Brexit – The United Kingdom Votes to Withdraw from the European Union

On June 23, 2016, the public of the United Kingdom voted in a referendum to decide whether the country should remain in the European Union or whether it should leave. In a result now known as "Brexit" that was surprising to many and that has caused shock waves across global financial markets, the UK has voted to leave the EU by a margin of 52 percent to 48 percent.

The Details of Brexit

David Cameron, the outgoing Prime Minister of the UK, announced in February 2016 that the country would be holding a referendum on whether it should remain a member of the EU or whether it should begin the process of an exit. The referendum vote held on June 23, 2016, resulted in 52 percent of the British public voting to leave. While the majority of people in Scotland, Northern Ireland, and London voted to stay, the total number of “leave” votes cast across the nation means that the UK will now likely start the process of withdrawing from the EU.

The result of the referendum does not itself give effect to any legal obligation for the UK to leave the EU; however, it would be the government’s democratic duty to give effect to that vote. The next step is for the country to give formal notice of its intention to leave under Article 50 of the Lisbon Treaty. As David Cameron has announced that he is stepping down as Prime Minister, this will likely not happen until a new leader has been selected, probably in October this year, although there may be pressure from Europe to start the process sooner.

Once notice has been given, there is up to a two year period during which the UK Government will negotiate the terms of withdrawal with the remaining members. A finalization of the withdrawal from the EU could occur before two years have passed in the unlikely event that negotiations are settled prior to the two year deadline. The process of negotiation will likely take much longer, particularly if includes negotiating terms of the UK’s future relationship with Europe. However, the two year period under Article 50 can only be extended with unanimous consent of the rest of the EU membership (a total of 27 countries).

Until a formal withdrawal from the EU the UK will remain a member, with all the benefits and obligations that that entails. From a corporate tax perspective, this means that companies can still rely on the Parent-Subsidiary or Interest & Royalties Directives, for example, to eliminate withholding taxes that would otherwise be payable under the relevant double tax treaty. Further, there should be no immediate changes to the VAT or Customs Duty regimes.

Going forward, the expectation is that the UK will continue with its implementation of the OECD’s BEPS initiative action items, with the possible exception of the recently agreed upon EU anti-tax avoidance directive. Companies will also want to think about planning for possible withdrawal of the Parent-Subsidiary or Interest & Royalties Directives, however, it is by no means certain if this will happen as the UK could decide to continue as a member of the EEA or negotiate a Swiss style arrangement to continue to benefit from these directives.

More importantly, both for existing businesses in the UK, and for businesses contemplating their first step into Europe, there is no expectation that there will be any change in the UK’s ambition to have the most competitive tax regime in the G20. If anything, it is likely that the government will seek to bolster the UK’s attractiveness as a business location and, to that end, we could see new measures and incentives introduced to underscore that ambition.

Kruggel Lawton Insights

• Many US groups have found the UK to be an attractive location for a regional holding company or trading base, and will wish to evaluate the potential impact of the Brexit as the specific implications of this become clearer over the coming months. In the meantime, the UK’s relationship with the EU will not change overnight.
• It should be remembered that many of the fiscal attractions of the UK such as its treaty network, exemptions from tax on dividends and gains, and absence of withholding tax on dividends paid to the US is unaffected. Further, it is expected that the UK will continue to support existing business incentives despite the Brexit, as well as introduce new measures in due course with the aim of ensuring that the country remains an attractive proposition inbound investment.
• For further information, please contact your Kruggel Lawton tax advisor.