Brexit is shrouded in uncertainty, with still no clear view on how events will develop. However, there are measures that UK businesses and overseas investors can take to mitigate the uncertainty and risk surrounding any UK exit from the EU.
Expansion outside the UK
UK businesses that are likely to require a “borderless” access to EU markets should already be thinking about incorporating at least one subsidiary company within the EU, in order to ensure full access to EU markets in the event of a hard Brexit. Provided that any such subsidiary is incorporated under the laws of a Member State, and conducts genuine economic activity in a Member State, it will be capable of engaging the fundamental freedoms of the European Treaty. Such a measure will not only provide immediate access to the economy of the incorporation state, but a guarantee from the EU Treaty that the company can freely establish in any other member state i.e. receive equal treatment with locally incorporated companies. In practice, UK companies will be likely to incorporate in the EU countries where they wish to trade, however following the European Court’s judgement in the Cadbury Schweppes case, a company located in the EU could incorporate a subsidiary in an EU member state chosen because it levies low tax rates (e.g. Ireland, Bulgaria, Cyprus, Hungary, Malta). Provided that such a low-taxed company conducts genuine economic activity in the low-tax host state, Cadbury Schweppes is authority that this is not an abuse of the EU Treaty.
A UK parent company receiving profit repatriation by way of dividend from any EU subsidiary company will normally receive such income free of UK corporation tax, and therefore without economic double taxation. This exemption is not something that falls away after Brexit, as it is enshrined in UK tax legislation. Moreover, recent reforms to the UK’s “substantial shareholder” exemption will widen the circumstances that enable UK parent companies to sell EU subsidiary trading companies free of UK corporation tax on resulting capital gains in the UK, if certain reasonable conditions are met.
It is also envisaged that EU parent companies will continue to incorporate UK subsidiary companies, because the historic openness and accessibility of the UK market economy to foreign traders and foreign investment is not based on principles of EU law, but is a reflection of the policies of the UK and its common law.
For foreign investors, the UK now offers significant opportunities:
- A competitive exchange rate for the acquisition of UK assets.
- The opportunity to trade in an economy that has held up well to external pressures such as Brexit, and the global banking crisis of 2008.
- The opportunity to trade in one of the largest and most open economies in the world. World class legal system and independent judiciary that gives confidence to non-UK investors acquiring UK assets or entering into legal agreements written under UK law.
- The opportunity to trade in a low-tax environment. The UK corporation tax rate is now only 19% and is scheduled to fall to 17% by 1 April 2020. Furthermore, overseas investors can repatriate profits from UK companies very tax-efficiently - there is no UK withholding tax on outward-bound dividends, for example.
Employer on-costs (e.g. national insurance) are also much lower in the UK when compared with many other EU countries’ equivalent regimes.
Despite the shadow cast over the UK by Brexit, UK businesses seeking access to EU trading markets will still be in a position to do so by incorporating genuine businesses in the relevant EU member states.
The long-standing tax advantages of the UK corporate tax regime will also continue to apply post – Brexit i.e. the largest double tax treaty network in the world, low corporate tax rate, and no or limited application of withholding taxes on outward bound profit distributions.
For foreign investors, the UK remains open for business, whether the UK Brexits or not. The ease and low cost of UK company formation is a famous hallmark of the UK, as are its liberal rules concerning foreign investment in UK businesses and real property. In the event of a Brexit, these characteristics are likely to be further accentuated.
Author: Martin Palmer, Consultant, Vistra UK
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