The United Kingdom (hereinafter referred to as the UK) leaving the EU has been a very topical issue at the European level for the last two years. If the UK does not approve the EU withdrawal agreement, or request a prolongation of EU membership, it should be released on 31 October 2019, from the EU without the Agreement, i.e. a hard BREXIT.
It could be otherwise, if the UK concluded an agreement with the EU under which it would, among other things, be still regarded as it would have been an EU Member State in certain areas, including tax area. This has not been done so far.
The UK leaving the EU will affect citizens, business entities and administrative authorities both in the UK and in the European Union. The changes will concern new controls at the EU external borders, the validity of licenses, certificates and authorizations issued by the UK or new conditions for data transmission.
How should a Slovak trading company prepare for BREXIT?
- Customs
If the UK leaves the EU without agreement, the customs authorities will apply all trade-related rules and formalities between the EU and third countries for goods imported from or exported to the UK. Thus, customs formalities will be applied, customs declarations will be submitted as well as customs duties will be applied to goods entering the EU from the UK. However, business entities that do business with the UK on a regular and frequent basis may, in order to shorten the customs procedure related to import / export / transit of goods, request the customs office to authorize the use of simplified customs procedures.
Business entities that have so far done their business exclusively within the EU and plan to trade with the UK must apply for the assignment of an EORI number (EORI = Economic Operators Registration and Identification number). In the Slovak Republic, Financial Administration is a registration authority for the EORI number.
When exporting products to third countries with which the EU has a free trade agreement, exporters can benefit from a preferential tariff if the products have sufficient „EU content“ in terms of the rules of origin. After BREXIT, companies can no longer rely on the fact that inputs into the finished product from the UK will be considered EU content.
- Value added tax
If the UK leaves the EU, it ceases to be an EU member state on the day following that of its withdrawal and becomes a third country. The most important changes and impacts in the field of VAT are as follows:
- Procedure for buying and selling goods from the UK
Goods that enter the EU tax (VAT) territory from the UK or are dispatched or transported from the EU tax (VAT) territory to the United Kingdom will be reckoned as import or export of goods in accordance with Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. This means charging VAT on imports, while export is exempt from VAT.
- Procedure for applying a tax refund from UK for applicants from Slovakia
VAT registered taxpayers will submit tax refund applications electronically via the VAT REFUND system pursuant to § 4 or 4b of the VAT Act until the UK leaves the EU . Requests for refunds after the UK’s withdrawal from the EU will only be provided in the manner and procedure set out under UK national legislation.
- The VAT Mini One Stop Shop (“MOSS”) scheme
Taxable persons (established in a third country) wishing to benefit from one of the special schemes of Title XII, Chapter 6 of the VAT Directive (the so-called “mini one-stop shop” or “MOSS”) and providing telecommunications, television and radio broadcasting services or electronic services to non-taxable persons in the EU will need to register with MOSS in an EU Member State; they will no longer be registered in the UK.
- International taxation and direct taxation
As far as international taxation is concerned, BREXIT will not affect the applicable Double Taxation Treaty on avoidance of double taxation concluded between the UK and the Slovak Republic, i.e. the legislative framework for determining which State has the right to tax the relevant income tax-payable income and the extent to which it remains unchanged. The provision of § 16 (Taxpayer’s income tax source with limited tax liability) will henceforth be applied for the income for taxpayers with a limited tax liability (residents of the UK) from sources in the territory of the Slovak Republic. However, the status of such a taxpayer is changing.
As the UK taxpayer will not be considered a taxpayer of a Member State of the European Union after BREXIT, or a taxpayer of a Party to the EEA Agreement, such taxpayer will be taxed in accordance with the Income Tax Act as a taxpayer the so called „third state“. An overview of changes in a UK taxpayer status is available on the website of the Financial Directorate of the Slovak Republic (FRSR). The following impacts we count among the most significant in terms of direct taxation:
- Exemption of interest and licence fees
One of the most significant changes resulting from the UK’s withdrawal from the EU is the impossibility of exempting interest and licence fees (§ 13 (2) (f) and (h) of the Income Tax Act) under the EU Parent-Subsidiary Directive.
- Tax provision
A tax provision institute will be applied to such taxpayers after the UK’s withdrawal from the EU. The liability to provide tax pursuant to § 44 (2) of the Income Tax Act applies to taxable income of taxpayers with limited tax liability arising from sources in the territory of the Slovak Republic, if the right to tax this income for residents of Contracting States is attributed to the Slovak Republic. In order to provide tax on taxable income, in addition to the income from which the tax is withheld, the income payers are obliged to deduct 19% of the amount of the financial settlement in the case of UK.
Example No. 1 – Tax provision from taxable income of UK taxpayers after EU withdrawal
In 2019, a Slovak limited liability company pays the rent for the lease of non-residential premises to the owner of the real property, which is a company based in the UK. Is the Slovak company obliged to deduct 19% from the income for tax provision in accordance with § 44 of the Income Tax Act?
Answer
Income from the lease of a property located in the territory of the Slovak Republic is a taxable income of a taxpayer with limited tax liability (resident of the UK) from sources in the territory of the Slovak Republic pursuant to § 16 (1) letter f) of the Income Tax Act as well as § 6 of the Double Taxation Treaty on the avoidance of double taxation concluded between the UK and the Slovak Republic.
The UK tax resident is obliged to settle the income in question through the tax return filed after the end of the tax period, while the taxpayer (resident of the SR) is obliged to provide tax on such income in accordance with the provision of § 44 (2 ) to (6) of the Income Tax Act.
