The exit of the United Kingdom from the European Union on 1 February 2020 is subject to a transitional period until at least the end of the year. The withdrawal agreement regulates the consequences of this exit during this period in tax matters and even in certain areas beyond.
It is a well-known fact that in application of the agreement 2019/C 384 l/01 signed on November 12th of 2019 (JOEC C 384 I) by the European Union and the United Kingdom, this last is no longer a member of the European Union, since 1 February 2020. In reality, this exit will in fact only have consequences at the earliest at the end of the year, due to a transitional period until at least 31 December 2020.
Here is a point about the tax situation.
An effective exit but with no effect until 31 December 2020
Internal texts implementing directives and regulations
The exit of the United Kingdom from the European Union, effective on 1 February 2020, is accompanied by a transition period which ends on 31 December 2020, unless a decision is taken to extend it (by one or two years).
During this period, European Union law continues to apply to the United Kingdom, and the United Kingdom continues to be regarded as a State of the European Union by the other Member States (art.7 (1) & art. 127 (6) of the agreement).
This rule applies to tax matters as in other areas (art. 126 & 127 of the agreement).
All European tax directives continue to have effect in the United Kingdom until 31 December 2020, whether it be the VAT Directive (“directive TVA”) , the Parent-Subsidiary Directive (“directive mère-filiale”), the Mergers Directive (“directive fusions”), etc.
To give a few examples : the neutrality of restructuring operations provided for by the Merger Directive will remain the rule, the exemptions from withholding tax provided for by the Parent-Subsidiary Directive will continue to benefit flows between a State of the European Union and the United Kingdom, cross-border transactions will continue to follow the VAT rules when they are carried out, during this transitional period, between a State of the European Union and the United Kingdom.
The same principale applies in EU regulation, in particular the Regulation on the coordination of European social security systems pursuant to which the CJUE and, subsequently, the Conseil d’Etat ruled that persons covered by a European social security scheme without being dependent on a compulsory French social security scheme should be exempted from CSG and CRDS on their income and property gains (CJUE 26-2 2015 aff. 623/13, de Ruyter ; CE 27-7-2015 n°33455).
Also, the provisions of European Union law that come into force during this transitional period are binding on the United Kingdom until the end of this period. For instance, the reporting obligations that will apply from 1 July 2020 to intermediaries and certain taxpayers provided for in Directive 2018/822 of 25 May 2018, known as “DAC6”. The United Kingdom would also be obliged to apply the new VAT rules on e-commerce if the transitional period were to last beyond 1 January 2021, the date of entry into force of Directive 2017/2455 of 5 December 2017.
National rules that are directly dictated by a European directive or regulation is thus settled : these rules remain applicable until 31 December 2020 as if Brexit had never happened.
Internal texts implementing fundamental freedoms
If European law continues to apply, what about national rules that are not dictated by an obligation to transpose directives, nor are they the result of European regulations? Many national laws take account of the fundamental freedoms stemming from the Treaty on the Functioning of the European Union. There are countless laws that originally reserved a special tax treatment for a purely French flow and which, in order to respect the fundamental European freedoms, had to grant the same advantages to intra-Community flows.
The 29 January Agreement’s includes in Article 127 (6) the principle that “unless otherwise provided in this Agreement, any reference to the Member States in the Union law applicable under paragraph 1, including in its implementation and application by the Member States, shall be understood to include the United Kingdom”.
In the example of a law reserving a favourable tax regime for a purely internal financial flow, and which has been amended to give flows with EU States the same favourable tax treatment, the exit from the United Kingdom should not have an impact before 31 December 2020 (at the earliest) since in this case the legislative amendment is the implementation of the European free movement of capital.
A practical example of this is the PEA (equity savings plan). Originally reserved for investments in exclusively French securities (Law 92-666 of 16-7-1992), the PEA was opened to European equities (as of 1 January 2002) and to units or shares of French UCITS (“OPCVM”) composed of at least 75% European equities (as of 1 January 2003) and finally, by the Finance Act for 2004, to units of UCITS established in other Member States of the European Community employing more than 75% of their assets in eligible securities and rights. These changes are a direct result of the French government’s obligation to respect the free movement of capital. Consequently, and in application of the principle laid down in paragraph 6 of the above-mentioned article 127 of the withdrawal agreement, the securities of companies established in the United Kingdom will continue to be eligible until the end of the transitional period.
A general rule following specific preventive solutions
In reality the French State, fearing a Brexit without an agreement, had already taken a number of solutions, by legislative means, by ordinance or even by simple rescripts.
