Germany

The taxation of companies has been significantly influenced by European law over the last few years.

For example, low-taxed companies domiciled in the EU/EEA are not subject to controlled foreign corporation rules in accordance with the German Foreign Transaction Tax Act. 

For foreign subsidiaries, the most important change will be the future loss of the benefits of the parent-subsidiary directive, which makes dividends within the corporation/group exempt from the deduction of withholding tax (WHT) across borders within the EU. Fortunately, UK law (currently, at least) stipulates that dividends paid out from UK companies are not subject to WHT. This means that, initially, nothing will change for dividends from the UK subsidiary to the EU parent company, but this is not the case for dividends moving in the other direction. For the latter, the UK-Germany double tax treaty will apply to dividends paid from Germany, so that a 5% WHT rate will apply to investments of more than 10%.

According to the Interest and Royalties Directive (Directive 2003/49/EC), no WHT is levied on interest and royalty payments to associated companies within the EU. Therefore, for interest and/or royalty payments from/to the UK, the situation will change when the UK leaves the EU and the respective national laws and double taxation agreements will apply. 

Currently, hidden reserves in capital assets brought to foreign permanent establishments are not considered realised by law if these permanent establishments are in a EU or EEA member state, or taxation on hidden reserves can be deferred. In the future, this privilege will no longer apply in relation to the UK unless it joins the EEA.

At present, cross-border reorganisations are possible without paying tax within the EU. In the future, these could no longer be carried out tax-neutrally when involving companies from the UK. A special and yet unresolved problem concerns the fiscal consequences if holding periods have not yet expired at the point of the UK’s exit. This could potentially, but not definitely, result in ‛grandfathering’ for reorganisations notarised before 29 March 2017.

The central problem in corporate law is the termination of the freedom of establishment. Bilateral agreements are likely here, but it is unclear when these will be negotiated and what their content will be.

A special problem, which fortunately only concerns a few companies, arises for European public companies (SEs) based in the UK. If no regulations are agreed as part of the exit negotiations, these companies must change their legal form.

However, there is a similar problem for limited liability companies which have their formal headquarters in the UK but are actually domiciled in another EU member state. These will no longer be permissible without appropriate regulation in the exit negotiations or a unilateral regulation by the German legislator, with the result that managing directors and shareholders will take on full personal liability.

An agreement for the relocation of financial bookkeeping / servers outside of Germany that has already been granted according to the regulations of the German General Fiscal Code should not be affected by Brexit. In the future, such agreements are likely to be granted by the fiscal authorities as long as the double taxation treaty with the UK contains the current ‛major information clause’ and access to the data does not seem to be endangered by newly introduced access restrictions.

After the UK has left the EU, VAT law is likely to undergo many changes in relation to applicable regulations, ledger and document evidence, information on invoices and in parts also the location of services. These changes could lead, in certain cases, to financial disadvantages. In particular, the regulations on intra-community purchases and supplies will be replaced by rules on import and export. Requests for reimbursement of UK input tax will no longer be submitted to the German Federal Central Tax Office, but instead to the UK tax authorities.

Numerous procedures will need to be reorganised. Transport and processing times will be extended, even if no customs duties are being levied, because the relevant border customs offices will have to provide documentary records for the purposes of sales tax about the entry/exit of goods from the EU region. They will also have to levy turnover tax on imports or determine whether the conditions for input tax refunds have been met.

Subject to agreements to the contrary as part of the exit process, the EU could in future levy import duties on British goods at its external borders. The end of the customs union would result in new customs formalities, which would create a considerable strain on the movement of goods.

For supply agreements to and from the UK, amended VAT and customs rules could lead to both parties’ calculations being out of kilter. In our experience, only a few agreements contain clauses about how such a serious change to the transfer tax/customs situation should be dealt with. The legal concept of the ‛frustration of contract’ does exist, but it is unclear how courts may deal with disputes arising in this situation. Given this situation, appropriate clauses should be included as a matter of urgency in new agreements that will apply after 2018, as well as in old agreements if these are being changed for any reason.

The notionally unrestricted tax liability (or unrestricted tax liability for EU citizens on application) will no longer be possible for UK citizens after Brexit.

In terms of German inheritance tax and gift tax, it is still unclear to what extent the aggregate wages paid in subsidiaries in UK will be taken into account for the aggregate wage comparison as part of the operating asset benefit after Brexit.

No changes will result from Brexit regarding inheritance law and matrimonial property regimes for German citizens, as neither the European regulation on succession nor on matrimonial property regimes are applicable in the UK or in relation to the UK. 

Deferrals of taxes, which have been granted as part of exit cases (e.g. the relocation of a shareholder of a German corporation to UK) for the hidden reserves within the company’s shares, could be threatened with retraction. These deferrals are only granted when individuals are moving into an EU member state, and this deferral condition would no longer be met after Brexit.

One of the triggers for Brexit was UK voters’ concern over the freedom of movement for workers – one of the basic EU freedoms. For German companies operating in the UK, considerable risks could arise here.

In terms of rights of residence, a transitional solution is being discussed, at least for EU citizens who already work in the UK. A simplified procedure for residence permits is being considered to enable EU citizens already based in the UK to avoid the complex procedures that used to exist (pre EU). EU citizens in the UK are expected to require a residence permit shortly. What will happen in the reverse case of UK citizens in the EU is still a mystery.

For companies, the question of whether Regulation (EC) No. 883/2004 on the coordination of social security systems will continue to apply is probably even more important. This is because the UK has so far only established a social security agreement with the Republic of Ireland. Complexities in this area could substantially complicate the deployment of employees.

EU companies with premises in the UK must note that the regulations under Section 613a of the German Civil Code relating to the transfer of operations will be forfeited. The UK will presumably create its own national regulations governing the transfer of employees from an acquired company to the purchaser in the case of a transfer of operations. However, when this will happen and the content of such regulations cannot currently be predicted.

Finally, the German co-determination regulations will also be affected. In the future, the UK members of a European works council or the works council of an SE will have no right to collaborate in these committees. Similarly, EU employees and their representatives will have no right to information and consultations being planned by the corporate management of a UK parent company.

Should the United Kingdom not become a member of the EEA during negotiations, German companies could simply contractually exclude British commercial agents and official distributors from post-contractual claims for compensation, claims for account excerpts and other regulations of German distribution law and would no longer be bound by the previous minimum notice periods.

Little thought has been given to the question of whether UK-produced goods requiring authorisation (pharmaceuticals, certain machines, vehicles, etc.) would require new licences for distribution in the EU in future, and similarly whether the UK would recognise local licences for exports from the EU to the UK. If a completely new licensing procedure is required in each country/region, this would create a considerable trade barrier. Something similar applies to smaller ’inspections’ like CE marks. Until the formal exit, it is probable that any licences already granted and inspections performed will be recognised, but it’s not clear what will happen for new cases. One option could be for companies to rapidly bring forward some procedures and complete these under the existing regime.