The repeated rejection of the so-called "Brexit-Deal" by the British Parliament makes a “No-Deal-Brexit” probable. The United Kingdom would then leave the European Union without any multilateral transitional agreements.

Tax aspects of a “No-Deal-Brexit”

In case the United Kingdom leaves the European Union without any multilateral transitional agreement, a large number of tax consequences would follow because the United Kingdom would then be a third party state. In particular, the Directives of the European Union, e.g., the Merger Directive (90/434/EEC) or the Parent Subsidiary Directive (2011/96/EU) and the basic freedoms set forth in the Treaty on the Functioning of the European Union ("TFEU") would then no longer apply.  The Federal Republic of Germany has accordingly submitted a bill (Brexit Tax Accompanying Act - Brexit-Steuerbegleitgesetz, "BTA-Act"), in order to mitigate the tax consequences resulting from an exit of the United Kingdom from the European Union.  The BTA-Act includes, e.g., a new Section 4g para. 6 German Income Tax Act (Einkommenssteuergesetz, "GITA") which provides that offsetting tax balance sheet positions (steuerliche Ausgleichsposten) do not have to be immediately dissolved as a consequence of a Brexit with a corresponding increase in the profits. However, a large number of negative tax consequences and lack of clarity remain. The BTA-Act has not fully regulated aspects such as the tax complexities of conversions previously implemented.   

The following discussion has been limited to the main corporate tax aspects. Against this background, two corporate tax aspects have to be emphasized: (i) withholding tax exemptions of dividend payments would no longer be available under Section 43b GITA, and (ii) British corporations with their administrative headquarters in Germany would no longer be recognized under German corporate law, and the consequence would be a legal reclassification as a (commercial) partnership.  

Withholding tax and dividend payments

The Parent Subsidiary Directive and Section 43b EStG would no longer apply after the Brexit to dividend payments to a German subsidiary to its British parent company. The dividend taxation would then occur in accordance with the general rules applicable to third party countries. The German-British Treaty for the Avoidance of Double Taxation ("DTT GB") stipulates in Art. 10 para. 2 lit. a) DTT GB a reduction of withholding tax for dividend payments to 5% of the gross amount of the dividend.  The prerequisite for the reduction of the withholding tax under Art. 10 para. 2 lit. a) DTT GB is a stake in the German subsidiary in the amount of at least 10% of the stated capital.  The reduction to 5% is implemented by way of a reimbursement or exemption process under which the prerequisites in Section°50d para. 3 GITA have to be met, i.e. the requirements for the substance of the parent company have to be satisfied (ECJ, order dated 14 June 2018, case C-440/17, is generally not applicable to companies with their headquarters in a third party country, see GvW Newsletter August 2018). In order for British holding structures to reduce the withholding tax to at least 5%, a proper tax structuring might be necessary.

In the case of dividend payments from a British subsidiary to its German parent company, stricter requirements would apply after the Brexit with regard to an exemption from trade tax because the activity clauses in Art. 23 para. 1 lit. c) DTT GB and in Section 9 no. 7 German Trade Tax Act (Gewerbesteuergesetz, "GTTA"] would have to be complied with. Furthermore, Section 9 no. 7 GTTA also requires a participation in the British subsidiary in the amount of 15% of the stated capital. Therefore, also German holding structures with British subsidiaries may have a need for tax structuring measures.

British corporations with administrative headquarters in Germany

The so-called headquarters theory (Sitztheorie) (instead of the so-called establishment theory - Gründungstheorie) would apply after a Brexit for British corporations with their administrative headquarters in the Federal Republic of Germany, such as the private limited company by shares and the public limited company, since the general principles of European freedom to establish branches under Art. 49 TFEU would no longer apply for British companies.  This means that the German law is the applicable law towards such British corporation with the consequence that they would be treated for purposes of corporate law as (commercial) partnerships or sole proprietor businesses.  Although it is doubtful under German tax law whether the German Supreme Tax Court (Bundesfinanzhof, "BFH") would follow these German corporate law principles and find that there is a co-entrepreneurship (if commercial) for tax purposes, since the BFH as a general rule makes a comparison of the legal classification in the case of foreign companies.  In any event, there would be a liability risk of the shareholders/partners because partners are generally fully liable under German law.  Therefore, various measures should be considered in such a situation, in order to again limit liability.  In light of this aspect, the legislature has simplified measures under the law governing transformation of corporate forms in cross-border situations, in order to enable as many British corporations as possible with headquarters in Germany to make a cross-border conversion.  A potential cross-border change in form which is the most attractive under German tax law, however, involves some uncertainties under the law governing conversion of corporate form because the cross-border change in form is not codified. In addition, a cross-border merger into a German corporation or partnership is conceivable, whereby the tax issues must be noted.

Conclusion

There are still possibilities to mitigate the negative tax consequences of the No-deal-Brexit. These possibilities should now be used quickly. Thought must also be given to indirect taxes such as value added tax, and it should be reviewed whether a (still timely) restructuring makes economic sense.

Dr Michael Engel, Attorney/tax adviser
Frankfurt am Main