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Brexit consequences in personal income tax

​The main implications in the personal income tax of the exit of the United Kingdom and Northern Ireland from the EU are detailed below. This information is based on the assumption that the so-called "Brexit" would imply the departure of the United Kingdom from both the EU and the European Economic Area. Likewise, it must be understood without prejudice to the application that may be applicable to each situation of the Agreement between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland to avoid double taxation and prevent tax evasion in terms of income and property taxes and its Protocol, made in London on 14/03/2013.

Francisco Guijarro

Date 11/02/2020

The main implications in the personal income tax of the exit of the United Kingdom and Northern Ireland from the EU are detailed below.

 

This information is based on the assumption that the so-called "Brexit" would imply the departure of the United Kingdom from both the EU and the European Economic Area.

Likewise, it must be understood without prejudice to the application that may be applicable to each situation of the Agreement between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland to avoid double taxation and prevent tax evasion in terms of income and property taxes and its Protocol, made in London on 14/03/2013.

 

Based on these premises, the main implications in the personal income tax of the exit of the United Kingdom and Northern Ireland from the EU, effective from 1/01/2021, would be those set out below. For a general analysis of the UK withdrawal agreement from the EU,

 

1. Revenue and profit allocation pending in the event of a change of residence.

a) If a taxpayer changes residence to another State, all income pending imputation must be integrated into the tax base of the last tax period to be declared for this Tax. In the case of moving to an EU country, the taxpayer may choose to present, as each of the income pending imputation is obtained, a complementary self-assessment of the year in which the residence changed, without penalty, late payment interest or surcharge (LIRPF art.14.3).

If the United Kingdom ceases to be part of the EU, the transfer to that country would not allow such an option. b) The regulations of the Tax also oblige to pay for certain capital gains when there is a change of residence, even if the transfer or reimbursement of the securities or participations has not occurred, and provided that the required requirements are met (LIRPF art.95 bis). This is what is known as «exit tax», establishing certain specialties basically consisting of deferring taxation when the taxpayer travels to a Member State of the EU or the European Economic Area with effective exchange of information (nº 2110 s. Fiscal Memento 2019).

These specialties would not apply to travel to the United Kingdom if it ceases to be part of the EU and the European Economic Area.

 

2. Securities not allowed for trading. In this Tax, negotiated securities are understood as those admitted to trading in one of the official secondary markets of defined values in Dir 2014/65/UE. The non-application of the aforementioned Directive to the securities of listed companies resident in the United Kingdom, on the occasion of their exit from the EU, would have the following consequences: - The LIRPF art.25.1.e) and 33.3 establishes the treatment of the distribution of the premium for issuing shares or participations and reducing capital with refund of contributions, between securities admitted to trading in any of the EU securities markets defined in Dir 2014/65/UE and securities not admitted to trading.

In the cases of distribution of the issuance premium and reduction of capital with return of contributions, to the values of listed companies resident in the United Kingdom, when leaving the EU, the treatment that is planned for unlisted companies would be applied. - In the event of transfers of securities or shares admitted to trading in any of the EU securities markets defined in said Directive, when the taxpayer has acquired homogeneous securities within two months prior to or after such transfers, the capital loss is integrated as the securities or shares that remain in the taxpayer's equity are transferred. In the case of transfer of unlisted securities, the term taken into account is not two months but one year before or after the transfer (LIRPF art.33.5).

In the case of the securities of listed companies resident in the United Kingdom, upon leaving the EU, the period required to be able to integrate a capital loss derived from a transfer of said securities followed by a reinvestment would pass from two months to one year. - The Tax regulations establish specific valuation rules in relation to different cases in which there is an equity alteration, among which the treatment applicable to onerous transfers of quoted and unquoted securities is included (LIRPF art.37.1.a) y b)).

In the case of securities of listed companies resident in the United Kingdom, upon leaving the EU, the treatment of the transfer for consideration of such securities would be the one planned for the transfer of unlisted securities.

