If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
Tax (3rd edition)
Advantages to re-locating activities in Switzerland include overall business-friendly and modern regulations, strong political and financial stability, efficient and accessible authorities (including tax authorities, with the possibility to request a tax ruling to clarify the tax consequences of a planned structure or transaction), multiple favourable tax regimes (see 17 above) and quality infrastructure.
Some disadvantages include the high cost of doing business in Switzerland, as well as strict regulations in some areas of law such as immigration law, particularly regarding work permits for non-EU nationals.
Following the passage of the Tax Cuts and Jobs Act in December 2017, the US tax system has become more competitive, especially for US corporations that provide services or sell goods abroad. For example, as noted above, corporations are subject to a 21 percent flat tax rate and, although the US statutory corporate tax rate is still not as low as the UK (19 percent for 2018), certain income derived from sales of good and services outside of the US is effectively taxed at 13.125 percent.
While US corporations now enjoy significantly reduced income tax rates on their worldwide income (including subpart F income and GILTI), large US corporations may now be subject to a base erosion minimum tax (“BEAT”) that is payable in addition to any other tax liability. As noted, the base erosion minimum tax amount is generally the excess, if any, of 10 percent (five percent in the case of taxable years beginning in calendar year 2018) of its modified taxable income over an amount equal to its regular tax liability reduced by certain tax credits.
Finally, under the TCJA, US shareholders of CFCs are now subject to tax on their pro rata share of GILTI, without regard to whether the income is distributed to the shareholders. For these purposes, GILTI generally includes all business income of a CFC other than subpart F income or income effectively connected with a US trade or business. And, while the new GILTI regime reflects an expansion of the US tax base to tax active business of a US shareholder’s CFC, US corporate shareholders are generally allowed a 50 percent deduction on their share of GILTI. A foreign tax credit generally is available to offset, in whole or in part (only 80 percent, in the case of GILTI), the US tax owed on non-US source income.
Canada is not likely to be a jurisdiction that international groups would relocate to from the UK as a result of Brexit, as it is neither a low tax jurisdiction nor is it a member of the European Union.
An advantage in relocating business activities to Austria may lie in the modern group taxation regime, the extensive double tax treaty network with in total more than 80 countries. Austria has a participation exemption for dividends and qualified shareholdings in foreign corporations. Important factors are strong political stability and the geographically location of Austria in the center of Europe. The new government program foresees a reduction of corporate tax rate for retained profits. Furthermore there is no inheritance or gift tax in Austria.
Tax advantages lay in the CIT credit for research and development expenses and the inbound assignee regime for individuals. The overall taxation level should decrease with the progressive CIT reduction and wealth tax limited to real estate owned directly and indirectly. France offer a very attractive tax regime for inbound assignees who have not been tax resident since the last 5 civil years under certain conditions (tax exemption for the additional compensations received from the assignment in France, including part of the remuneration corresponding to a professional activity performed abroad during the 8 first years following to the year of arrival, 50% tax exemption for interest rates, dividends, royalties, capital gains, industrial and intellectual gains during the 8 first years following to the year of arrival, exemption of wealth tax on real estate properties located outside France until the 31st December of the fifth year following to the year of arrival).
France has a wide tax treaty network and the tax treaty signed with the United Kingdom remains applicable despite the Brexit.
Most of the advantages to locate or relocate a business in France are non-tax related, such as excellent education, housing and medical systems, good recruitment pool and a fine transportation networks (airports, train, cars and underground) as well as available office premises in the Paris area and a steady economy.
The main disadvantage of France would be the instability of the tax regime which make tax planning hard and the high level of social charges.
Cyprus provides an ideal base for businesses from all over the world wishing to establish a base in the EU. It is strategically located at the crossroads of three continents, it has a well-developed business infrastructure and a business-friendly, low-tax regime with a wide network of double taxation agreements. It also offers a high quality of life, low operating costs and substantial tax exemptions (including a 50 per cent income tax exemption for the first 10 years of residence for individuals earning above EUR 100,000 per year).
