BREXIT – NO-DEAL: Entrance to the EU single market or from the EU to UK market

The day of 29 March 2019 draws dreadfully close and many companies with branches or subsidiaries in the United Kingdom of Great Britain and Northern Ireland are unsure about what consequences the withdrawal of the UK from the European Union, nowadays better known as Brexit, will really entail for their business and what adjustments may be necessary to keep the business going as it is – at the least possible cost. Some are not yet aware of how deep the changes reach.

After two years have elapsed after British premier minister Theresa May initiated the Brexit on 29 March 2017, i.e. starting on 30 March 2019, the UK will be treated as a third country by the EU unless the United Kingdom and the EU come to an understanding and negotiate terms within these two years or extend this negotiation period. As this possibility seems more and more unlikely many European companies have started bracing themselves for the consequences of a No Deal Brexit.

And not only the typical European companies with several branches in different European countries including the UK are affected. The consequences will be just as harsh for third countries, for example the USA, India or China, that chose the UK as the location to operate their European business from.

Current situation

Countries of the EU are privileged to the freedom of establishment and services in other countries of the EU. This means that any company that has its registered office in a member state of the EU and has acquired a business license – in a regulated market segment like insurance or banking – in its own country can do business in any other country of the EU upon notifying the appropriate regulating authority in the other EU country (so called ‘Single License’ principle). There is for example no need for a German company to go through the regular licensing procedure that can take up to 12 months if it wants to do insurance business in Italy or – currently – the UK.

If said German company wants to establish a branch in the UK it currently only has to prove a sufficient organisational structure and have an on-site general representative in the UK, additionally to the notification to the regulating authority, the Bank of England, represented by the Prudential Regulation Authority.

Situation after 29 March 2019 in a No Deal Brexit scenario

The consequences of a No Deal Brexit can take different forms depending on the business model and structure of the affected company.

An important criterion is if a company has a branch, an outlet of the company that does not constitute a separate legal entity and is dependent on the company’s main office, or a subsidiary, a fully licensed company registered in its own country but owned by and belonging to the holding or parent company, in the UK pre Brexit.

While an individual case by case analysis of the affected company’s situation is required in any case, the following common examples should serve well as a first orientation and introduction to the changes and challenges companies will face after 29 March 2019:

German company with a branch in the UK

By the legal conception as of today a branch of a European company – in a regulated market with the requirement of a licence from the responsible state authority – will have to be licensed as a third country branch by the regulating authority in the UK. The problem is that this cannot be filed for yet due to the unprecedented legal situation which most likely is only going to be fully clarified by 30 March 2019.

Compared to being a European branch, as a third country branch, the company will have to prove a sufficient organisational structure and the existence of financial assets as securities for the company’s clients in the UK.

An alternative to the uncertainty of formerly European branches soon to be third country branches would be transforming the branch into a subsidiary. This way the company could act before 30 March 2019 and ensure a legally safe situation.

But this solution also comes with its own problems. Apart from the obvious additional costs of founding the subsidiary, transferring the business of the branch onto the subsidiary etc. and the licensing process alone can take very long and might not be completed before 30 March 2019.

German company with a subsidiary in the UK

European companies with a subsidiary in the UK will have an easier time. The subsidiary has already been licensed in the UK so it can technically resume business with its UK clients as before. There will still be changes when dealing with the company’s European holding company or parent company that have to be considered. The EU Mother-Daughter Regulation, that any dividends paid from the subsidiary to the holding company, will no longer apply and payment of dividends will be subject to withholding tax in the UK.

Third country companies, such as Indian or US companies, with a branch in the UK doing business with clients in the UK

An Indian company as a third country company will most likely have to prepare for the least changes. Post Brexit, the UK will be a third country as well so any regulations India may have with the EU will not be in effect. Other than that, there might not be a lot to look out for.

Third country companies, such as Indian or US companies with a branch in the UK doing business with clients in Germany

This is where it gets tricky. If a third country company handles all of its European business from a UK branch, it will have to adjust its business model to ensure the same advantages it had pre Brexit.

The branch in the UK will most likely become a third country branch. Therefore, doing business with other European countries from the branch in the UK will be treated the same way as doing business from its main office in India for example. One of the few remaining advantages is the available IT and personnel on site, which is familiar with the European business in the UK. Other than that, the UK branch of the Indian company faces the same challenge described in a). In some cases, at least in the first few month after Brexit, it could be that other countries such as India, US or Japan have much better treaties with the EU than the UK will have in the case of a Brexit without a deal, e.g. the new free trade agreement between Japan and the EU. In that case it is even better for a Japanese company to deal directly with the EU and not through a UK subsidiary.

However, to make use of the freedom of establishment and services within the EU an Indian company will have to found a new branch or subsidiary in a different European country.

Conclusion

The consequences of the Brexit are often underestimated. As the legal situation is not yet fully clarified many companies are not sure about how to prepare for the changes or how they are even affected. Many companies will have to make a lot of adjustments and further investments to continue their European business as before.