Brexit: chances on the European continent

More and more Japanese companies are sharing their views on Brexit in terms of the main location of their European activities. A substantial number of them, including some globally operating banks, expressed that they find Amsterdam a logic alternative for the city of London.

Though there is not yet a fixed model for the future relationships among the United Kingdom (UK) and the European Union (EU) (Will it be a total Brexit? Will the Brexit be designed as a regime similar to that of the countries in the European Economic Area?), it is definitely recommendable to consider any consequences of the Brexit in respect of legal and tax in particular to assess whether certain activities should be relocated to a place within the EU in order to avoid any adverse consequences of a Brexit.

In the past most Japanese companies went to London due to the additional tax costs (i.e. withholding tax) concerned the Netherlands in case of dividend distributions to the Japanese head office. By virtue of new tax treaty concluded by and between the Netherlands and Japan ("NL-Japan Treaty"), however, this is no longer an issue: for qualifying structures, no Dutch dividend withholding tax is due.

Therefore, we are pleased to provide this non-exhaustive overview of legal consequences of Brexit and a high level comparison of the tax regimes of the UK and the Netherlands.

Legal consequences
Brexit will have impact on inter alia the following matters:

• Financial regulatory

Currently financial institutions (including, but not limited to, banks, securities brokers and insurance companies) benefit from a passporting which, on the basis of home country control, enables financial institutions to operate under one license (by means of passporting) in all countries of the EU through the establishment of a branch office or through offering of cross-border services (without physical presence). Under a total Brexit, the passporting system will be no longer available in respect of the UK, which means that only financial institutions that have their license basis in another EU member state will be in the position to benefit from the passporting system. Furthermore, most likely the cost of cross-border transactions between the UK and a EU member state will be subject to change.

• Capital markets

In respect of listings of securities on the London Stock Exchange, a total Brexit would mean that prospectuses approved by a regulatory authority in a EU member state cannot be passported to the UK and a separate approval from the UKLA (United Kingdom Listing Authority) shall be required. This also works the other way round (UKLA approved prospectuses cannot be used for securities offerings within the European Union).

In the scenario of a total Brexit, UK listed companies (including, but not limited to, EU based companies listed on the London Stock Exchange) will no longer fall within the ambit of the mandatory offer rules in the EU, which means that, if no similar equivalent of such rules will be introduced into English law, such could have adverse consequences for the rights of minority shareholders.

• Corporate law

The possibilities for cross-border mergers with UK companies involved, may be adversely affected by a Brexit and only be possible insofar permitted under both legal systems involved.

Currently, it is not uncustomary to choose for English law as the applicable law in commercial agreements. Final and enforceable judgments of an English court are recognized and may be directly enforced in the EU member states. There is uncertainty whether this will remain in force after a Brexit. Therefore, in transactions that have no connection with the UK, a choice for English law and dispute resolution by English courts may no longer be a recommendable option.

• Freedom of movement of goods

At the moment, free movement of goods is realized by on the basis of EU regulations for the free movement of goods which will be affected by Brexit. After Brexit, countries (or the EU as a whole) shall have to enter into bilateral arrangements with the UK in respect of movement of goods and the costs thereof.

• Intellectual property rights

Brexit can affect the validity of existing EU trade marks and Community Designs. Such intellectual property rights will in principle not be valid anymore in the UK and should be re-registered in the UK or converted into a national UK trade mark or design. Patents seem not to be affected as the UK is and will remain a member of the European Patent Convention, but in terms of the contemplated unitary patent system, it is not yet clear whether the UK will conclude bilateral arrangements in the absence whereof, unitary patents registered in the EU will not be protected in the UK.

Tax Implications for Holding Company Regime
The UK as well as The Netherlands has been a popular country for multinational enterprises to set up a holding company as a key gateway for foreign investment into the European Union. Of course, there are plenty of business reasons to choose the location of holding companies, but tax certainly can be an important factor. How will Brexit affect the tax position of holding companies in the UK?

Generally, key tax considerations for the location of holding companies include:

1. Inbound withholding taxes - Low or no withholding taxes levied on dividends, interest and royalties paid by subsidiaries to the holding company.

2. Taxation in the holding jurisdiction - Low or no corporate income taxation on dividends and capital gains from the sale of shares.

3. Outbound withholding taxes - Low or no withholding taxes levied on dividends, interest and royalties paid by the holding company to the (ultimate) parent company.

4. Taxation in the home jurisdiction - No (immediate) corporate income taxation on dividends or retained profits in the home jurisdiction where the (ultimate) parent company resides.

Inbound withholding taxes
In principle, the extent to which inbound withhold taxes are levied on payments from subsidiaries to a holding company is a matter of the domestic tax law of source countries where subsidiaries reside. Nevertheless, tax treaties can effectively reduce or eliminate withholding taxes thereof. Therefore, it is important to consider the favorable treaty network the holding jurisdiction has extended.

Moreover, a holding company located in the EU can also rely on the provisions of the EU Directives including, among others, the EU Parent-Subsidiary Directive ("P/S Directive") and the Interest and Royalties Directive, which effectively eliminate withholding taxes levied on dividends, interest and royalties paid by subsidiaries located in the EU.

Following Brexit, however, UK holding companies will no longer be able to rely on the EU Directives and so they might suffer from withholding taxes when they receive payments from EU subsidiaries, unless applicable treaties effectively prevent source taxation. For example, under the UK-Germany treaty, Germany may tax dividends paid by German subsidiaries to UK holding companies, which is currently not allowed under the P/S Directive.

Taxation in the holding jurisdiction
It is also important to consider the corporate income taxation on dividends and capital gains from the sale of shares derived by a holding company. It is a matter of UK domestic law whether and how income or gains derived by UK holding companies is taxable in the UK. The UK has a participation exemption regime for inbound dividends as well as capital gains from the sale of shares, although certain conditions (including complicated anti-avoidance rules) are required to be satisfied, which are especially burdensome in case of intermediate holding companies.

Outbound withholding taxes
Apart from the application of tax treaties, it is also a matter of the UK domestic law whether and how withholding taxes are levied on dividends, interest and royalties paid by UK holding companies. Under current UK tax law, there is no withholding tax on dividends, but there are withholding taxes on interest and royalties, which are currently limited by the Interest and Royalties Directive.

Following Brexit, even though the Directive would not be applicable anymore, tax treaties could still effectively restrict the UK withholding taxes in many cases, but that is not always the case.

Taxation in the home jurisdiction
Under the P/S Directive, in qualifying EU situations taxation of dividends is limited or reduced in the jurisdiction of the parent company. Hence, holding companies located in the EU can rely on the P/S Directive to ensure taxation of dividends is reduced. Following Brexit, the protection of the P/S Directive will no longer apply to UK holding companies.

Another important factor to consider is the CFC legislation of the home jurisdiction. Brexit may have impact on this matter as well. For example, the UK Chancellor announced the intention to reduce corporate income tax rate further to below 15% to continue attracting investment in the UK after the decision to leave the EU. This can trigger CFC legislation in some jurisdictions, resulting in immediate taxation on retained profits derived by holding companies.