A new law on Alternative Investment Funds provides incentives for funds to relocate to Cyprus, including a highly beneficial flat tax regime for carried interest.
There are further advantages for businesses relocating from the UK - because Cyprus used to be a British colony, the whole legal, financial and administrative infrastructure is very similar to that in the UK, and English is very widely spoken and used in business.
There is no advantage or disadvantage for the company to re-located activities from the UK in anticipation of Brexit since Brazil does not have a double tax treaty signed with the United Kingdom.
German law in general as well as German tax law are applied strictly following the rule of law. In addition, Germany has a profound infrastructure, a highly qualified multilingual workforce and is the geographical center of Europe, so a good place for re-locating for logistical reasons. Frankfurt is deemed to be the financial hub of continental Europe, is the residence of important financial regulatory authorities, like the ECB, and therefore a place offering direct access to key regulators and market participants. Finally, Germany is financially and economically robust.
The key advantages Ireland offers from a tax perspective are a low, but internationally acceptable, headline corporate tax rate of 12.5% with the opportunity to significantly reduce the effective rate through amortization of intangibles acquired. The taxable profits and effective tax rate in Ireland are not reliant on any rulings or deemed deductions but rather are determined based on accounting profits and OECD transfer pricing principles. Ireland has a wide network of more than 70 double tax treaties reducing or eliminating withholding taxes. Furthermore there are broad domestic exemptions for withholding taxes on payments out of Ireland.
Ireland has long since been a key location for foreign direct investment from all over the world. It is not just about the tax regime. Some other non-tax relevant factors for a UK international group facing the prospect of life outside the EU would be Ireland’s continued commitment to the EU and the Euro providing a single point of access to the entire EU market. For financial services groups this may also offer the possibility of regulatory access to the EU. Ireland is culturally and physically close to the UK allowing for the possibility of co-location rather than re-location of activities post Brexit. This is facilitated by shared language and shared common law legal system. Continued access to the large EU labour market will also continue to be a key advantage.
The primary disadvantage with the Irish tax regime is the fact that there is no participation exemption for dividends. Although the credit system typically ensures there is no incremental tax on dividends in Ireland there can be an administrative burden associated with managing dividend flows and the credit calculations. It is expected that a participation exemption on dividends will be introduced in the near future.
Otherwise the primary disadvantage of Ireland is for international groups that rely on physical transportation of certain products by road or rail and need to be close to large customer markets. Clearly for certain industries or products this is not an issue but it may be an issue for some.
Israel is a member of the OECD and generally follows OECD principles with respect to taxation. Israel is also a party to over 50 double tax treaties which facilitate cross-border transactions and provide protection against double taxation.
In recent years, Israel has witnessed significant progress in its economy and capital markets as well as its high-tech industry and has attracted multinational corporations, investment funds and internet companies seeking to invest in, and access, its local market. In addition, Israel generally encourages, through incentive legislation and other programs, inbound investment and outbound exports aimed at strengthening its economy, including enacting and continuously simplifying laws that provide various tax benefits, reduced corporate tax and dividend withholding rates, such as the new IP Regime.
Malaysia is one of the UK’s largest trading partners in the region and the Malaysian government has consistently introduced and maintained a large gamut of attractive tax incentives to encourage new investments in various sectors, especially in respect of research and development, high-technology and green technology.
Malaysia also has in place multiple special economic regions offering different tax incentives and the Labuan taxation regime in place to boost and attract investment.
As an Associate Member to the BEPS Package, and in light of the recent introduction and enaction of various legislations in line with the BEPS Action Plans, Malaysia is expected to continue to improve on transparency and accountability to bolster the economic and financial infrastructure that are in place.
Mexico offers the most important treaty network within Latin America. Therefore, any UK based company interested in making an investment throughout Latin America could find Mexico as an important hub for its operations.
