Brexit – the likely impact

InterGame has received a question-and-answer run-down of the likely effects of the Brexit vote by the UK, especially in respect of international business operations.

It has been produced by Maalouf Ashford & Talbot, one of the world’s leading international business and corporate law firms. The company has been named Law Firm of the Year for 2016 in eight different countries and in 31 different categories.

Partner John Maalouf, who is based in New York, said: "Since Brexit was announced on June 23, we have received hundreds of inquiries from clients and colleagues seeking to learn more about what effects the UK’s exit from the EU will have on their international business operations. As a service to our clients and friends, we have put together a summary addressing some of the most common questions we’ve received.”

Q1: What changes can we expect to see in UK laws and regulations? 

A1: There will be a period of uncertainty as to the future application of EU laws in the UK. This will be clarified as part of the exit arrangements and it seems likely that the UK will retain much of the existing regime. In some areas, such as antitrust, there will likely be an added layer of complexity, uncertainty and cost resulting from dual-regulation or parallel investigations. As for companies whose businesses or dealings are not subject to EU-wide regulatory or passporting regimes, the impact should be limited.  

Q2: Will our existing legal contracts be affected?

A2: Brexit should not have a significant impact on existing or new contracts, except in those few circumstances where a counterpart’s business is severely affected. In general, contracts will remain in full force and effect; the parties' rights and obligations will be largely unaffected and specific Brexit-related provisions in new contracts are unlikely to be needed.

Material adverse change provisions, for example, in M&A and debt finance documents, are unlikely to be triggered. The Brexit should not affect the approach which parties take to including English governing law clauses in their contracts or, in most cases, to including English jurisdiction clauses (save in the limited category of cases where enforcement of English judgments becomes more difficult post-Brexit). 

Some contracts (such as IP or IT licences and distribution or franchise agreements) may contain territorial restrictions that would likely need to be amended following the Brexit, as would references to EU legislation to the extent that it is no longer applicable. 

Q3: What will be the impact of Brexit on international trade?

A3: The short-term effect of Brexit on international trade will be significant, as exiting the EU will leave UK businesses without the benefit of the 53 free trade deals to which the EU is a signatory. While some of these agreements may be replicated bilaterally by the UK, negotiating those deals will undoubtedly take a significant amount of time. Additionally, whether the UK will be able to negotiate agreements on terms as favourable as those granted to the EU remains highly uncertain.

Trade and single market access is a fundamental component of the UK's relationship with the EU, as nearly half of all UK exports go to EU countries.  How this relationship is redefined will be one of the main areas of focus, with future trading relationships dependent entirely on the nature of any agreements reached. In the short-term, this will result in significant uncertainty for UK companies, as well as multinationals conducting business in the UK.

An EU/UK trade agreement may not overcome tariff barriers and the other potential trade models which have been proposed also have significant drawbacks. For example, a Norwegian model would require the UK to continue to observe many of the EU's regulations and a Swiss model would provide access to the single market for the UK's goods, but not its services. 

Q4: Are our company’s intellectual property rights going to be affected?

A4: The most immediate impact of Brexit would be on unitary, pan-European, intellectual property rights such as Community trade marks and Community registered designs. These would not cover the UK post-exit, although they would continue to cover the rest of the EU as before.

It is widely expected that the UK government would provide for right-holders who lose protection in the UK in this way to be granted an equivalent UK national registered trade mark or design right preserving their priority rights, so they should not lose out in the long run.  

The position for unregistered Community Design Rights is less clear, so companies operating in fields where designs are important, including consumer goods and mobile devices, would need to consider registering design rights wherever possible. In the patents field, the UK would not be able to participate in the new European Unitary Patent or Unified Patent Court. “Classic” European patent however, protecting inventions in the UK, would continue to be available through the European Patent Office as before.

Q5: What will be the effect of Brexit on international finance?

A5: For some borrowers or issuers of securities, uncertainty around Brexit and resulting financial market volatility will likely impact the availability or cost of some types of finance. The impact on the loan market, however, will likely be limited, at least in the short to medium-term, and relationship-driven lending is unlikely to be significantly affected. The impact will likely be greater in the bond market. 

In the short-term, certain businesses may find that their access to financing will be reduced, or their borrowing costs will be increased (through increased margins or coupons on new transactions or step-up provisions on existing ones). In the longer term, the availability or cost of finance could be affected by the regulatory landscape post-Brexit (such as through loss of the ability to “passport” prospectuses, or changes in regulatory capital rules or their application). A great deal will depend on the UK's post-Brexit relationship with the EU. 

Q6: What will be the effect of Brexit on taxes?

A6: Although it is not yet certain, Brexit will likely result in the UK no longer being a part of the customs union. Exports between the UK and the EU would, in that event, need to go through ordinary customs procedures. We believe it probable that the UK and the EU will enter into a free trade agreement with either no, or very low, customs duties.

Following Brexit, the UK would also sit outside the territorial scope of EU VAT. It could therefore change how VAT is charged in the UK or even replace it with an entirely different tax regime. Over time, there could be some divergence from EU VAT, although the risk of double taxation or double non-taxation may incentivise the UK to keep its VAT system materially aligned with the EU's.

The most tangible consequence of Brexit would likely be the imposition of import VAT when goods enter the EU from the UK and vice versa. The VAT would often be recoverable, but there may be an unwelcome cash flow cost for the period between import and recovery.  

EU directives prohibiting withholding taxes on intra group interest, dividends and royalty payments made within the EU will also no longer be in place. Following Brexit, EU subsidiaries will not be able to rely on the directives to make these payments to their UK holding companies free from withholding taxes. Relief under bilateral double tax treaties would be an alternative, and in many cases, would eliminate withholding taxes entirely.

At some point after Brexit we may see the UK reintroduce UK tax rules that have been held contrary to EU law. The 1.5 per cent stamp duty charge on UK shares issued into clearing systems such as Euroclear, Clearstream and DTC is one example. The UK would also have more scope to adopt competitive tax regimes that would currently be contrary to state aid rules. Conversely, we may see anti-avoidance rules applying to arrangements with UK businesses that previously would have been exempt. 

Q7: We are a multinational company with operations in the UK; will our employees and executives still be able to work in London? 

A7: Although we believe it to be unlikely, in the worst case scenario, EU nationals currently based in the UK and UK nationals currently employed in the EU could be required to return to their home countries (potentially on short notice). In the more likely scenario, however, depending on the details of the post-Brexit agreements negotiated, it may simply become more difficult to retain and/or move employees from the EU to the UK and vice versa, which could give rise to skills gaps, an inability to service customers in relevant countries and a loss of talent. 

There may also be an impact on EU-wide recognition of qualifications, which could present another barrier to the mobility of senior executives, as well as staff. This may extend beyond the EU if recognition of qualifications, or the ability to operate in particular countries, derives from free trade agreements entered into by the EU rather than the UK. 

Q8: Have any specific details of the exit been disclosed yet? 

A8: The specific details and mechanisms regarding the UK’s exit from the EU are just beginning to be negotiated and final agreements may take two years (or longer) to conclude. Whatever form a Brexit might ultimately take, there is likely to be a significant impact on the legal rights and obligations of commercial parties in all sectors, as well as the wider legal framework.