Brexit: What you need to keep in mind
As part of the EU exit negotiations, the deadline for the ratification of the exit agreement was further extended by the European Council on 10 April 2019. This extension is now valid until October 31, 2019. If both parties ratify the withdrawal agreement prior to this date, they will resign on the first day of the following month. As the conclusion of an agreement remains uncertain, UK-related companies should prepare for possible consequences of so-called “hard” Brexit.
Originally, the United Kingdom (UK) was formally to leave the European Union (EU) on 29 March 2019. The EU and UK had already agreed in March 2018 on a 21-month transition period until the end of 2020. Their ratification, however, is still pending. If there is no agreement on a follow-up solution, trade between the UK and the EU would only be in accordance with the WTO rules (so-called “hard Brexit”). It is also uncertain how the current EU free trade partner countries will treat the UK in the future, be it in the transition period or after.
So much is still unclear, but one thing is clear: UK companies should make good use of the time they have left. Listed below are the main relevant topics for which there is a need for action. The use of the term “Brexit” assumes that the UK is leaving the European single market at the end of a transitional period at the end of 2020.
Customs law and Brexit
For German companies, Brexit means that, as in the case of trade in goods with other non-EU countries, they must issue customs declarations and, if necessary, apply for export and import licenses. In particular, companies that until now have only delivered to customers within the European single market must, for the first time, be prepared for the customs requirements for trade in goods with third countries for flows of goods between the EU and the UK.
In addition, according to the current status of the negotiations – apart from the agreed transitional period – the introduction of customs controls at the borders, as well as increased administrative effort, should be expected.
Preferential proof and preferential calculation
Goods that are in free circulation within the EU have so far been delivered duty-free between the UK and Germany. In the future, this will most likely only be the case if the evidence for an EU or UK preference origin is available. If the evidence is not available, customs duties will apply in the future. The effort to obtain the preferential proofs may be higher than the customs duties incurred on third-country goods. In terms of preferential costing, value-added by third countries will be accepted by third countries as no longer determining the origin of EU preferential goods. Especially for products calculated according to the value clause, the increase of input materials without EU preferential origin may lead to the loss of EU preference. If these deliveries can no longer benefit from EU origin in the future, these deliveries will in future have to be made at the higher third country duty rates instead of the previous preferential duty rates in the respective destination country.
Value Added Tax
In terms of VAT, the UK’s exit from the customs territory of the EU also leads to increased bureaucracy in the form of changes in the obligation to provide proof and explain. This applies especially to the movement of goods. In the absence of intra-Community deliveries pursuant to § 6a UStG, deliveries of goods from Germany to the UK will in future be considered as export deliveries (acc. § 6 UstG). The internal processes must therefore be converted to a customs export. In particular, the proof of VAT exemption must comply with the requirements of §§ 9 to 11 UStDV in the form of exit notes. Since insufficient VAT verification leads to a failure to pay VAT, it is necessary to adapt the corresponding internal company documentation systems at an early stage. Even in the reverse case, deliveries of goods from the UK can then be declared as imports, which may be accompanied by an additional burden of import sales tax and customs duties. As a rule, services should continue to be taxed in one of the two countries because of the recipient location principle. However, deviating national local regulations may lead to double taxation.
Product requirements for imports/exports of goods
UK-based manufacturers and importers (importers) are likely to be no longer considered as EU-based economic operators after leaving the EU. Under European law, traders would therefore become importers of third-country goods entering the EU or placing them on the EU market from that date.
Berlin companies that are currently sourcing goods from UK should review their supply chains. The key question must be answered: Does my UK supplier still have the necessary EU marketing authorizations for his products in the future? Type Approvals by British regulatory authorities lose their validity for the EU internal market according to current knowledge after the expiry of the transitional period.
When importing and/or exporting certain goods, such as medical or cosmetic products but also waste or chemical substances (REACH), from third countries to the EU, the manufacturer and/or importer has to comply with certain notification, approval or labeling requirements. In addition, due to specific legal regulations, it is often necessary to designate so-called authorized agents, who must be established in the EU.
Moreover, certain products in the EU may only be placed on the market and put into service if they are CE marked. This marking may only be affixed if regulated product-specific conformity assessment procedures have been carried out. For certain product areas, the presence of a Notified Body is required. The Notified Body is responsible for verifying the conformity of products in accordance with applicable EU legislation. Settled in the UK, “Notified Bodies” may lose their EU status from the date of their departure. German companies that require a CE marking for their products must ensure after Brexit that the required certificates are issued by a recognized “Notified Body”.