Thus, to take the example of the PEA, a decree of 22 March 2019 (JO of 24) had already provided that securities issued by UK companies and registered in a PEA prior to the withdrawal of the United Kingdom from the European Union without agreement would remain eligible for the plan for a period of 15 months from the withdrawal of the United Kingdom from the European Union without agreement, and that units of UK UCIs (“OPC”) held in a PEA prior to 30 March 2019 would remain eligible for a period of 15 or 21 months (BF 6/19 inf. 478).
About the integrated groups area, it should also be borne in mind that, for financial years ending on or after 31 December 2018, Article 32 of Law 2018-1317 of 28 December 2018 provided that the withdrawal of the United Kingdom from the European Union would not put an end to existing integrated groups until the end of the financial year, in progress on the date of withdrawal, whether the UK company is a non-resident parent entity or a foreign company or an intermediate company (FR 1/19 inf. 52 n°31 to 50 p.116).
This legislative provision may today appear redundant since, where a group is composed of companies which end their financial year on 31 December 2020, the date on which the UK company will cease to be regarded as an EU company is the same as that provided for by the transitional period of the Agreement.
However, in practice, the withdrawal agreement may, depending on the situation, be more or less favourable than the above-mentioned law. It will be more favourable if it is extended. In this case, the British company will be deemed to be European until the new term decided by the extension, in the event that it goes beyond the closing date of the company following the financial year in progress on the date of the withdrawal on 1 February 2020. However, if the transition period actually ends in December 2020, domestic law may be more favorable in the event that the UK company begins a financial year between January 1, 2020 and February 1, 2020 : it will be deemed to meet the conditions for eligibility for integration until its closing date, i.e. beyond December 31, 2020. However, this possibility of benefiting from a deferral beyond 31 December will not be open to companies opening their financial year after 1 February 2020, unless the administration agrees to extend the favourable legislative measure by considering as the date of withdrawal from the United Kingdom, not the official date of 1 February, but the actual date of 31 December 2020.
Finally, it was in a rescript dated 6 March 2019 (BOI-RES-000035) that the tax authorities dealt with the fate of products giving entitlement to the parent-subsidiary regime for shareholdings in British companies. It is known that when certain conditions are met, Article 216 of the CGI allows a quota of 1% instead of 5% to be applied to these products. The rescript makes it possible to maintain this favourable rate for income received from a UK company until the company receiving the distribution closes its current financial year at the time of withdrawal from the UK (FR 13/19 inf. 2).
In some areas : rules laid down for the period after the transitional period
Many situations, arising before the end of the transitional period, require the preservation of EU law beyond that period. This is the case for customs (Articles 47 to 49 of the withdrawal agreement), VAT (Article 51) and excise duties (Article 52).
Special rules for the application of VAT are already laid down :
- the VAT Directive will apply to flows which began before the end of the transitional period and for five years thereafter “as regards the rights and obligations of the taxable person in respect of transactions with a cross-border element between the United Kingdom and a Member State which took place before the end of the transitional period” ;
- applications for refunds of VAT by a non-established taxable person may be submitted until 31 March 2021 in the United Kingdom (for taxable persons of an EU Member State) and in each of the EU Member States (for UK taxable persons) using the electronic procedure provided by the directive 2008/9 ;
- and, finally, declarations made via the OSS before the end of the transitional period may be rectified by 31 December 2021 at the latest.
Similarly, administrative cooperation or access to information systems shall be subject to specific extensions so as not to undermine their effectiveness :
- the procedures for administrative cooperation between the Member States and the United Kingdom will continue to apply from the first day following the end of the transitional period for a period which varies according to the area : in customs matters until completion of a procedure initiated earlier (Article 98 of the Agreement), in VAT matters for four years (Article 99) and for five years in the recovery of tax claims arising before the end of the transitional period (Article 100) ;
- access to information systems in the relevant areas of EU law will be provided in the United Kingdom (Article 50 of the Agreement) for the purposes of operations arising before the end of the transitional period. The duration of access will vary according to the databases concerned (Annex IV to the Agreement). For instance, the VIES VAT database will be accessible until 31 December 2024 and must continue to be updated by the United Kingdom in the meantime.
Finally, state aid procedures may be initiated by the European Commission against the United Kingdom for four years in respect of situations arising before the end of the transitional period. In general, the European Court of Justice may be seized by the United Kingdom for failure to fulfil its obligations before the end of the transitional period.
For many other situations, however, the Agreement does not lay down any rules and it will be for the Member States and the United Kingdom to determine the shape of the new post-Brexit relationship.