The purpose of this article is to raise awareness of the potential international tax implications for Australian corporate groups with a significant presence in Europe in a post-exit environment.
In saying this, we acknowledge that it is impossible to reliably predict the mid to long term cross-border tax profile of post-exit UK and EU at this point in time (noting there are significant constitutional hurdles and EU negotiations to overcome before arriving at a complete exit).
Repatriating European profits
Many corporate groups take advantage of the EU Directives which eliminate the imposition of withholding taxes between corporations in EU member states.
While the UK does not impose dividend withholding tax, EU subsidiaries may be liable to withhold taxes on dividends paid to an UK parent company. This could result in a tax leakage where Australia will not provide a foreign income tax offset for any EU withholding taxes suffered on repatriation of profits via UK parent companies. Should this situation arise, effective global taxation for Australian shareholders may be in excess of 50%.
Insight: failure to evaluate post-exit IRRs on foreign profits will result in a failure to appropriately manage shareholder expectations.
The end result is that Australian corporate groups may need to consider restructuring their European holding model to base the parent company in an EU member state to retain the benefit of the EU Directives; moreover, corporate groups may need to consider whether Australia’s double taxation treaty network is robust enough to accommodate a decentralised holding structure (i.e. subsidiaries owned directly by an Australian parent or sub-parent company).
Similarly, the use of related party debt funding to manage international Treasury functions and profit repatriation will need to be examined in the event there is an impost of interest withholding taxes on payments of interest between UK and EU member states.
There may also be a marked preference of EU lenders to restructure customers’ borrowing facilities in particular jurisdictions to reduce material tax inefficiencies suffered by lenders in a Brexit scenario, or, even more commonly, borrowing costs will increase as lenders invoke a right of indemnity for withholding taxes suffered.
Given the increasing importance of the digital economy and the rise in dominance of intellectual property (IP), it will be necessary to reconsider the jurisdiction in which IP is beneficially owned and licensed in order to ensure resulting royalty streams are not materially impacted by cross-border withholding taxes.
For existing IP, we see Boards of Directors engaging in a serious deliberation of whether to transfer valuable IP to another jurisdiction if ongoing inefficiencies outweigh the upfront transaction taxes required to restructure a corporate group’s IP; alternatively, we see new cross-border licensing agreements will be necessary to counter the Brexit implications from a royalty withholding tax perspective.
Australia’s “CFC” anti-deferral regime
It is not uncommon to encounter transactions between foreign subsidiaries of an Australian multinational group. Such groups will be (or ought to be) familiar with the consequences of Australia’s controlled foreign company (CFC) regime which imposes Australian corporate tax on foreign profits as an anti-deferral mechanism.
In some instances, it may actually be preferable to trigger CFC taxation as a profit repatriation mechanism due to the limitations of Australia’s foreign income tax offset regime and the inefficiency of cross-border withholding taxes. Accordingly, a detailed CFC analysis should also be undertaken as part of a Brexit scenario to identify a cost-effective and tax efficient model for repatriating European profits to Australia.
It should be apparent from the above that a comprehensive post-exit review of existing arrangements to manage profit repatriation from Europe will be necessary for Australian corporate groups with exposure to the UK and EU member states. In our view, Australian corporate groups directly affected by the Brexit should take steps now to quantify their exposure and investigate cross-border restructuring opportunities.
Insight: Boards of Directors, accounting, finance and legal teams will need to be coordinated and educated in relation to the post-exit implications as such teams will be involved in global restructuring efforts required to react swiftly to the Brexit scenario once fully materialised.
This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.
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