Brexit and corporate taxation
In the absence of ratification of the Withdrawal Agreement by the United Kingdom at the time of its exit from the European Union, several important changes in corporate taxation are to be anticipated, notably concerning eligibility for the research tax credit, intra-group relations and also in terms of VAT after the United Kingdom’s exit from the European Union.
1. Research tax credit and British approved research organization
Research operations carried out directly by French companies in another state of the European Union (EU) or in another state party to the Agreement on the European Economic Area (EEA) which has concluded an administrative assistance agreement with France to combat tax evasion and avoidance are eligible for the research tax credit (crédit d’impôt recherche – CIR), provided they are not related to the operation of a permanent establishment [1].
Consequently, in the absence of ratification of the General Exit Agreement, such expenditure incurred in the UK will no longer be located within the EU or the EEA, and will therefore no longer be eligible for the research tax credit.
2. The consequences of Brexit on intra-group relations
2.1. Exit from the tax consolidation perimeter
Certain companies will no longer be able to benefit from the French tax integration regime, which allows companies belonging to the same group to offset their individual tax results at the level of the group’s overall tax result.
In the absence of ratification of the General Exit Agreement, British companies will no longer benefit from the tax consolidation system once the UK has left the EU. As a result, the French subsidiaries of UK resident companies will also exit the tax integration perimeter.
Where the UK company is the group’s parent company, the French tax group as a whole will come to an end.
The Finance Act for 2019 provides for certain measures to limit the impact of Brexit for integrated groups. Non-resident parent companies and intermediate companies will be deemed to meet the eligibility conditions for the tax consolidation regime until the close of the financial year in which the UK’s withdrawal from the EU is due to take place.
2.2. Withholding tax rate applied to dividends paid within a group
Dividends received by a company that is a member of an integrated group, from a “European company” i.e. one located in the EU or the EEA which, if it were established in France, would meet the conditions for being a member of the same group, are exempt from corporate income tax subject to the taxation of a share of costs and expenses equal to 1% of the amount of the distributions in the situation where these distributions qualify for the parent-subsidiary regime. Since the 2019 Finance Act, if distributions do not qualify for the parent-subsidiary regime, then they can be deducted from income up to 99% of their amount. Dividends will therefore also be taken into account in the group’s income up to 1%.
If the UK withdraws from the EU and the EEA agreement, the distributing company will immediately lose its status as a European company. The income concerned will therefore be taxable in France at 5% of its amount if the conditions of the Parent-Subsidiary regime are met, and at the full amount in other cases.
The French tax authorities have published a tax ruling clarifying the treatment of dividends paid by a company established in the UK during the year of withdrawal from the EU. Income received from shareholdings in such companies will be deemed to derive from companies established in the EU until the French company making the distribution closes the financial year in progress at the time of withdrawal from the UK [2].
With regard to dividends distributed by French subsidiaries to their British parent companies, in the absence of ratification of the General Exit Agreement, British companies will no longer be able to benefit from the parent-subsidiary regime and the exemption from withholding tax on French-source dividends.
In application of the tax treaty between France and the United Kingdom of June 19, 2008, dividends paid by a French company to a British company which holds, directly or indirectly, less than 10% of the capital, will be subject to withholding tax at a rate of 15%.
3. Impact of Brexit on VAT taxpayers
3.1. Specific declarations relating to imports and exports
In the absence of ratification of the General Exit Agreement, the UK will be treated as a non-EU country, and the harmonized European VAT system will no longer apply. As a result, transactions with the UK will no longer be considered as intra-Community acquisitions or deliveries, but as imports and exports to a non-EU country. French companies carrying out VAT transactions with the UK will have to declare and pay UK VAT to the UK authorities. The procedures and formalities to be completed are the sole responsibility of the UK tax authorities.
For UK companies, there will be no change to their French VAT number. If these companies no longer carry out taxable operations in France requiring the maintenance of this number, they must inform the foreign company tax department of the Non-Residents’ Tax Department so that the number can be invalidated.
