English Version Are you ready for Brexit? IHK checklist for businesses
Are you ready for Brexit? IHK checklist for businesses 17 issues that businesses need to consider Introduction 3 Trade / Customs Law / Logistics 4 Value Added Tax 6 Trademark rights / certifications and labelling / REACH 7 Contracts 10 Corporate law 10 Taxation 11 Financial services and insurance 12 Imprint 13 2 14
Introduction On 29 March 2019, the United Kingdom (UK) will formally leave the EU. In March 2018, the European Union and the UK agreed on a subsequent 21-month transition period until the end of 2020. The final withdrawal of the UK from the EU's internal market and customs union, and thus the end of the application of EU law, will thus in principle be postponed to the end of 2020. However, this transitional period still has to be ratified and this is not expected to happen until the end of 2018. Whether it will be possible to conclude a free trade agreement between the EU-27 and the UK in time, at the latest by the end of the transition phase, is currently uncertain. If no agreement on a follow-on solution is reached, trade between the UK and the EU would only take place in accordance with WTO rules (so-called "hard brexit"). It is also still uncertain how current EU free trade partners will treat the UK in the future, whether in the transition period or thereafter. So much is still unclear, but one thing is clear: companies with UK business should make good use of the coming months. The most important relevant topics where action is needed are listed below. The topics are continuously updated in line with current developments. When the term "brexit" is used, it is assumed that the UK will leave the European internal market - either on 30 March 2019 or at the end of a transitional phase at the end of 2020. 3 14
Trade / Customs Law / Logistics After Brexit, trade with the UK will be conducted as with any other third country. This means that EU customs law must be observed, alongside national and European import and export inspection measures. Customs declarations must be drawn up and, where necessary, export and import licences applied for. Customs duties may also be incurred. If a free trade agreement is struck between the EU and the UK, it may be possible to draw on reduced tariff rates. To do this, however, businesses must establish the preferential origin of goods based on the respective rules of origin and apply for or issue corresponding proofs of origin. Here are just some of the points to bear in mind: 1. Customs formalities Notes Conditions: We have put the necessary personnel, administrative and technical measures in place for drawing up and managing customs declarations within our company (e.g. applied for an EORI number, set up an ATLAS user account for submitting electronic customs declarations, applied for an elster certificate). Practice: We have addressed the practical aspects of drawing up customs declarations (indication of the customs tariff number as per the EU customs tariff, indication of the relevant codes for customs procedures as per the instructions for customs declarations). Other documents: We have researched which other documents are required for customs handling (e.g. IHK certificate of origin, invoice, customs value declaration (on the import side)). Customs clearance: We are familiar with the practical aspects of customs clearance (presentation to the customs office, customs control, etc.) at the relevant customs offices. Value chains: We have considered the possibilities of continuing existing value chains with the UK and covering them by special customs procedures, where applicable (e.g. inward and outward processing). Temporary admission in the UK: We know that either a formal customs procedure or, alternatively, the ATA Carnet procedure will apply to the temporary shipment of goods to the UK after Brexit. We are aware that we have the option to instruct an external customs service provider to handle the customs formalities mentioned above. 4 14
2. Prohibitions and restrictions Notes Measures: We have familiarised ourselves with the EU and German inspection measures that apply to prohibitions and restrictions on cross-border goods traffic with third countries (e.g. inspection of goods, inspection of consignee, inspection of purpose). Licences: We are familiar with the bodies responsible for notifying and approving imports and/or exports, as well as with the process of filing an application (e.g. the German Federal Office for Economic Affairs and Export Control, German Federal Environment Agency, State Offices for Food Safety) and the requirements for in-house compliance structures (nomination of a person responsible for exports, creation of a work and organisational instruction on export control). We are prepared for the fact that UK businesses will no longer be classed as importers when they leave the EU, so the duty to notify will pass to German companies when goods are shipped from the UK. 3. Customs duties and rules of origin Notes Tariff rates: We are aware that, should no bilateral free trade agreement be concluded between the EU and the UK, our products may incur WTO customs duties when they are imported or exported. Rules of origins: If a free trade agreement is struck between the EU and the UK in future, we intend to draw on tariff preferences. With this in mind, we are making preparations that will enable us to establish the preferential EU origin based on rules of origin that are yet to be defined, and to issue proofs of origin. Suppliers declarations: We acknowledge that, after Brexit, British companies will longer be permitted to issue or be issued with internal EU suppliers declarations (SD) or long-term suppliers declarations (LTSD) for goods with preferential origin status. Input materials: Our company purchases input materials from the UK for further processing. After Brexit, these materials will no longer count when seeking to achieve preferential EU origin status for the finished product. We have analysed our supplier structures and the possibilities of relocating sites from the UK to the other 27 EU states, given the potential loss of preferential origin status and how that would affect trade with other parties who have agreements with the EU (e.g. South Korea, South Africa). 5 14
