The Brexit has implications for organisations active in the Benelux. To give a quick overview of these implications, we have formulated FAQ’s for various practice areas.
1. What is the background of the 23 June 2016 referendum?
During the Conservative campaign for the 2015 UK general elections, Prime Minister David Cameron promised that, if the Conservative Party were to win these elections, he would negotiate a settlement with the EU on issues of concern for the UK and submit that settlement to a referendum as to whether the UK should leave or stay in the EU. The leaders of the other EU Member States reached an agreement on such a settlement with the UK government at the 19 February 2016 European Council. It will only come into force if the UK decides (after the referendum) to stay in the EU. On 23 June 2016, the British voter will be asked the following question:”Should the UK remain a member of the EU or leave the EU?”
2. What does the 19 February 2016 Agreement between the UK and the other EU Member States entail?
The Agreement mainly covers three main areas: Sovereignty, Economic governance and Competitiveness.When it comes to Sovereignty, The Agreement provides that the UK ”is not committed to further political integration into the European Union […] so as to make it clear that the references [in the EU Treaties] to an ever closer union do not apply to the United Kingdom”. In terms of Sovereignty, the Agreement also introduces a ”red card” mechanism on top of the “yellow card” mechanism introduced by the 2009 Lisbon Treaty. This mechanism entails that if 55% of the national parliaments agree, they can block or veto a proposal from the European Commission.On Economic Governance, the Agreement states that EU rules on financial service will continue to be applied throughout the EU, regardless of whether the services concerned are provided in a Eurozone Member State or note. It also provides that non- Eurozone Member cannot be required to fund euro bailouts. Finally, when it comes to Competitiveness, the Agreement provides that the EU shall seek a maximum reduction of the regulatory burden on key sectors.
3. What will be the next steps if the referendum results in a majority having voted for a Brexit?
The result of the referendum is not legally binding for the UK government. If the British voters opt to leave the EU and the UK government follows this, this will initiate a protracted secession process. The procedure for this process is laid down in Article 50 EU Treaty, which was inserted in the EU Treaty pursuant to the 2009 Lisbon Treaty, at the request of the UK. Briefly put:i) If the UK decides to leave the EU it has to notify the European Council.ii) After the notification, the EU and the UK must negotiate a withdrawal agreement regulating “the framework for the future relations” between the UK and the EU.iii) This Agreement is negotiated by the Commission on behalf of the EU pursuant to negotiation guidelines set by the Council and must be agreed upon by the Council, deciding by qualified majority upon approval by the European Parliament.iv) The EU Treaty and the Treaty on the Functioning of the European Union (TFEU) will cease to apply to the UK after the withdrawal agreement has come into force or, if no withdrawal agreement has yet been concluded, two years after the notification to the European Council, unless that period has been extended, in which case the Treaties shall cease to apply to the UK after that extended period.v) If the EU Treaty and the TFEU cease to apply to the UK, the same holds true for all Directives and Regulation adopted pursuant to the TFEU.
4. What are the models for the future relations between the UK and the EU in case of a Brexit?
The negotiations on the “framework for the future relations” between the UK and the EU under Article 50 EU Treaty may lead to various outcomes, based on the following existing models:
- Norwegian-style EEA agreement: The UK joins the European Economic Area (EEA) and maintains full access to the single market, but must adopt EU standards and regulations with little influence over these. The UK need not be involved in EU programmes involving financial redistribution, such as the Structural Funds, the Common Agricultural Policy and the Framework Programmes for R&D.
- Turkish-style customs union: Internal tariff barriers are avoided, with the UK adopting many EU product market regulations, but sector coverage of the customs union is incomplete. UK companies exporting to the EU and vice versa are required to pay external custom tariffs, without influence or guaranteed access to third markets.
- Swiss-style bilateral agreements: The UK and the EU agree on a set of bilateral agreements which govern UK access to the single market in specific sectors only.
- Free Trade Agreement-based approach: The UK is free to agree FTAs independently and the UK’s relationship with the EU itself is governed by an FTA.
