Brexit: tax consequences for shipping companies
Since the UK has decided to leave the EU based on the referendum, it became clear the path to actual leave the EU will be complex. Among others, leaving the EU will lead to a range of tax issues. A major part of the currently applicable EU rules are part of UK national law. This applies to the EU Directives, which member states must or can include in their national law. As long as the UK do not change their national tax law, effectively they still apply these EU Directives. However, when leaving the EU, there will be a necessity to change part of these national rules. Furthermore, within the EU the EU Treaty (including the free movement of goods, services, people and capital and the right of establishment), Directives and EU case law apply. These rules will not apply anymore for the UK when leaving the EU. This may lead to adverse tax consequences, e.g. dividend withholding tax on dividend paid to the UK, custom duties etc. This is especially the case with goods or money flowing from an EU member state towards the UK. Below we will outline some of the possible tax issues when the UK will leave the EU specifically for shipping companies, if no other agreement is concluded. We will also indicate possible consequences in the case the UK will decide to become part of the EEA (currently being Iceland, Norway and Liechtenstein).
The VAT within the EU is largely harmonized; a VAT Directive and some Regulations govern the VAT. Based on the VAT Directive, and implemented in UK national law, many supplies in connection with shipping are 0%. When the UK leaves the EU, the UK is entirely free to introduce amendments or even transfer to a different VAT system altogether.
Import and export between EU member states are free of import duties. However, import duties are due when third countries are involved. As soon as the UK leaves the EU, import duties can be levied on UK imports and the UK can levy customs on imports of EU member states.
Corporate income tax
The tax facilities for shipping companies are regulated by the EU maritime state aid guidelines to allow tonnage tax systems (amongst others). Based on these EU guidelines to apply for the tonnage tax the EU/EEA flag is required. The UK has implemented this in their national law. However, leaving the EU/EEA will lead to various considerations. Should the UK become part of the EEA, there is no necessity to adapt these national rules. If the UK will not be part of the EEA, the national rules regarding the tonnage tax regime may be adapted.
Within the EU a Directive applies for cross border dividends between parent and subsidiary. This means that (i) no withholding tax on dividends will be levied if the shareholding in the EU company is at least 10% and (ii) that the EU member state where the dividends are received exempts these dividends from taxation. If the UK does not amend its national rules, these rules will continue to apply. However, for dividends received by a UK company, the EU member state of the distributing entity may start to levy withholding tax. In that case, the tax treaty (if any) will determine the rate of the dividend withholding tax. This can lead to dividend withholding tax on dividends received by an UK company.
The same applies to withholding tax on interest and royalties. The UK levies withholding tax on interest and royalties. The Interest and Royalties Directive provides for an exemption when the interest or royalty is paid to company with a shareholding of at least 25%. If the UK does not amend its national rules, these rules will apply. However, the EU member state of the distributing entity may start to levy withholding tax on the interest and royalties distributed to the UK entity. In that case, the tax treaty (if any) will determine the rate of the withholding tax.
Within the EU, a Directive applies regarding the social security position of seafarers. This provides for seafarers of Member States to be only insured in one country. Since the Regulations are not implemented in national rules, the UK’s national rules will apply as soon as the UK leaves the EU. This can lead to double social security issues or result in a total absence of a social security position if no separate agreements will be made.
The EU treaty includes a provision prohibiting state aid. When the UK will leave the EU, this provision will no longer apply. This would imply that the UK could start to provide state aid to certain kind of businesses or activities. However, within the OECD Based Erosion & Profit Shifting (BEPS) project, several action points are formulated to make sure that countries refrain from harmful tax competition. These action points will also affect the UK, as a member of the OECD.
As set out above various tax issues arise when the UK will leave the EU. Many national regulations may or should be altered and also new international agreements should be (re)negotiated. For international businesses, such a shipping and maritime services, a lot of questions arise regarding their tax position. We believe Brexit will give opportunities to other maritime cities within the EU, such as Rotterdam. Rotterdam is centrally positioned within Europe, has the largest harbour within the EU and a great cluster of highly experienced maritime services.
We would be pleased to discuss the consequences of Brexit for your business.