The EU Interest and Royalties Directive (IRD) and Parents Subsidiary Directive (PSD) allow EU companies to make certain interest and royalties payments to associated companies and permanent establishments within the EU without needing to deduct tax from them. However, if the UK leaves the EU without a deal on 29 March 2019, these directives will no longer apply to the UK. Therefore due to this transition HMRC published a Brexit no-deal guidance to clarify the treatment of such payments.
While the UK has double tax treaties with all of the EU member states, which can be relied upon in the absence of the IRD and PSD, however not all of these treaties provide full exemption from withholding taxes on interest, royalties or dividends in the respective EU member state. Thus in the no-deal scenario, interest, royalty or dividends payments from the EU to the UK may become taxable in some of the EU member states, for example payments made to the UK from Germany or Italy only partially exempted.
Under UK law there is no obligation to withhold tax on dividends. For interest and royalty payments from the UK, the UK has enacted the IRD into domestic law and it has been confirmed that this is not being repealed. Subject to meeting the necessary conditions, there will be no need to start deducting tax from interest and royalty payments to associated companies in the EU following the UK’s departure from the EU.
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