The following examines how the taxation rules will change after the withdrawal of the United Kingdom of Great Britain and Northern Ireland (the UK) from the European Union (EU) and from the European Economic Area (EEA).
How will the taxation of excise goods change?
If the UK withdraws from the EU on 29 March 2019 without any transition period, the UK will become a third country in the meaning of the excise legislation since 30 March 2019 and the free movement of excise goods between the UK and the EU will end.
All UK excise permits are invalid from 30 March 2019, 00:00h (CET) and it is not possible to issue electronic delivery notes to the UK since 30 March 2019.
If the electronic delivery note is issued in the UK before 30 March 2019 and the excise goods, moving on according to this delivery note, leave the UK and enter any other EU Member State also before 30 March 2019, upon the arrival of such excise goods to Estonia are applicable the same rules as upon the arrival of the excise goods, dispatched from another EU Member State under excise duty suspension arrangement.
How will the taxation with VAT change?
If the UK withdraws from the EU on 29 March 2019 as planned, upon the taxation with VAT the UK is a so-called ‛third country‛ (a country not member of the EU) since 30 March 2019. Upon the taxation with VAT it means the following.
When an Estonian VAT payer provides services to a UK person engaged in business, it is not important any more whether the recipient of the service is registered in the UK for VAT liability or not – upon the provision of the service, when a so-called basic rule is applicable (the place of supply is the country of the recipient, irrespective of the country where the service was actually provided), to any third country person engaged in business it is always the service with 0% VAT for the Estonian VAT payer.
The difference in comparison with today’s situation – zero-rated service which is provided to a third country person shall be declared only in line 3 of the VAT return (Form KMD), such supply shall not be declared in line 3.1 of Form KMD and also shall not be declared in the report on intra-Community supply (Form VD).
- When an Estonian VAT payer or VAT payer with limited liability receives from a UK person engaged in business any service, taxable in Estonia through reverse charge, after Brexit the taxable value of the service shall be declared in the informative line 7 of Form KMD, not in line 6.
- When an Estonian VAT payer provides services to a UK person not engaged in business, there will be a change in relation to immaterial services, listed in subsection 10 (5) of the Estonian VAT Act – the provision of such services (including electronic communication services and electronically supplied services – hereinafter digital services) to a third country person not engaged in business is the supply with 0% VAT which shall be declared in line 3 of Form KMD. When the recipient of such kind of service is an EU person not engaged in business – any other immaterial service shall be taxed with 20% VAT and shall be declared in line 1 of Form KMD and upon the provision of digital services the special arrangements for imposing VAT are applicable.
- When an Estonian VAT payer transfers the goods to a UK person together with the transport of goods from Estonia to the UK, after Brexit it’s always the export of goods which is taxable with 0% VAT and shall be declared in lines 3 and 3.2 of Form KMD. The transfer of the goods to a UK private person together with the transport of the goods from Estonia to the UK by or on behalf of the seller is not distance selling any more then but also the export of goods, taxable with 0% VAT. The transfer of the goods to a UK natural person in Estonia is treated as the export, if all requirements listed in subsection 5 (2) of the Estonian VAT Act are met (so-called tax-free sales).
- When an Estonian person purchases the goods in the UK together with the transport of goods from the UK to Estonia, after Brexit it is the import of goods, not intra-Community acquisition, and the provisions of the VAT Act related to import of goods are applicable. See also "Brexit and its effects on customs clearance and on the trade with the United Kingdom".
- If an Estonian VAT payer purchases the goods or services from a UK VAT payer after Brexit and VAT with the UK VAT rate is added to the price according to the UK VAT legislation, it is not possible any more to lay claim for refund of VAT, paid in the UK, through the EC cross-border VAT refund system.
VAT paid in third countries can be refunded to the Estonian entrepreneurs according to the reciprocal principle and it depends on whether the authorities of the correspondent third country have decided to start to refund the VAT to the Estonian entrepreneurs or not.
