Corporate tax law, corporate law and foreign permanent establishments
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.