Brexit means Uncertainty

Securing tax neutral restructurings related to Brexit with a tax insurance solution

The United Kingdome (UK) formally left the European Union (EU) in January 2020. However, due to the agreed transition period the UK based companies continue to be subject to all EU rules and benefit from the four freedoms of the European Single Market until the end of 2020.

Since the Brexit referendum in 2016 there was a confidence in the market that the UK and the EU will be able to conclude a comprehensive trade agreement allowing each side to carry on economic activities in the UK and the EU. Such an agreement is in particular crucial for the regulated industry operating under common EU regulation such as financial services (banks, asset managers, insurances) pharma, aviation or energy. Despite the optimistic attitude towards the negotiation’s outcome, many businesses have undertaken restructuring measures and transferred European activities from the UK into newly implemented EU subsidiaries. The reorganisation have been considered as necessary in preparation for a “No-Deal” Brexit, which appeared to be unlikely but possible. Some businesses developed Brexit contingency plans but held back the implementation of them in the hope of a regulated Brexit.

The executed or envisaged Brexit restructuring measures have often been structured as tax neutral transactions relying on the European Mergers Directive and respective national M&A tax law. Such measures often included contribution of an EU permanent establishment of an UK entity into an EU entity or a cross border merger of an UK corporation into an EU corporation. To cover the tax uncertainties of the interpretation of the international and national tax law for cross border transactions and to back up tax neutrality, some companies applied with the local tax authorities for a binding ruling. However, the binding rulings have not been granted in all cases and some of the granted binding rulings had limited scope or lost the binding effect over time (e.g. due to a change in fact patterns).   

In light of the latest political developments on both sides of the English Channel, it appears now to be likely that no subsequent trade agreement will be in place by the end of the transition period. A “No-Deal” Brexit becomes a realistic scenario. To satisfy the regulatory requirements, many businesses will have to implement their contingency plans and significantly change the legal structure and/or the business model. In particular, the financial institutions will need to bring additional substance into its European subsidiaries and will move certain trading activities, assets, capital and people functions to the EU. This transfer might cause significant tax consequences and lead to additional corporate income tax burden and non-recoverable VAT exposure.

However, a binding ruling does not always provide certainty, as the applications are often rejected for formal or material reasons and do not cover certain tax aspects such as transfer pricing and valuation. Furthermore, the binding effect of the ruling does not apply if the implemented facts (substantially) differ from the fact pattern represented in the application for a binding ruling or if the binding ruling is subsequently classified as illegal.

A tax insurance solution can provide certainty about tax burden on transformation of the legal structure and business model. In particular, the tax insurance can cover risks from the following taxes:

• Corporate income taxes
• Value added taxes
• Transfer taxes
• Transfer pricing and valuation
• Exit taxes

A tax insurance enables the insured to outsource tax risks to an insurer and thus avoid the economic risk of additional tax payments. It can cover future and historic legal interpretation issues, but not factual uncertainties. Depending on the complexity of the Brexit restructuring measures and the risk profile, an insurance solution can be found within 2 to 4 weeks and the insurance premium can range between 2 and 7% of the maximum tax risk.

For German version click here.