- Most Favoured Nation-based approach: No need to agree common standards and regulation, but at the expense of facing the EU’s common external tariff, which damages UK trade in goods and as services with the EU.
5. What will be the overall legal impact of a Brexit for doing business to and from the UK, from a legal perspective?
The immediate impact of a Brexit on the legal aspects of doing business to and from the UK will be limited. If the UK votes in favour of a Brexit the UK would remain in the EU until its withdrawal terms have been negotiated, which will be a difficult and protracted process. During that time the UK would have access to the single market and continental companies will continue to have access to the UK. At the same time, however, this process entails a high level of uncertainty on the outcome of the negotiations between the UK and the EU and companies are likely, pending these negotiations, to make conservative choices, based on the worst case scenario.
6. Can UK and Benelux companies continue to merge post-Brexit?
Currently, Dutch limited liability companies, as well as the European Cooperative Company, may enter into a cross border merger with their UK equivalents. Cross border mergers involving the UK may be excluded following Brexit. Belgian and Luxembourg companies may merge cross-border with non-EU companies, however they do not benefit from the cross-border merger directive. Consequently, a cross-border merger of a Belgian or Luxembourg legal entity with a UK entity will only be possible if permitted under the relevant UK law.
7. Today a Dutch, Belgian or Luxembourg company can be converted into a UK company. Is that still possible after Brexit?
EU member states must allow the conversion (omzetting) of domestic limited liability companies in entities of other EU/EEA member states. After Brexit, conversion of, or into, a UK entity may become impossible to achieve. Under Luxembourg law, it remains possible to migrate a company to the UK if the UK allows the same.
8. Are there significant effects for Benelux companies listed in London?
As a result of Brexit, EU-wide mandatory offer rules may cease to apply to Dutch, Belgian and Luxembourg issuers whose shares are listed on the LSE. This may affect exit rights of minority shareholders of such issuers, in case a shareholder builds up a stake of 30% or more in such a Benelux company.
9. What corporate law applies to an English limited that is exclusively operating in the Netherlands?
The Dutch Act on Foreign Companies (Wet formeel buitenlandse vennootschappen) shall become applicable to UK legal entities that exclusively or almost exclusively conduct their activities in the Netherlands. This is in addition to its home rules on corporate law. This means, for example, that an English limited company will have to register with the Dutch trade register, annually file financial statements, not make profit distributions unless permitted by Dutch law, and that its directors may be liable in case of its bankruptcy in case of improper management.
10. Does it make sense to make continental transactions subject to English courts and English law?
Given the uncertainty that surrounds the enforcement and recognition of decisions of English courts post-Brexit, and also taking into account that English courts will no longer be bound by decisions of the EU Court of Justice, dispute resolution via English fora, and English law as governing law for that matter, in relation to continental EU transactions with no real English connection may no longer be a sensible alternative. In particular, shareholders agreements regarding a Dutch, Belgian or Luxembourg company should not be governed by English law.
11. What is the influence of a Brexit on an SE?
After a Brexit UK companies cannot longer transform into an SE. If a company from a member state wishes to become an SE, employees of an UK business or UK subsidiary are not eligible to become members of the special negotiation committee which negotiates with the management about employee co-determination.
12. Could Brexit affect the provision of services in the UK by Benelux financial institutions?
Benelux financial institutions can provide regulated financial services in the UK through three structures:(i) on a cross-border basis: services take place without a permanent establishment in the UK.(ii) through a branch office: a permanent establishment is opened in the UK that forms part of the Benelux legal entity.(iii) through a subsidiary: a separate legal entity is incorporated in the UK, from which the services are provided.Currently, option (i) and (ii) are possible on the basis of a European passport for a large number of financial services, including banking, insurance and investment services. A European passport can be obtained by a Benelux institution that is duly licensed in the Benelux and entails that the Benelux entity would not have to apply for a separate license in the UK. For some services, such European passport is not available (yet). For option (iii) a UK license is generally required for the UK subsidiary.Under a total exit model, Benelux institutions will not anymore, in general, enjoy the opportunity to rely on a European passport to establish a branch or provide services in the UK and will need to obtain local authorisation in the UK for their cross-border operations.
