Technical
Paul Golden 7 Sep 2017 12:59pm

Continental shift

As UK businesses that trade with the EU ponder their post-Brexit options, Paul Golden outlines some of the key issues for those thinking of setting up new entities within the single market

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Caption: Image: James Olsstein

Understandably, given the number of people employed in the sector and the revenue it generates, much of the discussion surrounding the impact of Brexit on the UK economy has focused on financial services.

However, the UK’s future relationship with the group of nations that consumed almost half (48%) of all the goods it exported last year will affect businesses across all sectors – many of whom will be looking for guidance on the pros and cons of either setting up subsidiary operations in the EU or relocating there.

Businesses are concerned about the impact of Brexit, and this is particularly true of early stage businesses. Responding to Silicon Valley Bank’s 2017 startup outlook survey, 21% said they would remain in the UK but open a mainland European outpost, while a further 11% said they were thinking about moving their head office to Europe.

A report published by the Association for UK Interactive Entertainment – which represents the interests of the gaming industry – found that 40% of companies in that sector were considering relocating some or all of their business from the UK. Almost one in four (23%) had already been approached by prospective new locations including Ireland, France, Germany and Spain.

Such concerns should not be dismissed lightly given that the value of goods and services produced by the UK games, IT and software industry is greater than that of advertising, film and TV and publishing combined.

EU SUBSIDIARIES

Some UK companies are asking if there would be any benefit in establishing an EU subsidiary. Many companies that are relocating rather than opening subsidiary or branch offices in the EU will have tax equalisation arrangements that ensure staff are no worse off as a result of the move. This is especially relevant when the company is moving to a jurisdiction where personal taxes are higher than in the UK, explains ICAEW international tax manager Ian Young.

The people running the company will also have to balance the financial impact on themselves and their staff versus the commercial implications of remaining in the UK.

The benefits of establishing a European office or subsidiary depend on what the company is supplying, says Tim Sarson, a partner in the tax practice of KPMG. “For example, there is no major obstacle to UK companies providing services that are delivered remotely, other than the possibility that customers in the EU won’t want to deal with UK-based companies post Brexit.”

The exception to this is where the UK company is supplying government bodies. EU states are prevented from favouring domestic companies in the tender process, but there is nothing to stop them discriminating against non-EU based companies.

REGULATORY SUPPORT

Sarson also observes that UK companies that depend on regulatory support from Brussels will find their ability to influence EU legislation significantly diminished, since the UK government will have less leverage with EU lawmakers. Creating a subsidiary in continental Europe could enable these companies to retain access.

For those companies exporting goods to the EU there are a number of export duty and supply chain issues to consider. Many firms that buy from and sell into Europe will have never had to deal with customs clearance, which could render the business model of companies sending small packages on a just-in-time basis to EU-based clients unviable.

In that situation, creating a European logistics hub or warehouse would make sense, says Sarson. “This can be done without necessarily establishing a subsidiary – a UK company could do what many Swiss companies do and simply own stock located in the EU, perhaps through a registered branch office.”

There is no specific guidance available on the minimum requirements necessary for UK companies to create an entity that would enable them to trade within an EU member state and be taxed on the same basis as companies in that state.

Anything that is not a sham would appear to be acceptable according to Young. “For example, new headquarters companies tend not to require a great number of ‘boots on the ground’, although they will require some staff.”

Any UK company looking to set up a new operation in Europe would also need to be aware that profits made in the EU jurisdiction would be taxed at the local rate rather than the rate paid by the company in the UK. This could make the move more attractive, although companies would also want some assurance that tax rates were likely to remain low.

Young observes that Ireland has demonstrated its commitment to maintaining its 12.5% corporate tax rate in the face of criticism from other EU member states. The country came under particularly intense pressure from Germany and France to bring this rate into line with the rest of the EU during the negotiations for the 2010 bailout.

“Businesses want certainty and cannot afford to make a mistake when relocating,” he says. “For example, French policymakers are keen to stress that France is open for business, but it is far from certain that President Macron will be able to push through reforms in the face of considerable union resistance. Until it is clear what he will be able to achieve, it would be difficult to recommend moving to France.”

TAX PERSPECTIVE

From a tax perspective, a registered branch office has to be recorded with the company register and a copy of the parent company’s accounts would usually have to be filed along with an annual return identifying the manager of the branch.

The company would probably have to register for VAT in the country and start charging local customers VAT and there would also be an obligation to register for corporate tax and do an attribution of profits between the UK operation and the business in the EU country.

Subsidiaries are subject to all the above as well as audit requirements and the need to appoint a board of directors and hold regular, minuted meetings.

For UK-based companies that export goods or services to the EU, Ireland is often the first choice for setting up an office or subsidiary elsewhere in the EU. Global employment organisation Shield Geo observes that companies moving existing operations to an EU jurisdiction have two main human resources options – relocate existing staff or make UK employees redundant and hire at the new location – both of which have cost implications and present potential legal complications.

Relocating an employee to another EU location could incur significant additional costs. For example, social security and benefits payments in the UK are set at around 13.8% of salary (employee and employer contributions combined), but countries such as France impose a 50% tariff just for the employer and in Germany it is a combined payment of up to 35%.

TERMS OF ENGAGEMENT

UK law requires that if a company moves, an employee must be offered the chance to relocate abroad on similar or better terms. However, employees may have personal reasons for wanting to remain in the country, such as family connections or cultural preference.

While redundancy packages may be a less costly option for workers that want to remain in the UK, other costs will arise with the need to hire new EU employees. Establishing new office locations, incorporating and setting up local payroll will all cost money, as will staff training.

A company entering a new EU country will be required to comply with local employment and labour laws governing leave, termination and severance. For instance, some French workers could in theory be entitled to 50 days of holiday leave per year; most do not work during the month of August.

Choosing the most appropriate option is vital to preserving continuity of business, protecting capital efficiency and minimising the impact on existing collateral, netting and hedging arrangements. In some cases, a cross-border merger might be the best solution.

Are you thinking of opening an EU subsidiary in anticipation of Brexit? Have you explored the options available? Email your views to economia@icaew.com

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