Norway is a highly developed and modern country with a small but robust and open economy. The country's economy is a mix of free marked activity and large state ownership. A wide range of opportunities, stable political environment and excellent economic framework is some of the features that makes Norway appealing to foreign investors. Norway is not a member of the European Union (EU), but is a member of the European Economic Area (EEA).
A corporate tax rate of 23 % and a participation exemption method on dividends and capital gains that is amongst the most liberal within the EEA, are some of the advantages of investing in Norway. Combined with no withholding tax on royalties or interests in general, or on dividends paid to corporate shareholders within the EEA and a wide range of double taxation treaties this makes Norway suitable for holding companies, especially when investing within the EEA.
Other advantages is a tax consolidation regime for corporate groups by which losses can be off set, and efficient and accessible authorities (including tax authorities, with the possibility to request a tax ruling to clarify the tax consequences of a planned structure or transaction).
There are few tax incentive schemes and special tax programs available in Norway. Another disadvantage is the extensive anti-avoidance doctrine (substance over form) in place to control innovative tax-planning techniques.
Another disadvantage is the interest limitation rule (described in more detail under item 9 above). The Ministry of Finance has, however, announced that they will prepare a consultation paper to introduce VAT in the financial sector as well as withholding tax on royalties and interests in the coming years.
Tax advantage in Panama are related with the territorial system. Therefore only income that is generate locally is subject to tax, any profits obtain from abroad are not subject to taxation under Panama Tax Regulations.
In addition to the above there are several tax regimes that provide tax benefits in addition to the provision of labor and custom duties incentives, such as the SEM regime that allow the Multinational Group to have a back office center within Panama exempt of taxes in addition that provide the benefits of having foreign individuals working for this special entity without the implications of labor limitations, meaning that the company is able to have more than 10% of foreign employees. In addition there are savings related to social security contributions do the exemption that is granted for foreign individuals working for the SEM Company.
Panama is also known as the HUB of the Americas providing the facilities for connections, communications in order to establish the LATAM center of business in our country.
Finally Panama is taking all the necessary steps to be a cooperative country as recommended and require by the OECD, GAFI among other international organizations.
The Philippines is one of the most vibrant economies in South East Asia and its strategic location is an advantage for businesses that require distribution in major Asian markets. Availability of skilled workforce is not a problem and there is no language barrier to contend with for the Philippines is an English speaking country. On top of these, tax incentives and special regimes are also available for certain activities that are not reserved for local businesses. Activities that are identified and encouraged can register with the Board of Investments for incentives on a pioneer or non-pioneer status. Other incentives can also be secured if the business activity is qualified for registration with the Philippine Economic Zone Authority and by operating in any of its accredited zone areas. Businesses in these areas are mostly export enterprises. The incentives include, among others, income tax holiday, tax and duty free importation and a special 5 per cent tax regime based on gross income. Freeport and other special economic zones are also available to foreign investors. More than this, the Philippines is focused on building the needed infrastructure under the current administration’s Build, Build, Build Program that is aimed to address the long complained transport, communication and power deficiency issues of foreign investors.
Portugal benefits from legislation applicable on an EU wide basis (passport feature and EU wide compliance and guarantees), and is also a compliant OECD member state, with an extensive net of Double Tax Treaties (currently, 79 of which 77 are already in force).
Apart from the highly-skilled human resources and the fact that salaries are not too high, some of the previously described regimes can represent an advantage for companies re-locating to Portugal, such as the participation exemption regime, the MIBC regime, as well as many other incentives that Portuguese law foresees for investment activities, including contractual tax incentives for significant investments, tax incentives for companies established in the interior of the country as well as the non-habitual tax resident regime which may apply to employees relocated to Portugal resulting in a lower tax burden also for the company.
The biggest disadvantage would be the fact that the CIT rate of 21% has not been lowered as it was foreseen when the CIT reform took place in 2014. But it may be a non-issue should a contractual tax regime (applicable for 10 years) be negotiated (it is common, and nowadays a streamlined procedure), not to mention other generous (and automatic) regimes granting CIT credits in connection to new investments (RFAI) and to research and development (SIFIDE).