13. How will a Brexit influence financial transactions and investments entered into by Benelux entities with UK counterparties and other transactions with a UK element?
Other than the consequences for license requirements and passporting opportunities and the fact that the costs of cross-border activities to and from the UK will most likely be adjusted, a Brexit may also have an impact on existing and future transactions and investments entered into by Benelux entities with UK counterparties and other transactions with a UK element. The following may, for instance, become applicable:(i) market fluctuations may impact the value of investments with a UK component and therefore the capital position of Benelux banks, insurance companies and pension funds. (ii) exposures on UK counterparties may be treated less favourably under the EU capital regulations applicable to Dutch banks and insurance companies. (iii) a Brexit may have an impact on the eligibility and value of UK instruments, such as UK government bonds or shares in UK companies, as collateral under financial transactions. (iv) instruments issued or guaranteed by an EU Member State generally benefit from lower risk-weight classes under EU capital requirement regulations and may be treated as assets with a higher liquidity quality. If the UK no longer has the same status as an EU or EEA Member State, this may impact the treatment of such UK instruments under these regulations.(v) a Brexit could trigger specific provisions in financial transaction arrangements and may therefore lead to an event of default or termination rights becoming applicable.
14. How would a Brexit effect the current prospectus regime and other regimes affecting capital markets deals?
Currently the EU prospectus regime does not allow for the passporting of prospectuses to non EEA countries and a Brexit would therefore imply that Benelux issuers would need to have their prospectuses approved by the UK authority before offering securities in the UK, absent specific passporting arrangements. The same will apply to UK issuers who wish to offer securities in the EU in future.
15. What will happen to the interplay between the EU and UK rules on competition?
The division of labour between the European Commission and the UK Consumer and Markets Authority (“CMA”) in cartel and abuse cases is that the case is investigated and fined by the authority that is “best placed”. In practical terms, this means that infringements with a pan-European scope or overarching several Member States will be dealt with by the European Commission, while infringements with a narrower scope will be dealt with by the national competition authorities concerned, such as the CMA for the UK. In case of a Brexit, what would now be a one-stop-shop European Commission case would have to be investigated in parallel by the European Commission and the CMA.The division of labour between the European Commission and the CMA in merger cases is that cases triggering the EU turnover thresholds fall under the exclusive jurisdiction of the European Commission, while cases that do not fall under the exclusive jurisdiction of the national competition authorities, such as the CMA. Again, in case of a Brexit, what would now be a one-stop-shop European Commission case would have to be notified to and assessed in parallel by the European Commission and the CMA.
16. What will happen to the State Aid rules?
In the field of state aid, a Brexit would mean that the UK would be outside the EU state aid control system, which entails the prohibition and repayment of any aid granted by EU Member States that is likely to distort market competition. This is unless the withdrawal agreement provides for the extension of the State Aid rules to the UK post-Brexit. Indeed, if the UK wishes to negotiate an exit on terms that allow it to continue trading as part of the single market (or a similar agreement), then the remaining EU Member States may well insist that it adopt equivalent state aid rules under national law to preserve a level playing field with EU-based competitors.
17. Could a Brexit affect the validity of existing EU Trade Marks (EUTMs) and Community Designs (CDs)?
EUTMs and CDs would not be valid in the UK because the UK would no longer be a party to the EU regulations creating those rights. This means that current owners of such EU IP would have to convert their EUTM or registered CD to or register for UK national trade marks and designs to preserve protection in the UK (and incur the costs in doing so), hopefully being able to preserve their priority rights in some way or the other. Another issue is that existing EUTM registrations that have predominantly been used in the UK, are at risk of nullification for non-use, since their owners would not be able to demonstrate use in a substantial part of the EU (which is necessary for a EUTM after five years of registration). When it comes to Unregistered Community Designs (UCDs), which are also available under EU law (often relied upon in sectors where designs are frequently updated, such as the clothing industry), these would only provide protection for the remaining parts of the EU. Although the UK has an equivalent of the UCD, the scope of protection is narrower, excluding surface decoration, which would thus need to be protected through UK design registration or by other means (e.g. copyright). However, because the only requirement for ownership of a UCD is that the products have been put on sale in the EU, UK companies who wish to enforce UCDs in the EU will still be able to do so after a Brexit.