It will no longer be possible to check the validity of a UK VAT number on the European Commission’s VIES website [3] . Unlike intra-Community transactions, import and export transactions require specific declarations to be filed with the “administration des douanes et droits indirects” when the goods are imported or exported [4].
3.2. Claiming a VAT refund
- French VAT refund: appointing a fiscal representative
In the absence of ratification of the General Exit Agreement, a British company will still be able to claim a refund of deductible VAT from the VAT refund department of the Non-Residents’ Tax Department.
However, the VAT refund procedure is different. VAT on goods and services acquired in France for business purposes by a taxable person established in another EU member state may, under certain conditions and in accordance with certain procedures, be refunded.
Following the UK’s exit from the EU, the UK company will come under the provisions of the Thirteenth Directive 86/560/EEC of the Council of the European Communities of November 17, 1986 [5], which grants taxable persons established in a country outside the EU a refund of VAT under different declaratory arrangements to those granted to EU taxable persons. In the same way as refunds for taxable persons established in the EU, the refund is subject to conditions relating to the situation of the taxable persons (they did not have in France the seat of their economic activity or a permanent establishment from which the transactions were carried out or, failing that, their domicile or habitual residence) and to the transactions carried out (they did not carry out supplies of goods or services located in France). Refunds are made via an electronic portal in each Member State[6]. Taxable persons established outside the EU are required to appoint a VAT-registered tax representative established in France to carry out the formalities necessary to obtain the refund on their behalf. The tax representative gives a written undertaking to pay the VAT on behalf of the taxable person liable, should the latter fail to meet the conditions required to benefit from the refunds claimed.
- UK VAT refunds
In the absence of ratification of the General Exit Agreement, applications for UK VAT refunds can be made to the DGFIP before the date of the UK’s exit from the EU, using the taxpayer’s internal website and professional space at www.impots.gouv.fr. If it has not been possible to transfer the request to the UK before the date of exit from the EU, the request should be made directly to the UK tax authorities, as France will no longer have a legal instrument for exchanging information with them. From the date of the UK’s exit from the EU, VAT refunds must be claimed directly from the UK tax authorities, in accordance with a procedure to be defined by them.
3.3 Mini-guichet and UK VAT
In the absence of ratification of the General Exit Agreement, you will have to declare and pay via the French mini-guichet the VAT due in the UK on services for each of the quarters preceding the date of the UK’s exit from the EU.
VAT relating to transactions taxable in the UK from the date of the UK’s exit from the EU will have to be declared and paid directly to the UK authorities in accordance with the procedures laid down by the UK, and no longer via the mini-guichet.
This is because the UK will no longer be allowed to connect to EU IT systems. If you are identified for the mini-guichet in the UK and are not established in an EU member state, you will be able to use the electronic counter set up for taxable persons not established in the EU, and register on the portal of an EU member state of your choice. Otherwise, you’ll have to contact the relevant consumer member state directly. In the case of France, you will need to contact the Foreign Business Tax Department of the Non-Resident Tax Department.
3.4. No obligation to appoint a fiscal representative
In the absence of ratification of the General Exit Agreement, British companies with no permanent establishment in France are not required to appoint a fiscal representative to pay VAT. The foreign company tax department of the Non-Resident Tax Department will be responsible for the files of British companies.
4. Withholding tax and the obligation to appoint a French tax representative
In the absence of ratification of the General Exit Agreement, British companies will be required to appoint a tax representative for withholding tax purposes. The tax representative will take the necessary steps on behalf of the company with the foreign company tax department of the Direction des impôts des non-résidents.
[1] BOI-BIC-RICI-10-10-20-20160706 n°1, 06/07/2016
[2] BOI-RES-000035, 06/03/2019
[3] http://ec.europa.eu/taxation_customs/vies/
[4] Article 74 of Annex III of the CGI for export exemption conditions; Articles 292 and 1695 of the CGI for export tax calculation.
[5] BOI-TVA-DED-50-20-30-40-20150805 n°1, 05/08/2015
[6] Article 289 D of the CGI