In addition to the patent box regime already mentioned, Italy grants and R&D tax credit equal to 50% of certain qualifying R&D expenses provided that the total expenses over the year are over 30,000 Euro. The R&D tax credit can never exceed 20 million in very given tax year.
Italy features a Notional Interest Deduction regime available to resident companies and Italian permanent establishment of non-resident companies. Particularly, under such regime, companies may claim a deduction corresponding to the net increase in the equity employed in the entity, multiplied by a rate yearly determined by the Italian Ministry of Finance. Specific anti-avoidance rules apply.
A super-deduction and an iper-deduction regimes are available in respect of certain assets purchased by 31 December 2017. Under the super-deduction regime companies can determine the amount of tax deductible depreciations on the basis of 140% of the acquisition cost of the assets. Such percentage is increased to 250% for assets qualifying for the iper-deduction regime (typically, high tech assets).
Finally, it is worth mentioning that individuals carrying out an employment in Italy ma benefit from a 50% exemption on their employment income provided that:
- They graduated from university;
- They worked abroad for at least 24 months before moving to Italy;
- They become tax resident of Italy.
The 50% exemption applies from the first period of Italian tax residence and the following 4.
There is an investment incentive system in Turkey which allows companies to benefit from various incentive elements. To benefit from this system, companies need to obtain Investment Incentive Certificate (IIC).
Investments are supported through 6 different incentive schemes and different incentive elements designed within the scope of the Investment Incentive System. Contributions provided to investors through incentive elements depend on the characteristics of the investment and applicable schemes.
These elements are mentioned below:
- VAT Exemption
- Customs Duty Exemption +RUSF
- Municipal Revenue Support
- Stamp Tax Support
- Real Estate Tax Support
- Tax Deduction ( There are duration limitations and the rates differs depend on the scheme and type of investment for this support)
- Investment Land Allocation
- SSI Employer Share ( There are duration limitations and the rates differs depend on the scheme and type of investment for this support)
- Interest Support
- Insurance Premium Support
- Revenue Tax Witholding Support
- VAT Refund
Not applicable to Japan. However, Japanese multinational financial institutions are definitely looking for an alternative location to the UK after the Brexit, for example, the Netherlands, Germany and Ireland, taking into consideration various factors.
The main advantages for re-locating a company to the Netherlands can be summarized as follows:
- The Netherlands has an extensive bilateral income tax treaty network with over 100 treaties that aim to avoid double taxation by, among others, providing for beneficial allocation of capital gains taxing rights and reduced withholding tax rates. Furthermore, the Netherlands has concluded nearly 100 bilateral investment treaties.
- The Dutch tax authorities are easily approachable and can enter into advance tax rulings (ATR) and advance pricing agreements (APA) with taxpayers for advance certainty on the tax treatment of certain structures and transactions, within the boundaries of published ruling policy.
- Dutch companies are allowed to file their tax returns in a foreign currency other than the Euro if their annual reports are drawn up in the same foreign currency.
- Group companies can be consolidated for Dutch corporate income tax (CIT) purposes if they form a fiscal unity, thus potentially leading to substantial tax savings and administrative relief.
- The Netherlands has an expat regime. This regime is known under the name: 30% ruling. A 30% ruling is a tax-free reimbursement of 30% of the employee’s salary, provided that the employee has been recruited or assigned from abroad and has specific expertise, which is based on a minimum salary standard.
- Pursuant to the participation exemption regime, benefits derived from a qualifying shareholding, including dividends and capital gains, are exempt from CIT.
- Administrative procedures are quick and affordable.
- The Netherlands is located in the centre of Europe and is classified as one of the most ‘wired’ countries in the world and hosts the largest data transport hub in the world. The Netherlands has excellent infrastructure, the population is well educated and English is widely spoken.
