Rough seas lie ahead if Philip Hammond, the UK’s new Chancellor of the Exchequer, follows through on his predecessor George Osborne’s proposal to slash the UK’s corporate tax rate to 15% to help Britain attract and retain FDI.

Jeroen Smits, an Amsterdam-based partner and tax specialist at Dutch law firm Stibbe, says EU members can be expected to retaliate if the plan goes ahead, even if they do not join what German finance minister Wolfgang Schäuble called “a race to the bottom” in corporate tax rates.

Strictly speaking, after Brexit the UK would not be bound by the EU’s restrictions on state aid to companies, including preferential tax rules, notes Mr Smits. “However, if the UK introduces a very aggressive corporate tax regime – and some member states already consider the absence of UK withholding tax on dividends, royalties or interest as harmful – remaining member states won’t like it,” he adds. “The UK’s chances of coming to a favourable agreement with the EU would be difficult.”

Furthermore, Mr Smits warns, an aggressive UK tax regime could lead other countries, even some outside the EU, to apply “controlled foreign company” rules with negative tax consequences, blacklist the UK as a low-tax jurisdiction, or reconsider double-tax treaties with the UK. Such moves, he believes, could discourage EU or foreign companies from establishing themselves in the UK or cause them to pull out altogether.

A possible upside

Mark Stapleton, a partner in law firm Dechert LLP’s London office, is more optimistic. “If we go to 15%, it would benefit financial services and trading businesses in reducing tax relative to other jurisdictions, and we wouldn’t need to care too much about what the EU has to say,” he comments.

In Mr Stapleton’s view, the biggest risk is damage to the UK’s position as a leading location for holding companies doing business in Europe. The EU’s Parent-Subsidiary directive allows dividends to be paid from an EU company to a UK holding company without withholding tax. If that changes, Mr Stapleton fears holding companies could move to the EU.

Conflicting UK-EU tax regimes could make future FDI decisions more challenging. But Daniel Dunn, chair of Dechert’s international and US tax group, says there would be no drastic change in his advice to clients on making global investments. And as Mr Smits points out: “Obviously, this is politics. It is all negotiable, and nobody really knows where it will go.”