The European Union ("EU") and the United Kingdom have agreed to a new extension, until January 31 2020, to negotiate the conditions of the United Kingdom's EU exit. Should the situation remain unchanged and should the parties fail to come to an agreement, the main tax consequences deriving from the United Kingdom's exit would be as highlighted below.
Broadly speaking, any tax regime deriving from the harmonisation promoted by EU legislation would no longer be available to the United Kingdom as a result of its EU exit. Examples worth noting are VAT legislation, the Mergers Directive or the Parent-Subsidiary Directive… Below is a quick overview of some important items in relation to the different taxes in Spain's system:
Corporate Income Tax ("CIT")
- The special Neutrality Regime deriving from the Mergers Directive would no longer be available for those transactions (mergers, demergers, share for share exchanges…) where such regime is conditional on the EU residency of intervening companies or shareholders or on the fact that the assets involved should be located in or transferred to a Member State. Neither would such regime be available for a transfer of a company's registered office involving a Member State and the EU.
- Tax credits for research and development and technological innovation will not apply where such activities are carried out in the United Kingdom.
- Spanish companies with subsidiaries in the United Kingdom should also pay attention to changes in the application of Spanish controlled foreign company rules. Spanish CIT law provides for an exception to controlled foreign company rules where the subsidiary covered by such rules is resident in the EU and its incorporation and operative are based on valid business motives. In this respect, following the United Kingdom's exit from the EU, groups would no longer be able to rely on this escape clause.
Value- Added Tax ("VAT")
- Supplies of goods between Spain and the United Kingdom would be considered as imports or exports. Such transfers will no longer be sheltered under the exemptions applicable to intra-Community acquisitions between EU Member States and will be subject to customs formalities. In the case of imports from the United Kingdom to Spain, VAT would become chargeable at the point of import, with the corresponding cash effect (unless the taxpayer can opt for a deferral in the payment of import VAT).
- Transitions between Spain and the United Kingdom will no longer need to be included in the information returns relating intra-Community transfers (Form 349).
- Spain will be able to rely on the "use and enjoyment rule" to charge VAT on services located in the United Kingdom but effectively used in Spain.
- Businesses established in the United Kingdom carrying out transactions subject to Spanish VAT should appoint a tax representative in Spain.
- Businesses established in the United Kingdom bearing Spanish VAT may apply for a refund of such VAT provided there is a reciprocity agreement or reciprocal treatment for VAT recovery with the United Kingdom.
- The Mini One-Stop Scheme ("MOSS") will also be affected. Under MOSS, businesses supplying cross-border telecommunication, television and radio broadcasting, or digital services to EU customers were allowed not to register in each EU Member State of operation. In this respect, third country businesses which have elected the United Kingdom as the Member State for registration for MOSS purposes, will need to change such registration.
Personal Income Tax ("PIT")
- Exit taxation is also an aspect to bear in mind when considering the effects the United Kingdom's exit from the EU. Those taxpayer transferring their residency to the United Kingdom will not be entitled to defer their exit tax liabilities, under ruled designed for transfers of residency to other EU Member States.
- As highlighted above in relation to CIT, income from United Kingdom entities subject to Spanish controlled foreign company rules will not be sheltered under the exception applicable to EU entities.
- PIT taxpayers will no longer be entitled to apply certain valuation rules in relation to assets located in the United Kingdom or income originated in such State; such as for example:
- Contributions to United Kingdom pension plans will not be deductible.
- Capital gains deriving from securities listed in the United Kingdom will be calculated in accordance to the difference between acquisition and transfer values (with no reference to their stock exchange listing).
- The special rule referring to the compensation of losses derived from the transfer of listed securities, when securities of the same kind are reacquired within two months will applies to securities listed in EU stock exchanges. With the United Kingdom's EU exit, a full year should be taken into account to limit the compensation of such losses.
Non-Resident Income Tax ("NRIT")
- The following NRIT exemptions available for income sourced in Spain will no longer be available to UK resident taxpayers (although the Tax Treaty between the United Kingdom and Spain should be taken into account to determine the effective tax burden):
- Interest, income from the financing of third parties and capital gains from moveable property not obtained through a permanent establishment.
- Profits distributed by Spanish subsidiaries to their United Kingdom parent companies or to permanent establishments of the parent in the United Kingdom.
- Dividends or profits obtained by collective investment schemes or pension funds resident in the United Kingdom.
- Royalties paid by a Spanish resident company or a Spanish permanent establishment to a United Kingdom entity.
- The general NRIT tax rate applicable to United Kingdom residents will amount to 24%, as opposed to the current 19%. Moreover, United Kingdom residents will no longer be allowed to deduct expenses related to Spanish-sourced income, in comparison to EU residents which may do so.
- Taxpayers resident in the United Kingdom and liable for Spanish Wealth Tax will no longer be entitled to apply rules corresponding to the Region where the higher value of assets are located. Under current rules, such taxpayers would only be allowed to apply state rules.
Inheritance and Gift Tax ("IGT")
- IGT Law allows for regional rules to apply in certain situation where the connection with the tax is an EU Member State: e.g. either as the State of residence of the deceased or as the State of residence of the heirs, should the deceased not be resident in Spain. The United Kingdom's exit from the EU would entail that such regional rules would no longer apply where the connection with the tax is the United Kingdom.
It is important to bear in mind that the United Kingdom's exit from the UE will have important consequences for taxpayers. Absent an agreement between the United Kingdom and the EU's institutions, taxpayers are mired in uncertainty and cannot mitigate some of these effects with transitional rules. Parties should be able to come to an agreement regarding the extension of some of these regimes and the approval of transitional provisions to ease this exit.