18. What could Brexit mean for the unified patent plan and SPCs?
A Brexit may harm the unified patent plan, a new EU patent system in the making to be introduced in the next few years, which will create an actual unitary patent (rather than a bundle of centrally administered national patents currently available through the European Patent Office), or at least cause further delays in an already lengthy process. When the plan is continued though, the UK may want to continue its involvement, especially given its prior commitment to the plan, and conclude a bilateral arrangement. However, this is likely to require the UK’s ongoing adherence to EU law on related matters (such as enforcement mechanisms) and for it to still be subject to CJEU decisions arising from references from the unified patent court. If the UK does not do so, protection under the new unitary patent system would thus not extend to the UK.
The regime for supplementary protection certificates (SPCs), available to extend the life of a patent for primarily pharmaceutical inventions, operates via an EU Regulation which would not automatically apply in the UK post Brexit.
19. What is the effect of Brexit on the exhaustion principle?
At present owners of many sorts of IP rights cannot prevent further sales once their products have been sold in the EEA (incl. the UK) by themselves or with their permission (their rights are ‘exhausted’). If the UK does not join the EEA after a Brexit, this principle of EEA exhaustion would no longer apply, and the IP owners would potentially be able to restrict trading of products between the UK and EEA Member States since trade in, for example the Benelux, would not exhaust these IP right in the UK and the other way around.
20. How will a Brexit affect the recognition and enforcement of UK judgments in EU Member States?
If the UK is no longer a EU Member State, the Brussels I Regulation Recast would no longer apply to the UK. As a result, the UK can no longer benefit from, inter alia, the ‘free movement of judgments’ within the EU (i.e. recognition and enforcement of judgments in other EU Member States without need of an exequatur). Without the benefit of the Brussels I Regulation Recast, EU cross-border recognition and enforcement of UK Court judgments would be more burdensome. The application of alternative regimes (such as the 2007 Lugano Convention if the UK becomes a EEA member or separately becomes party to this Convention, the 1968 Brussels Convention, bilateral treaty or the national enforcement rules applicable in the respective EU Member States) would mean that, in order for a UK judgment to be enforceable in the EU Member States, a national exequatur would have to be obtained, or even new local proceedings would have to be initiated, depending on the subject matter of the judgment. Without a uniform framework for recognition and enforcement, UK judgments may be subjected to stricter review. Overall, this means that the recognition and enforcement of UK judgments in EU Member states would be more costly, time-consuming and burdensome for commercial parties. Commercial parties should take these practical implications of a Brexit into account when negotiating and agreeing upon jurisdiction clauses in commercial contracts.
21. Would English jurisdiction clauses (choice of court agreements) still be effective after a Brexit?
Proceedings on the basis of an English jurisdiction clause would not have the advantage of the new lis pendens provision in Brussels I Regulation Recast, which entails that any other court seized in the same dispute would have to stay its proceedings until the court designated in the exclusive jurisdiction clause has ruled on its jurisdiction. This would potentially re-open the possibility for procedural tactics, such as the jurisdictional “torpedo”. A Brexit may also cause the revival of anti-suit injunctions in support of exclusive English jurisdiction clauses. Without the Brussels Regulations framework – in which anti-suit injunctions have been declared contrary to the principles of mutual trust between EU Member States by the European Court of Justice – UK courts may possibly once more issue such injunctions against parties that initiate court proceedings in EU Member States in breach of an exclusive English jurisdiction clause.