 

3. Application of the special deferral regime.

The LIRPF art.37.3 recognizes the application to individuals of the special regime of mergers, spin-offs, asset contributions, exchange of securities and change of registered office of a European Company or a European Cooperative Society from one EU Member State to another provided for in the LIS. The departure of the United Kingdom from the EU could motivate the non-application of this scheme, since its application depends on whether the intervening entities, their partners or the elements involved are residents or are located in an EU Member State, or in some cases in the European Economic Area (LIS art.76 s.), and unless, in certain cases, the United Kingdom remains within the European Economic Area.

 

4. Special assessment of lottery, betting and raffle prizes.

The special levy of 20% applicable to prizes for lotteries, bets and raffles organized by public bodies or entities established in other EU Member States or the European Economic Area and which pursue objectives identical to those of the State Lotteries and State Betting Society, ONCE and Red Cross, would not be applied to those organized by equivalent entities resident in the United Kingdom, going to tax such prizes as capital gains in accordance with the general rules of the Tax (ie. no exemption and applying the general scale tax), unless the United Kingdom remains within the European Economic Area.

 

5. Family units formed by tax residents in Member States. Certain deductions are applicable to family units formed by tax residents in EU Member States or the European Economic Area (LIRPF disp.adic.48ª).

That provision would not apply with respect to the United Kingdom if it ceases to be considered a Member State of the EU or of the European Economic Area.

 

 

The main implications of the departure of the United Kingdom and Northern Ireland from the European Union are detailed below.

 

The LIS contains special rules applicable when entities resident in EU Member States or the European Economic Area (EEA onwards) are involved. Thus, the signing of the Agreement on the withdrawal of the United Kingdom from Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, commonly known as Brexit, will have an impact on these rules. However, as long as the transitional period applies (in principle until 31/12/2020), there is no change.

 

With effects 1/01/2021, the following changes will occur, notwithstanding the possible application of the CDI between Spain and the United Kingdom:

  - the making of contributions to employment pension funds of the United Kingdom of Great Britain and Northern Ireland (hereinafter United Kingdom), to the extent that they can be financially made, will not be considered a deductible expense (LIS art.14.2);

  - the change of residence of an entity with transfer of assets from Spain to the United Kingdom will generate a tax liability in the SI of the Spanish entities transferred, which may not be subject to deferment unless the United Kingdom is part of the EEA (LIS art.19.1);

  - regarding dividends and income derived from the transfer of securities representing the own funds of entities resident in the United Kingdom, if the investee resides in a territory of zero taxation or qualified as a tax haven, the CDI between Spain and the United Kingdom (LIS art.21);

  - in the reduction of income from certain intangible assets, when the assignee of said assets, resident of the United Kingdom, resides in a territory of zero taxation or qualified as a tax haven, its application will depend on what is established in the CDI between Spain and the United Kingdom (LIS art.23);

  - The expenses assumed by Spanish entities contributing by the SI as a result of research and development and technological innovation activities in the United Kingdom, will not be calculated for the calculation of the deduction base for carrying out this type of activities, unless the United Kingdom is part of the EEA (LIS art.35);

  - in the deduction for investments in Spanish productions of cinematographic feature films and audio-visual fiction, animation or documentary series, the co-productions in which British producers participate will not benefit from the increased limit on the cost of production (LIS art.36.1). Likewise, to determine if a production is Spanish, the authors, actors or creative personnel of a technical nature with British nationality or residence will not count for the fulfilment of requirements (L 55/2007 art.5);

  - Creative personnel with tax residence in the United Kingdom shall not give rise to the right to deduct the costs of executing foreign productions, unless the United Kingdom is part of the EEA (LIS art.36.2);

  - the special regime of business reorganizations will not be applicable to the change of registered office of a European Company or a European Cooperative Society from one Member State to another of the EU (LIS art.76 a 89);

