Withholding Tax – implications following Brexit

For any companies who previously relied on an EU directive in relation to Withholding Tax (“WHT”), there will be a need to consider the impact between the UK and other EU entities. The terms of the relevant Double Tax Treaty (“DTT”) should be reviewed to determine if there is any reduction, or possibly even elimination, of the withholding tax obligation. There may also be a requirement to make a new or amended claim to the relevant tax authority too.

New guidance from HMRC

HMRC have recently published new guidance reminding taxpayers that from 1 January 2021, there may be an increase in EU countries deducting Withholding Tax (“WHT”) from payments of interest, royalties or dividends now that EU directives are no longer in force and if a DTT clearance has not been made in its place (if available).

What if you relied on a EU directive before Brexit?

If a company relied on an EU directive before Brexit, there will be a requirement to check the domestic tax legislation of the relevant EU country to determine if WHT is applicable. If under the domestic tax legislation there is WHT to be applied, the next step would be to check if there is a DTT between the relevant countries. The DTT may result in a lower rate of tax, but if the transactions are taxed under the domestic tax legislation and the DTT does not reduce this to nil, then potentially the business will be exposed to a new additional tax cost, which can prove challenging to mitigate.

Applying for a Double Tax Treaty clearance

If the DTT can reduce the amount of WHT due, there may be a requirement to apply for a DTT clearance or other similar formality. A DTT tax clearance is sent to both tax authorities for approval and should be in place before any payments are made to avoid the risk of WHT being deducted from payments. There may also be a requirement for a certificate of residence.

Here at AAB we have experience of reviewing domestic legislation and DTTs, as well as making DTT claims for treaty clearance and applications for certificates of residence. If you previously had the benefit of an EU directive or think your business may be liable to or suffering WHT unnecessarily, please get in touch with us. We can help to review and potentially reduce the WHT rate by making an appropriate DTT claim and reclaiming any WHT if necessary.

For more information, please contact Chelsea Robertson or your usual AAB contact.

You can find out more about AAB’s International Tax team here.