Brexit has not been in place long enough for conclusions to be drawn about the real consequences of it on British companies and corporations. Even though, there is still much uncertainty about how UK businesses would be affected, the one thing that is clear up to know is that changes will come concerning VAT and import duties. This article does not seek to make a case for or against EU membership; rather we aim to set out the potential tax implications of leaving the EU.
The main issue comes indeed from the fact that the UK is no longer part of EU’s Customs Union. As a result, EU’s customs duties would apply to imports from the UK, making it less attractive for EU companies and consumers to source goods from UK companies. The UK besides does no longer benefit from 34 existing free trade agreements that the EU has negotiated throughout the world, meaning that Brexit could also give rise to non-tariff barriers as all goods would need to be customs cleared (first exported, then imported, in both directions), adding time, complexity and cost to UK companies’ value chains.
The government has not yet totally clarified which new trading arrangements would replace the existing free trade arrangement with the EU. Anyhow, Brexit requires that UK businesses need to deal with border controls when their supplies or sales cross the UK-EU border. Depending on which trading arrangement replaces EU membership, the mentioned controls could range from satisfying rules of origin to substantial increases in import duties.
There are so many potential tax implications and variables, depending on the way that a Brexit and ongoing trade deals are negotiated, that it is only practical to give an overview at this stage. Two paths are currently possible for Britain:
To strike a Norway-style deal with the EU after Brexit, meaning that it would be part of the European Economic Area (EEA), so that imported goods would still come in duty-free to the UK because there is free trade between EU and EEA members.
Not be able to strike immediately a trade deal with the EU, meaning that import duties negotiated at the World Trade Organization would kick in.
Under both cases, Britain would not have access to the coordinated VAT collection of the EU. Hence, a 20% VAT would need to be paid at the UK border, and the importer would no longer have the convenience of combining this with domestic VAT payments. UK businesses, which are required to register for VAT in an EU Member State, could face additional administration and costs because many member states require a non-EU VAT registrant to appoint a fiscal representative locally to deal with its tax affairs.
In this complex scenario, we consider that most British companies may be willing to open up to the possibility of a partial delocalisation of British organisations from the UK towards the EU. Besides, all of those Multinational companies manufacturing activities that use the UK as a gateway to the EU perhaps will come to review their international strategies to determine whether, and to what extent to use UK group companies.
This opening for delocalisation could result in interesting opportunities for Italian companies and in general for the country’s business. Indeed Italy’s role in exports and in the development plans of EU peripheral countries could now be even greater than before, particularly in Eastern Europe. The impact on Italy has the potential to certainly be positive, especially in strong sectors such as Made in Italy, luxury, transportation, naval, pharma, food and beverage. Besides, the long-term effects of Brexit could be paradoxically positive, resulting in a more united Europe focused on ensuring better prospects for growth and employment. Italy could have all the necessary credentials to play a key role in this new scenario. With one less political competitor at the European table, Italy could be able to push even more favourable agreements and conditions for Italian companies operating in the EU context.
Considered what said and analysed the significant potential for growth and space for revitalization of Italian business and market, we consider that interesting opportunities could come for British companies from the establishment of a branch in the country. Setting up a branch in an EU country in fact could prove an effective tool in order to secure UK companies’ position before tax issues. On those ground, we feel like Italy could be a good choice for those companies willing to open a branch inside the EU. So, what to do in order establish a presence in the Italian territory and avoid tax risks?
Italian corporate law allows foreign companies to establish a branch in Italy (Articles 2507 – 2510 of the Italian Civil Code). A branch is defined under Italian law as a foreign “unit” of the company itself, and thus not a separate legal entity from the company. In particular, the branch shall apply for VAT in Italy and shall file tax and VAT declarations in Italy.
Establishing a branch enables the company to operate in Italy with a more streamlined, cost-effective structure than if a full subsidiary were established in the country. Establishment of a branch in Italy requires to appoint a “legal representative” of the branch who shall be a physical person domiciled in Italy and to have a registered office for the branch. Branches are entered into a special register of the Italian Companies Register. For tax purposes, branches are considered as permanent establishments and are therefore subject to taxation. They shall thus keep their own books, submit VAT and income tax returns to tax authorities (Revenue Agency or Agenzia delle Entrate) each year, and file the annual report of the foreign company with the Italian Registrar of Companies.
In the field of direct taxation, Brexit already affects UK entities with subsidiaries or permanent establishments in Italy, considering that several (and favourable) domestic rules are applicable only to EU Member States and EEA (European Economic Area) countries. In case of UK entities without a permanent establishment in Italy, business income such as dividends, interest or royalties paid from an Italian entity could be subject to a final withholding tax, possibly reduced by treaty provisions. In case of UK entities with a permanent establishment in Italy, business income paid by an Italian company would be subject to (corporate income) tax in Italy as if it would have been paid to a resident company.
Article by Daniela Pacino