  - joint venture, constituted by Spanish and British entities, may not be considered as a European economic interest grouping, and the system for allocating income to the partners provided for in this special tax regime is not applicable (LIS art.44);

 - in IICs established in the United Kingdom and registered with the CNMV for commercialization, the income allocation regime provided for in this special regime regarding dividends and income derived from the transfer of shares in IIC will not apply. A case-by-case analysis should be performed to determine taxation (LIS art.53.2);

  - shipping entities registered in the United Kingdom may not apply the regime of shipping entities based on tonnage (LIS art.113);

  - British insurance companies that operate in Spain under a regime of free provision of services will not have the status of subject obligated to retain, in relation to the operations carried out in Spain, unless they operate through permanent establishment or that the United Kingdom is part of the EEA (LIS art.128.1).

 

  

Brexit: Consequences on Non-Resident Income Tax

 

 Analysis of the consequences in the IRNR of the exit of the United Kingdom from the European Union (Brexit) from the end of the transitional period.

The United Kingdom has ceased to be a member of the European Union (EU) with effect from 1/02/2020 (BREXIT).

The Agreement on the withdrawal of the United Kingdom from Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community provides for a transitional period ending on 31/12/2020, which may be extended up to two years prior agreement between both parties.

During the transitional period the EU will treat the United Kingdom as if it were a Member State, except for its participation in the EU institutions and government. Consequently, the specific provisions of the IRNR applicable to residents of other EU Member States will continue to apply to residents in the United Kingdom until the end of the indicated transitional period. In any case, there is currently a valid CDI between Spain and the United Kingdom that will continue to govern the end of the transitional period, unless denounced by any of the parties.

 

Among the implications and consequences of Brexit in the IRNR for residents of the United Kingdom, from 1/01/2021, the following can be highlighted:

  1. Exempt income (LIRNR art.14):

The following exemptions will no longer apply:

• Exemption of interests and transferable capital gains obtained by residents in another Member State of the European Union, with certain exceptions such as increases in equity derived from the transfer of shares, shares and rights in an entity in certain cases • Exemption of dividends and profit sharing without permanent establishment (EP) mediation obtained by pension funds resident in the EU or in member states of the European Economic Area (EEA) with clause of effective exchange of information and that are equivalent n the EU or in member states of the European Economic Area (EEA) with clause of effective exchange of information and that are equivalent to the funds of pensions regulated in RDLeg 1/2002, or those obtained by permanent establishments of these institutions located in the EU. • Exemption of dividends and profit sharing obtained without EP mediation by collective investment institutions regulated by Dir 2009/65/CE, or by collective investment institutions resident in the EEA member states with effective exchange of tax information.

• Exemption of fees between associated or fiscally linked companies and / or EP that reside in the EU, when the requirements to that effect meet.

• Exemption of benefits distributed by Spanish subsidiaries to their parent companies resident in another EU or EEA Member State with effective exchange of information, or to permanent establishments of the latter located in other Member States, when certain requirements are met. • Exemption for reinvestment in habitual housing (LIRNR disp.adic.7ª) for taxpayers residing in an EU or EEA Member State with effective exchange of tax information. The exemption reaches the capital gains obtained by the transfer of what has been your habitual residence in Spanish territory, provided that the total amount obtained in the transmission is reinvested in the acquisition of a new habitual residence.

  2. Calculation of the tax base (LIRNR art.24.6).

In the case of income obtained without EP mediation, the expenses provided in the LIRPF for taxpayers residing in another EU State, natural persons or, in the case of entities, those provided in the LIS, directly related to LIS, directly related to the income obtained in Spain and that have a direct and inseparable link with the activity carried out in Spain, will not be deductible.

  3. Type of Tax (LIRNR art.25).

Income taxed at the general tax rate (labor, real estate, etc.) obtained in Spain by non-residents without EP mediation will cease to be taxed at the rate of 19%, applicable to residents in other EU and EEA States with effective exchange of information, and will be taxed at 24%.