Free movement of workers
The free movement of persons is one of the four fundamental freedoms enshrined in EU law. EU citizens are allowed to work in the UK without a residence permit or work permit. If the free movement of persons between the UK and the EU is terminated, it is likely that workers who work in the other country on business trips or secondments will need a residence and work permits. For employees of German companies, who work in the context of services or secondments in the UK, but also for British employees employed in Germany, there are tax and social security changes. The extent of the change depends on the future form of association UKs.
Contracts with British business partners Existing contracts with UK business partners should be adapted to the new conditions at an appropriate time. The terms and conditions to be checked include u. a. the choice of applicable law and jurisdiction and the definition of “territory of the EU” (in the case of licensing or distribution agreements). Possibly. Contractual amendments for the settlement of customs duties, for currency hedging and for the termination of the contract must also be examined. Contractual regulations on CE markings and EU standards must also be redefined. In the case of service, employment or agency contracts, new regulations regarding the freedom of movement for workers or the provision of services must be observed.
Company Law / Business Permit
According to the case-law of the European Court of Justice on the freedom of establishment, British companies, such as a private limited company with administrative headquarters in Germany are recognized in Germany. After Brexit, however, German law applies: a British Limited company will then be treated as a partnership in Germany. The limited liability is thus eliminated.
Limited companies with administrative offices in Germany are therefore obliged to consider one of the following options for action at an early stage, with an appropriate timeframe for their individual review and actual implementation being planned: Options for action include, but are not limited to: a cross-border merger or conversion into consideration. In addition, individual assets of a Limited may be transferred to a German company and/or the Limited liquidated.
A re-qualification of Limited companies to partnerships or individual traders also involves the loss of the business license granted to Limited as a legal person. As a result, if the company continues to operate, a trade ban pursuant to Section 15 (2) GewO threatens. You can prevent this by getting a permission procedure for a new business license in good time from the responsible office.
Activity for insurance intermediary/advisor
For insurance intermediaries wishing to operate in the legal form of the English Limited with their registered office in Germany, the following applies: According to the case-law of the BGH, a limited company with administrative headquarters in Germany after Brexit is treated as an oHG if it operates a trade or otherwise as a GbR. The one-man limited becomes a sole trader or a non-registered sole proprietorship. Such a reclassification of these legal persons to partnerships or sole traders or individual traders would also entail the loss of the business license granted to Limited as a legal person. As a result, a “trade ban” pursuant to § 15 (2) GewO would have to be pronounced vis-à-vis the “new” traders – in the case of partnerships for lack of legal capacity of the partnership in trade law – due to lack of a business license.
Insurance intermediaries/consultants who are registered in the German Insurance Mediation Register and registered there for the purpose of carrying out their duties in the UK as a further activity country Great Britain can benefit from transitional periods in connection with Brexit.
UK has a low corporate tax rate of currently 19 percent (17 percent as of 1 April 2020) and a wide network of bilaterally agreed double taxation treaties. Currently, the so-called EU Parent-Subsidiary Directive facilitates the cross-border payment of profit distributions between affiliated companies. The EU Directive states here that no withholding tax may be deducted from the paying company or at least with no minimum taxation at the receiving company. In addition, there are further withholding tax exemptions, eg. For interest and royalty payments within the groups. The residence in the EU / EEA is in several places of the foreign tax law (AStG) application prerequisite, z. B. for the deferment of the exit tax or the proof of discharge in foreign family foundations etc. Brexit results may be additional tax burdens.
British distributors often work with the Irish market for their German clients. Companies should therefore already consider whether this approach is still the right way for them, even for the post-Brexit period. As a first step, companies should consider for themselves what real business potential the Irish market offers to their own business. If this market potential is worth mentioning, the German company should consider whether it would like to process the Irish market better in the future directly via an Irish distributor than through the British distributor. Other companies will also check this. Those who are early in their career have the best chance of securing an Irish distribution partner that is particularly suitable for their own product portfolio.
Brexit Checklist: Are you ready for BREXIT?
Companies with UK businesses need to be prepared for the actual exit of the Kingdom from the EU and make good use of this time. Depending on your UK exposure, industry and company size, the conversion effort may vary. There will be a particularly serious conversion effort in the movement of goods, in particular by the increase of tariff and non-tariff trade barriers. However, even with the purchase of primary products, the first product launch, the freedom of movement for employees or with British limited companies with branches in Germany or at German operations in the UK, a thorough analysis and, if necessary, conversion of the processes within the company is required.