Brexit effects from the tax perspective

Brexit effects from the tax perspective

The exact effects of Britain's outflow from the European Union are hard to predict, but we can identify some of them from a tax and legal perspective.

Deduction of VAT related to financial - banking services

Brexit can generate VAT deduction opportunities, for example, for banks and insurance companies in Romania. Currently, they do not deduct VAT or deduct in a minimum proportion.
Thus, the provision of financial-banking services provided by Romanian providers to customers outside the European Union will allow VAT deduction, by way of exception to the general rule.

Registration for VAT purposes

There are currently UK-based companies registered for VAT purposes in Romania through the direct procedure.  Along with Brexit, they will have to change the VAT registration procedure and will have to designate a tax representative with all the resulting obligations (for example - the liability of the tax representative for the British company's VAT obligations, issuing a bank guarantee letter, etc.).

There has not yet been a procedure to change the registration form or transitory arrangements to know how complicated or easy this change will be. It is true that the provisions of the VAT legislation in force do not allow the direct registration to be retained for VAT purposes, and if the VAT code becomes invalid, the commercial activities of British companies in Romania may be blocked.

"Use and enjoyment" rules on the provision of services

At present, the goods processing services provided by a Romanian company to a UK company are where the customer is established. After Brexit, however, the "use and enjoyment" provisions apply, whereby the provider is obliged, as a general rule, to collect VAT from Romania if the services are actually used and exploited in Romania. This, coupled with the fact that there are still no reciprocal declarations for VAT reimbursement between Romania and the UK, will increase the cost of the UK beneficiary.

Customs operations

Deliveries of goods shipped from the UK to Romania and vice versa will be subject to customs operations. Moreover, the amount of customs duties after Brexit is not known at present. Thus, at least for the immediate post-Brexit period, there may be delays in the logistics chain and an increase in costs for goods imported from the UK.

Impact on withholding tax exemption for external payments

In the area of ​​direct taxation there are some important areas that will be affected by Britain's exit from the European Union. This is particularly the case with the European Directives on dividends, interest and royalties that offer favorable tax treatment and which, post-Brexit, can no longer be applied in the relations between a Romanian company and a UK company. In the same spectrum, the favorable tax treatment provided by the Merger Directive will no longer be invoked in restructuring and reorganization actions undertaken between companies in Romania and UK companies.

Based on the Guidelines, the distribution of dividends, as well as interest and royalties payments made by a Romanian company to a UK company, are not subject to withholding tax in Romania under certain conditions. Once you leave the European Union, this benefit will no longer be available.

In the absence of the applicability of the Directives, the tax rates provided by the Fiscal Code (5% for dividends or 16% for interest and royalties respectively) or those provided for by the double taxation avoidance convention (10% or 15% depending on the nature of the payment) certain conditions will apply. These can generate additional costs for companies.

A change in the convention for avoiding double taxation between Romania and the UK by keeping a similar treatment to that provided by the Directives could reduce the tax burden.

A discussion on the renegotiation of the convention is on the agenda of the British Government in 2019, however, it remains to be seen in what direction these potential changes will go.

Right of residence in Romania, post-Brexit

In order to favor a more orderly Brexit, the European Union grants the UK a flexible extension of the term until it can leave the community bloc. If the Brexit agreement negotiated with the EU is approved by the British Parliament, then the United Kingdom will be able to leave the Union from the following month but not later than 31 October 2019.

Although a "no deal" scenario is becoming less and less likely, Member States such as Switzerland or the Czech Republic have already in place specific procedures for British citizens residing in these countries if they leave the Union without consent.

Including the Government of Romania on March 19, 2019, approved a Memorandum including the Measures Plan on the regulation of the status of British citizens in the context of a no-deal scenario.

The measures are aimed at clarifying some important aspects regarding ensuring the continuity of rights acquired by British citizens in Romania. The document treats the hottest topics in the context of "no-deal" Brexit, such as the right to stay, access to the labor market, land ownership, social security and, last but not least, access to education. At present, the normative act transposing the measures in the Memorandum is in the procedure of approval and approval, according to the legal provisions.