As of 1 January 2021, the United Kingdom’s exit from the European Union will take place, following the end of the transitional period.
As the date for the United Kingdom’s withdrawal from the European Union approaches, we believe it is appropriate to review the main aspects that will arise, structured by tax.
Value Added Tax
- Acquisition and supply of goods: As from 1 January next, the acquisition and supply of goods originating in or destined for the United Kingdom will not be considered as intra-Community transactions. Consequently:
- Acquisition of goods from the United Kingdom: They must be settled as an import at Customs, unless deferred VAT payment is requested (during the month of November 2020 with effect from January 2021). Remember that this means that VAT will be settled on a monthly basis.
- Delivery of goods to the United Kingdom: These will be considered exports and will be exempt from VAT. The rules of the distance selling regime will not apply to deliveries of goods to private individuals. Remember that in any case, it will be necessary to have an EORI number, which is obtained when registering for customs purposes in any country of the European Union. Trade in goods with Northern Ireland will be treated in the same way as trade with a Member State under the Ireland-Northern Ireland Protocol. However, it should be remembered that this treatment does not extend to services.
- Services: Services will be deemed to have been carried out in Spain if, in general, the effective use or exploitation of the services is carried out in the territory where Spanish VAT is applicable, i.e. the reverse charge rule will not apply.
As these transactions will no longer be classified as intra-Community transactions, they will no longer have to be reported on form 349.
Non-Resident Income Tax
Remember that this tax is levied on income obtained in Spanish territory by non-resident taxpayers, both individuals and entities.
The point to note is that those specific provisions that apply to residents of other member states (e.g. exemptions on interest or dividends, the applicable tax rate -19% /24%-, etc.) once the transitional period is over cease to be applicable to taxpayers resident in the United Kingdom.
However, it should be noted that this does not entail the non-application of the Double Taxation Avoidance Agreement between the United Kingdom and Spain, which will remain in force, so that, in the event that the taxation is more beneficial than that established in the domestic non-resident regulations, the regulations contained in the Agreement will be applied.
Personal Income Tax (Impuesto sobre la Renta de las Personas Físicas)
With regard to this tax, we list the aspects to be taken into consideration, without prejudice that, as indicated above, the rules established in the Agreement to avoid double taxation may be applicable:
- In the case of transfer of residence to the United Kingdom:
- obligation to declare any income pending allocation in the last tax return.
- taxation of certain capital gains, even if the disposal or redemption of the securities or shares has not taken place, if the requirements established in the regulations governing the “exit tax” are met.
- Non-application of Directive 2004/39/EC to the securities of listed companies resident in the United Kingdom, on the occasion of its exit from the EU, which affects the distribution of share premium and capital reduction. Similarly, it also does not apply the Directive with regard to the minimum period to be expected for the application of the rule on losses on the transfer of securities and subsequent reinvestment in homogeneous securities.
- The application of the Special Deferral Regime provided for in the tax neutrality regime of the LIS (Mergers, demergers, exchange of securities and contributions of assets) could be affected, since its application depends on the intervening entities, partners or assets being resident or located in the EU or in the European Economic Area. This will be subject to the UK remaining a member of the EEA.
- Application of the international tax look-through rule, unless the UK resident company can demonstrate that it is incorporated and operates for valid economic reasons and is engaged in economic activities. The same applies in the case of a collective investment undertaking incorporated and domiciled in a Member State of the European Union.
- Non-application of the deductions established for family units if these are formed by tax residents in Spain and the United Kingdom.
Corporate Income Tax
With regard to the tax treatment applicable to companies and transactions carried out between entities of the two countries, it should be remembered that, as mentioned above, there is a bilateral agreement between the United Kingdom and Spain to avoid double taxation, which will continue to be applicable.
Therefore, the rules of the agreement should be analysed in each case and the applicable tax treatment should be verified. It should be remembered that the provisions of the Convention are applicable in cases where the rules are more beneficial than the provisions of the domestic legislation.
Issues to be taken into account, among others:
- Impact on accounting provisions and other expenses such as, for example, with respect to the payment of remuneration to staff through defined contribution or defined benefit schemes to pension plans, as they will be considered non-deductible to the extent that they do not comply with the requirements established in domestic regulations.
- Changes of residence. From 1 January 2021 the change of residence of an entity with a transfer of assets from Spain to the United Kingdom will generate a corporate income tax liability, with no deferral of the liability being allowed.
- Without prejudice to what may be approved by the Budget Law for the financial year 2021, the exemption on dividends and income derived from the transfer of securities representing the equity of entities resident and non-resident in Spanish territory will have to be regulated on the basis of the domestic regulations and the Agreement to avoid double taxation between the two countries.
- Reduction of income from certain intangible assets (patent box). As in the previous point, the domestic rules must be analysed together with the DTAA.
- Deduction for research and development and technological innovation activities In order for R&D activities to form part of the deduction base, they must correspond to activities carried out or amounts paid for the performance of such activities in Spain or in any EU or European Economic Area Member State. Consequently, if the United Kingdom is not part of the EEA, the performance of such activities in the United Kingdom will not be taken into account. Note that the same wording applies to expenditure on technological innovation.
- Special regime for mergers, divisions, transfers of assets, exchange of securities and change of registered office of a European Company or a European Cooperative Society from one Member State to another Member State of the European Union. It should be noted that this restructuring rule applies not only to entities resident in the European Union, but also to those located in third countries, provided that there is the option of subsequent taxation in Spain. On the other hand, as can be seen from the very nature of the regulated event, this regime will not apply to the change of registered office of a European Company or a European Cooperative Society from one Member State to another EU Member State.Other impacts of Brexit at the beginning of 2021 will affect the following issues:
- Deduction for investments in film productions, audiovisual series and live performances of performing arts and music.
- European Economic Interest Groupings.
- Taxation of Collective Investment Schemes.
- Special tax regime for international tax transparency.
- Regime for shipping entities according to tonnage.
Lastly, and with regard to the obligation to make withholdings and payments on account and, more specifically, with regard to insurance entities, comment that, as from 1 January 2021, British entities will not have the status of subject obliged to withhold for this concept, (unless they operate in Spain through a permanent establishment).
As can be seen, there are many changes that Brexit will generate at both direct and indirect tax level. In this regard, we have sought to summarise the most important aspects that affect the daily operations of companies and individuals. However, AddVANTE remains at your disposal to answer any queries you may have in this regard.