  4. Option for EU or EEA residents to pay income tax (LIRNR art.46; RIRNR art.21 s.).

The regime by which non-resident taxpayers, natural persons, who prove to be residents in another EU or EEA Member State with which there is an effective exchange of tax information, with the exception of residents in tax havens, they may choose to pay taxes for the IRPF, without losing their status as taxpayers for the IRNR.

This optional regime applies when the taxpayer has obtained during the year in Spain for income from work and for income from economic activities, at least 75% of the total income, or that the income obtained during the year in Spain has been less than 90% of the personal and family mínimum that would have corresponded to them according to his personal and family circumstances of having been resident in Spain and that the income obtained outside of Spain has also been lower than said minimum, and when the income obtained in Spain has actually been taxed by the IRNR.

  5. Supplementary tax on EP income (LIRNR art.19.2 y 3).

This lien is required from the EPs of non-resident entities for the amounts transferred abroad from the income obtained by the EP.

The complementary tax is not applicable in the case of income obtained in Spanish territory through EP by entities that have their fiscal residence in another EU Member State, unless it resides in a tax haven, or in a State that has signed an agreement with Spain to avoid double taxation (CDI), through reciprocity, in which the contrary is not expressly provided.

Since there is a CDI between Spain and the United Kingdom in which nothing is foreseen regarding this tax, it will still not be applicable to entities resident in the United Kingdom.

 

 

VAT effects of EU abandonment by the United Kingdom

 

The most relevant consequences for VAT purposes of leaving the United Kingdom from the EU are related.

With effects 31/01/2020, the departure of the United Kingdom from Great Britain and Northern Ireland (United Kingdom), the European Union and the European Atomic Energy Community has been effective. While finalizing the final terms of the exit, the parties have agreed to establish a transitional period ending on 31/12/2020, during which EU regulations remain in force in the United Kingdom (Brexit Agreement , DOUE 31-1-20). And, although the transitional period is likely to be extended by the parties, if this does not happen the most prominent consequences on 1/01/2021 are:

 

1.  In the Value Added Tax (VAT):

a)  Deliveries of goods between the two countries lose their status as intra-community operations and become considered merchandise from third countries, subject to customs formalities such as import or export.

Supplies of goods to British individuals may not apply the rules of distance selling. b)  Regarding the provision of services, these will be located as provided in LIVA art. 69, 70 y 70.Dos, with the premise that it is now a third country.

c) Process:

- Transactions with the United Kingdom should not be reflected in the summary statement of intra-Community operations (Mod 349). Nor are they required to have an NIF-VAT. - Residents in the United Kingdom who carry out operations subject to the tax in TIVA must appoint a tax representative to fulfill the obligations imposed on LIVA, unless mutual assistance instruments similar to those existing in the Community are enabled (LIVA art164.Uno.7º). - The tax refund to employers or professionals in the United Kingdom cannot be submitted electronically and must use the procedure provided in Dir 86/560/CEE. For this it will be necessary to name a tax representative in Spain and, that there is reciprocity of treatment to Spanish companies or professionals, except:

a. Templates, molds and equipment acquired or imported to be used in the manufacture of goods that are exported to the entrepreneur or professional not established or destroyed.

b. Access, hospitality, catering and transportation services related to attending trade fairs, congresses and exhibitions of a commercial or professional nature that are held in the territory of application of the Tax (Peninsula and Balearic Islands).

c. Goods and services intended for the provision of telecommunications, broadcasting or television and electronic services by entrepreneurs applying the MOSS.

d) Under the Special Scheme for the provision of technological services (MOOS), employers established in the United Kingdom must modify their identification and register in an EU member country in the external regime of the union.

The operations carried out in this regime until 31/12/2020 (transitional period), must be included in your declarations to be submitted in 1T of the year 2021, although these are presented once the transitional period has ended.

 

2.  With respect to Customs, the document prepared by the AEAT is limited to consigning an email address where inquiries can be sent: brexitaduanas@correo.aeat.es



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