22. What are the consequences of a Brexit on the cross-border service of documents?
If the UK is no longer a EU Member State, the EU Service Regulation (Regulation 1393/2007) would no longer apply to the UK. As a result, the service of documents would become more complex. Without the benefit of the framework provided by the EU Service Regulation, litigant parties have to fall back on 1965 Hague Service Convention, or may even be forced to obtain prior permission to serve proceedings outside their jurisdiction. Such potential practical difficulties should be taken into account, especially when agreeing on a English jurisdiction clause. Typically, the practical difficulty of service of documents abroad is avoided by including a process agent clause for foreign parties in a choice of court agreement.
23. What tax implications would a Brexit have generally?
If the result of the referendum is that the UK will leave the EU, the likely outcomes are difficult to predict, not least because the terms of any future exit remain unclear. In general terms, not being in the EU would remove the UK’s powers to impact EU level tax matters, while on the other hand the UK will no longer be bound to the restrictions of EU treaty including EU efforts to limit harmful tax competition.
Nevertheless the tax implications of a Brexit would depend on what other agreements the UK is able to hammer out post exit. The expectation is that the UK’s membership of other international organisations, like the OECD, and other bilateral tax treaties would continue to limit its ability to set a completely individualistic tax policy.
24. What are the consequences of a Brexit on the Parent-Subsidiary Directive?
After a Brexit, dividends to UK companies are no longer governed by the EU Parent-Subsidiary Directive. In general, this provides that where a parent company in one EU member state receives dividends from a subsidiary company in another EU member state, the member state of the parent company must not tax the receipt. As a result, no withholding tax is due on dividend distributions to parent companies that are resident in the EU and fulfil certain other conditions.
If the Parent-Subsidiary Directive no longer applies, a group company with a parent company in the UK and subsidiaries in other member states (or vice versa), may become subject to double taxation in respect of profit distributions unless a double tax treaty or similar agreements prevent this.
In The Netherlands a withholding tax of 15% applies to dividends paid by Dutch companies to their shareholders. Dividend payments may be exempt from withholding tax if (i) the participation exemption applies; or (ii) the rate may be substantially reduced for foreign shareholders under the tax treaty The Netherlands – UK.
Following a Brexit a Switzerland model may be an alternative for the UK. Switzerland has got a bilateral agreement with the EU (the “EU-Swiss Savings Agreement”). This agreement allows Switzerland to benefit from rules similar to the EU Parent-Subsidiary Directive and the EU Interest and Royalty Directive.
25. What are the consequences of a Brexit on the Merger Directive?
The Merger Directive applies to mergers, divisions, transfer of assets and exchanges of shares that take place between companies in different member states and provides a deferral of the taxes that could be charged on the difference between the real value of such assets and liabilities and their value for tax purposes, subject to certain conditions.
After a Brexit, the UK will no longer be a party to the EU Merger Directive, which is de-signed to remove fiscal obstacles to cross-border reorganisations. This will make reorganisations involving UK entities more difficult and potentially trigger taxes.
26. What are the consequences of a Brexit on the Interest and Royalty Directive?
In general, withholding taxes on inbound interest or royalty payments (i.e. payments to Dutch parties) between associated enterprises within the EU may be reduced under the EU Interest and Royalty Directive. In the Netherlands there is no Dutch withholding tax on ordinary interest or royalty payments.
After a Brexit interest and royalties paid by and to UK companies are no longer governed by EU Interest and Royalty Directive and treaties need to be relied upon.
27. What are the consequences of a Brexit on Value Added Tax (VAT)?
UK VAT law derives from European Law and although the UK may no longer be required to give effect to the VAT Directives and regulations after a Brexit. It would be open to the UK to change how VAT is charged in the UK, or even to replace it with an altogether divergent tax.
After a Brexit new rules would have to be developed to replace or modify the existing VAT rules which distinguish between supplies made to or from the EU member states. Beside it, the UK would lose access to the EU “one-stop shop” mechanisms that are being introduced in various areas of VAT to remove the burden for a business which would otherwise be required to register for VAT in up to twenty-eight jurisdictions., while triangulation is another simplification measure which may not be available to suppliers.
If you have any questions about the possible implications for your business, please contact one of us directly or send an e-mail to email@example.com.
Compliments of NautaDutilh – A member of the EACCNY