- A disadvantage of relocating to the Netherlands is that the Netherlands have introduced a broad bonus maximum of 20% of the fixed salary, while the EU Directive regarding bonuses stipulated a maximum of 100% of the fixed salary.
From a tax perspective, Romania offers a competitive environment centered on the flat tax rate of 16% applicable to corporate profits and capital gains. Generally, income of individuals is taxed at a flat rate of 10%. In addition, there are several advantages for investors in Romania, as follows:
- Salary tax exemption for employees working in the IT field. This incentive was introduced in the tax legislation approximately 17 years ago, attracting a lot of international companies to create IT hubs in Romania. Combined with the fact that our country has very good IT schools, Romania is now a regional leader in software programming. Moreover, starting 2017, this incentive was also extended to employees involved in R&D activities developed in Romania.
- There are other tax incentives available for companies involved in R&D: companies operating exclusively in R&D may benefit of a 10 years tax holiday for the corporate income tax, while those doing beside R&D also other types of activities, can deduct an additional amount representing 50% of the R&D expenses, when calculating corporate income tax (i.e. R&D related expenses are 150% tax deductible).
- Companies investing in production equipment, IT equipment and software are exempted from corporate income tax for the part of the profits reinvested in such assets. This incentive was introduced in 2014, is applicable for an indefinite period of time and requires that such profits are kept in the company’s retained earnings during at least half of the useful life of the investments. Hence, a company doing such investment can postpone the payment of tax for the reinvested profits until the moment when decide to distribute these profits as dividends.
Regarding the main disadvantages, we can point out a certain degree of bureaucracy and lack of transparency in tax administration, combined with an aggressive approach of the tax authorities in case of tax audits. However, these problems can be overpassed with the support of good advisers or after a court case in the Romanian or European courts of justice.
Regardless of whether Gibraltar forms part of the EU by virtue of following the UK regarding Brexit, it is likely that it will continue to adhere to the same standards which will be reflected in local legislation.
As a UK overseas territory, it is proposed that Gibraltar would continue to have access to the UK markets for financial services post Brexit, and therefore anyone looking to re-locate from the UK to Gibraltar would continue to experience a number of benefits.
Located in the Mediterranean and in the geographic confines of continental Europe yet endowed with a familiar, reliable and predictable common-law system, Gibraltar is an attractive place for individuals wishing to relocate and/or do business.
Much would probably depend on the nature and scope of the group’s activities. Notwithstanding uncertainty caused by Brexit many advantages of the UK jurisdiction will remain. The UK will continue to possess a well-developed, sophisticated financial infrastructure. Its high level of connectivity with the rest of the world will not change. Whatever the eventual political settlement over Brexit, the UK Government has indicated that it intends to maintain existing trade etc standards and regulation. Consequently, but subject to the Brexit settlement, activities in the UK should continue to be compatible with similar activities within the EU. The UK courts are well used to dealing with international disputes and are often flexible in procedure and cost effective. They are likely to remain a forum of choice for the resolution of international disputes. The tax authority always scores well in comparison exercises with other national fiscs and is recognised as honest and sophisticated. Whilst the UK will not become a low rate tax haven, it is the policy of the UK Government to reduce corporate tax rates. The UK has a track record of using the tax system to encourage and incentivise business. Self-evidently the language of business in the UK is English.
Disadvantages attributable to Brexit will depend on the eventual political settlement but will most likely include the loss of membership to the single market and customs union, potential consequent loss of passporting rights, and inability to rely on the EU Arbitration Convention, which established a procedure to resolve disputes where double taxation occurs between companies of different Member States. Without an agreement with the remaining EU Member States, for example, directives, such as the Parent-Subsidiary Directive and Interest and Royalties Directive, will no longer have direct application to UK companies. Consequently, UK companies receiving dividends, interest and royalties from EU companies will have to rely on double tax treaties to eliminate (if possible) withholding taxes on such distributions. Depending on the terms of the tax treaty, companies might incur additional costs when distributing profits from certain EU Member States and might have to consider restructuring to distribute dividends more efficiently.