Brexit to change application of withholding tax and securing of tax
The United Kingdom has been trying to reopen the negotiation of the Brexit agreement with the EU, so far without success. If the agreement is not approved by the British parliament, a no-deal Brexit appears likely. The Czech Republic has prepared for this by adopting the Brexit Act.
The act has already been passed by the parliament and is now waiting to be signed by the president. The act is to enter into effect once the Treaty on European Union and the Treaty on the Functioning of the European Union cease to apply to the United Kingdom and the agreement on the conditions of the UK’s withdrawal from the EU does not enter into force, i.e. on the date of a “hard” Brexit.
The act mainly addresses issues concerning the free movement of citizens, access to the labour markets, public health insurance, existing supplementary pension insurance and construction savings. However, it also regulates income tax, stipulating that UK residents shall be viewed as tax residents of an EU member state, for the taxable period in which the act entered into effect. By this, the act in fact introduces a transition period, during which British citizens will continue to be subject to EU treaties and directives. This provision, however, does not cover withholding tax and securing of tax, which will be governed by the principle that UK residents are no longer residents of an EU member state.
The provision on withholding tax is likely to have a substantial effect on income that is standardly subject to withholding tax and that is paid to the United Kingdom, such as profit shares (dividends), interest and royalties. At present, taxation of these payments is governed by EU directives, which have been implemented into Czech laws. Under these provisions, income paid to abroad is exempt from withholding tax in the Czech Republic, subject to meeting the conditions stipulated in the directive or in the relevant law.
Once Britain leaves the EU without a deal, EU directives shall cease to apply overnight, meaning that the exemption from income tax can no longer be applied. Taxation of income will then be governed primarily by rules stipulated by the double taxation treaty concluded between the Czech Republic and the United Kingdom. For instance, dividends paid from the CR to the UK will be subject to a withholding tax of 15% or 5%.
Compliance with the conditions for exemption is usually assessed as at the date of the general meeting’s decision on the payment of a dividend (or an advance for a dividend), regardless of when the dividend (advance) is actually paid. The bill thus implies that a tax exemption of dividends (advances) paid to the United Kingdom could be applied, as long as the general meeting decides on dividend payment before Britain leaves the EU without a deal (most likely before 29 March 2019).
Similar attention should be paid to interest and royalties. Taxpayers who were issued a ruling awarding them an exemption of income from royalties and interest on financial instruments should take note in particular. As the general conditions stipulated by the Income Tax Act will no longer apply, the validity of the issued rulings will most likely terminate as well, regardless of for what period of time they were issued.
The act also addresses situations where profit shares are paid from the United Kingdom to the Czech Republic. In this case, the United Kingdom shall be deemed an EU member state until the end of the taxation period in which the validity of the act terminates (31 December 2020). This means that taxpayers may exempt income flowing from the United Kingdom from withholding tax until the end of 2020 (except for taxpayers using a financial year, who may apply the exception until the end of the taxable period started in 2020 – before 31 December 2020.