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Withholding Tax and the EU

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Many countries in the EU impose withholding tax on cross border payments of dividends, royalties, and interest.  Similarly, the UK imposes a 20% withholding tax on cross boarder payments of interest and royalties, but not on dividends.

However, where both the payee company and the recipient company are tax resident in EU jurisdictions, it is often possible to make the payments without withholding tax.

The Parent-Subsidiary Directive allows an exemption of withholding tax at source on dividends distributed between EU companies. It also exempts the dividends received from taxation at the level of the parent company if the equity interest in the subsidiary is at least 10% over a minimum period of one year.

The European Interest and Royalties Directive provides for a withholding tax exemption on royalties and interest if the shareholding (direct or indirect) is at least 25% and has been held for a minimum period of one year.

Brexit, depending on the terms of a potential new deal, may mean the loss of these exemptions for UK companies. It will then be a case of seeing if relief can be obtained under the respective double tax treaty, though these may not be as generous. So, for example, Germany has a withholding tax of 25% on dividends paid but this can possibly be reduced to 0% under the Parent-Subsidiary Directive. However, under the UK-German tax treaty, it can only be reduced to 5% and in some instances to 15%.

Therefore, we would recommend that companies check the impact these changes may have on them. In some cases, it may be worthwhile accelerating cross-border payments so that they are made pre-Brexit.

Please don’t hesitate to contact us if you would like to discuss any of the above in further detail. We are here to help and advise you through these challenging times.

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