Tax and the UK EU Trade and Cooperation Agreement, 18 January 2021

Jan 18, 2021

As expected, the UK EU Trade and Cooperation agreement does not contain any measures constraining the UK’s domestic tax regime or its tax rates which were largely always a matter for the UK to determine. See also last week’s update on VAT and social security in the most recent Brexit digest.

However the agreement does commit both the UK and the EU to uphold global standards on tax transparency and fighting tax avoidance. It also contains commitments to specific tax standards as they stand at the end of the transition period, including the international standards on exchange of information and anti-tax avoidance.

The commitments on tax are also captured in a stand-alone Joint Political Declaration on Countering Harmful Tax Regimes (page 3) with a continued commitment to BEPS (Base Erosion and Profit Shifting) actions. This declaration is aimed at being a political commitment to the principles of countering harmful tax regimes, and reflects the work done by the OECD in this area.

It should also be noted that the UK no longer is a participant in the EU Arbitration Convention governing tax disputes.

DAC 6 status

DAC 6 (EU Council Directive 2011/16) is a new system of mandatory reporting of cross-border tax arrangements affecting at least one EU member state where the arrangements fall within certain “hallmarks”. Commencement of reporting under DAC 6 had been previously been delayed six months meaning the first reporting date for some transactions is 30 January 2021.

However, now that the EU transition period has ended, HMRC has confirmed that the UK will not be applying DAC 6 in its entirety. Instead, only arrangements which would been within Category D of DAC 6 will need to be reported, in line with the OECD’s mandatory disclosure rules. We understand that this change is intended to be retrospective hence  disclosures are not required for any arrangements which previously were required to be reported. The earliest reporting date for arrangements falling under this revised policy remains 30 January 2021.

The UK previously implemented DAC 6 into domestic law via regulations which have now been amended.

Receipt of interest, royalties or dividend payments from the EU

From 1 January 2021, the EU Parent Subsidiary Directive and the EU Interest and Royalties Directive no longer apply in the UK. This means that certain payments to UK companies may now become subject to withholding taxes where none previously applied. HMRC has now published updated guidance in this area.

Overall, the key advice is to check the terms of the relevant double taxation agreement between the UK and the EU country if a company is UK resident for tax purposes and it receives interest, royalties or dividends payments from an associated company resident in an EU member state.

The amount of withholding tax required to be deducted depends on the double taxation agreement between the UK and the paying EU country.