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    The potential tax impact of the Brexit

  • On 23 June 2016 a small majority of the British people decided in favour of leaving the European Union (EU). Although the negotiations between the EU and the UK regarding the Brexit are estimated to take about two years and the outcome is uncertain, it is wise to already think about the potential impact. The potential impact on the UK tax system with regard to direct and indirect taxation will be discussed below.

    Tax consequences

    European VAT is governed by the VAT Directive and case law by the Court of Justice of the European Union (CJEU). The Brexit could mean that the UK is no longer bound by these sources and is therefore able to determine its own VAT rates, exemptions and reduced rates for certain supplies and services. If the UK will remain part of a customs union, it is likely that both EU legislation and CJEU case law continue to apply as the main sources of the UK indirect tax system.

    Corporate income tax 
    The EU provides for a certain degree of protection as regards corporate income tax (CIT). Because of the Brexit, this protection could disappear for UK companies. When the Brexit is official, a UK company can for example no longer rely on the Parent-Subsidiary Directive or the Interest and Royalties Directive. However, since the UK has aligned its corporation tax system with other European countries to maintain tax competitiveness, a certain degree of protection is likely to remain guaranteed.

    CJEU and State Aid 
    Depending on the outcome of the Brexit-negotiations between the EU and the UK, it is possible that CJEU case law and the EU State Aid legislation is no longer applicable in the UK. This could result in a certain freedom for the UK to create tax advantages for - for example - domestic companies.

    Impact for the Netherlands

    It is currently impossible to predict the outcome of the upcoming Brexit-negotiations between the EU and the UK. Should the applicable directives on direct taxation no longer apply, the taxpayers involved may seek protection under the 2008 Tax Treaty between the Netherlands and the UK (including protocol and explanatory memorandum). We keep you updated on further developments in the near future.

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