No-deal Brexit | Risks for UK groups with German subsidiaries due to non-applicability of the Parent-Subsidiary Directive

Published on 8th May 2019


After the UK Parliament failed to approve the draft EU-UK Withdrawal Deal, the UK and the EU agreed to extend the "article 50" notice period to 31 October 2019. This avoided the imminent threat of a no-deal Brexit, but a no-deal Brexit remains a possibility at this stage. In order to avoid the negative tax consequences in Germany due to a no-deal Brexit, the German Government enacted the Brexit Tax Accompanying Act at the beginning of this year. This Act supplements provisions of the German Income Tax Act and the German Corporation Tax Act in order to avoid (or at least mitigate) the negative tax effects due to a no-deal Brexit.

However, the German Government did not (intentionally or unintentionally) enact any provisions with regard to the Parent-Subsidiary Directive (the "PSD"). The aim of the PSD is to prevent double taxation of profits distributed by a subsidiary established in one Member State to its parent company established in another Member State. This is achieved (in broad terms) by the Member State in which the subsidiary is resident not levying withholding tax on dividends distributed to the parent company. However, as the application of the PSD requires the parent company to be resident in an EU Member State, a UK-registered parent company would no longer meet these requirements following a no-deal Brexit. As a consequence, the German subsidiary would, in the absence of any provisions in the Brexit Tax Accompanying Act, be required to deduct 5% withholding tax of the gross dividend (in accordance with Article 10 paragraph 2 of the Germany-UK Double Tax treaty).

In order to avoid this scenario in a no-deal Brexit, UK groups with German subsidiaries should consider taking action now. Groups could consider making an (advance) distribution of profits when their German subsidiaries adopt their annual financial statements. In addition, if there is a German holding company between the UK parent company and the operative German GmbH, the taxpayer could consider obtaining an additional "non-assessment certificate" in order to avoid a (significant) reduction of the distributable profit arising from any advance distribution of profits that is made.

If a withdrawal agreement is ratified by 31 October 2019, this risk would be avoided for the time being, since the UK would continue to be considered an EU Member State for the purposes of EU law until the end of a transition period. However, the position of non-applicability of the PSD is likely to arise in any event at the end of a transition period, so businesses should consider now how this might affect them.

If you would like any further information on this and how we can help, please speak to Florian Merkle, Efthimios Detsikas or Erika Jupe.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

Interested in hearing more from Osborne Clarke?