- If a UK person engaged in business will be registered in Estonia for VAT liability after Brexit, according to subsection 20 (6) of the Estonian VAT Act, a person of a third country engaged in business with no permanent establishment in Estonia shall appoint, upon registration as a VAT payer, a tax representative specified in the Estonian Taxation Act, who has been approved by the tax authority.
- If a UK person engaged in business provides the digital services to the EU persons not engaged in business (incl. Estonian persons not engaged in business) after Brexit and wishes to follow the special arrangements for imposing VAT, the person must follow the provisions concerning the registration for VAT liability of third country entrepreneurs (it means, if the person wishes to follow the special arrangements, he or she registers for VAT liability in any freely chosen EU Member State).
How will the taxation with income tax change?
The withdrawal of the UK from the EU has no influence to the convention between Estonia and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation with respect of tax on income.
- When the UK withdraws from EU and is not a member of the EEA either – then the Estonian resident company must take into consideration that the income tax is not charged on dividends according to clause 50 (11) 3) of the Estonian Income Tax Act in the following conditions:
the Estonian company paying the dividend has derived the dividend which is the basis for payment from a company where at least 10% of the shares or votes belonged to the Estonian company at the time of deriving the dividend, and
in the UK income tax has been withheld from the dividend or income tax has been charged on the share of profit which is the basis thereof.
Hence, the taxation of profit in the UK shall be certified.
Before the withdrawal of the UK from the EU it was sufficient for the tax exemption on dividends if the dividend was derived from a UK company where at least 10% of the shares or votes belonged to the Estonian company. The Estonian company had no obligation to present the certification about the taxation of profit. (Clause 50 (11) 1) of the Income Tax Act)
Also, profit of the Estonian resident company’s permanent establishment located in the UK is exempt from tax in Estonia only if income tax has been charged on such profit in the UK (clause 50 (11) 4) of the Income Tax Act).
Before the withdrawal of the UK from the EU it was sufficient for the tax exemption that profit was attributed to permanent establishment in the UK (clause 50 (11) 2) of the Income Tax Act).
Royalties, payable to a tax resident of the UK, shall be declared and tax advantages stipulated in the convention for the avoidance of double taxation are applicable only if the certification about the UK residency is presented.
Before the withdrawal of the UK from the EU income tax was not charged on royalties paid to a tax resident of the UK in the case of associated persons (subsection 31 (4) of the Income Tax Act).
A natural person who is a tax resident of the UK cannot submit an income tax return of the Estonian resident for using tax advantages stipulated for the Estonian residents upon the taxation of their Estonian income (the basic exemption, increased basic exemption upon provision of maintenance to two or more minor children, deduction of housing loan interests) and cannot carry forward the tax advantages to the spouse.
How will the taxation with social tax change?
If the UK withdraws from the EU and is not a member of the EEA either and the rules of the coordination of social security systems, established by the Regulation of the European Parliament and of the Council No 883/2004, are not valid any more in the UK, it means if:
- EU legislation in the social security field is not applicable any more to the residents of the UK who come to Estonia for the purpose of employment, then the Estonian domestic legislation (the Social Tax Act and the Unemployment Insurance Act) shall be applied to them from that moment. In such case, the remuneration payable to a resident of the UK for working in Estonia or for the provision of service in Estonia is taxable in Estonia without any exception and there is no avoidance of double taxation, established by EU legislation. Before the withdrawal of the UK from the EU, the principle of social security in only one country shall be applied to the persons who has come from the UK to Estonia for work purposes, and the taxation in only one country according to A1 certificates.
- The Estonian employers who send their Estonian resident employees to the UK for work purposes shall pay social tax, unemployment insurance premium and contribution to mandatory funded pension from the remunerations, payable to them, in Estonia (if the tax residency of the person does not change), irrespective of whether this remuneration is taxable also in the UK or not.