantage of the French provisions was to allow an exemption to be obtained when the beneficiary held only 5% of the distributor. Due to Brexit, in the event of a holding between 5 and 10%, the distribution of dividends is no longer exempt since, in application of the agreement, a holding of less than 10% implies withholding at source of 15%.
The termination of groups of companies including a UK company
The tax consolidation regime allows a parent company to constitute itself solely liable for corporation tax for the entire group that it forms with its subsidiaries or with its sister companies. Under this regime, it is possible to set up a horizontal group between subsidiaries, sisters or cousins on condition that they are at least 95% owned by a foreign parent entity or through the intermediary of foreign companies. Foreign companies, whether parent or intermediary, must be established in an EU or EEA member state.
The exit from the United Kingdom on December 31, 2020 therefore implies the termination of certain tax consolidation groups which have a parent and / or intermediary company established in the United Kingdom. However, the tax administration had specified that foreign entities were deemed to meet the eligibility conditions during the fiscal year ended December 31, 2020 or in progress on that date and invited the groups to reclassify securities.