European cabotage regulations state that only logistics companies based in the European Union may deliver to other EU states without the need for additional licences. 4. Logistics / Road haulage Notes We are aware that we need to prepare for more red tape when making shipments via road haulage. This will go hand in hand with much longer waiting times at the border with the UK, at port terminals and so on. Our company has examined whether we need to switch to a British forwarding agent. Value Added Tax The European VAT system is harmonised as far as possible within the EU, thus preventing double taxation on cross-border shipments and services. Once it withdraws from the EU, the UK will no longer have to apply the VAT Directive or comply with maximum and minimum VAT rates. Although it will also cease to have influence over how the VAT system develops going forward. The withdrawal of UK from the customs territory of the EU is expected to lead to increased bureaucratic effort in the form of amended proof and declaration obligations. This applies in particular to the movement of goods. In the absence of intra-community deliveries according to 6a UStG, deliveries of goods from Germany to the UK will in future be treated as export deliveries according to 6 UStG. The internal company processes must therefore be converted to customs export. In particular, proof of exemption from VAT must be provided in the form of output notes in accordance with the requirements of 9 to 11 UStDV. Since VAT exemption is denied in the event of inadequate verification, the corresponding internal company documentation systems must be adapted at an early stage. Even in the reverse case, deliveries of goods from the UK must then be declared as imports, which may entail an additional burden of import sales tax and customs duties. As a rule, services should continue to lead to turnover taxation in one of the two countries because of the principle of the place of destination. However, different national local regulations can lead to double taxation. 6 14
5. VAT Notes We will pay closer attention to documentation obligations and to ensuring that we record tax relating to the movement of goods correctly on VAT returns. We are aware that shipments from Germany to the United Kingdom will be classed as tax-exempt goods for export in future and that (deductible) import VAT will be incurred on imports from the UK. This is likely to result in higher costs for us. Different rules will apply to proofs of origin. UK companies will now have to submit applications for input VAT refunds in German. The deadline for such applications has been shortened by three months. We are aware that, as far as service transactions are concerned, the VAT ID number is no longer sufficient for an entity to operate as a business enterprise. Trademark rights / certifications and labelling / REACH At the moment, standard industrial property rights apply within the EU. After Brexit, it is possible that EU trademarks or Community designs will no longer be protected in the UK. After withdrawing from the EU, the UK could create its own set of rules for product and other standards (including those relating to technical safety/health/hygiene/labelling requirements), which may deviate in part from the rules followed by the remaining 27 EU states. Such changes could make it much more expensive for contracting parties to fulfil their contractual obligations due to new testing and certification requirements, for example. The CE mark proves that a product meets the safety, environmental and health requirements laid down in various European directives. Products may only be put onto the market in any EU Member State if they have this approval. Although they would often be able to self-verify, many companies choose not to go down that route, preferring to have approved testing institutes issue certificates of conformity instead. For especially sensitive product groups, such as medical devices, it is even a requirement to involve a testing institute in the conformity assessment process. After Brexit, British institutes will probably no longer be able to participate in any conformity assessments valid in the EU. 7 14
6. Property rights Notes We have examined how we are affected so we can adapt our business relationships to avoid disaster as far as possible. 7. CE mark Notes Our company puts products certified in the UK onto the EU market. With that in mind, we have taken steps to ensure either a new conformity assessment will be applied for through a certification institute in one of the remaining Member States, or the existing dossier will be transferred to another EU Member State. We have reviewed the non-binding list of affected goods and product groups drawn up by the EU Commission. 8. Product and other standards Notes In most cases, existing contracts will regulate who shall bear the additional costs incurred from testing and certification requirements. In new contracts our company will ensure that the parties share out the costs that are already known and to be expected as accurately as possible. 9. REACH Notes We have identified the substances we purchase that have been registered by companies in the United Kingdom. We are aware that we must regularly check the validity of the registration of these substances. 8 14
Workers and vocational training The free movement of people is one of the four basic freedoms enshrined in EU law. EU citizens may work in the United Kingdom without a residence or work permit. EU citizens who are in the UK on the formal withdrawal date of 30 March 2019 will have the right to permanent residency, as well as rights to healthcare, welfare and pension services. It is unclear whether these same rights will apply to EU citizens who start work in the UK after this date. In the last year, 41 per cent of people involved in vocational training through the Erasmus+ programme (apprentices and vocational students, as well as vocational training staff) went to the UK. The next most popular destination was Spain, although the numbers involved dropped considerably, down to a little over 10 per cent. In future, England, Wales, Scotland and Northern Ireland will no longer be considered as destinations for exchange programmes if an adequate post-brexit agreement cannot be reached. The same applies to the Erasmus student exchange programme. 10. Citizens rights Notes We are aware that termination of the free movement of people between the UK and the EU will probably mean people arriving in in the UK after Brexit will need residence and work permits. As we regularly send our employees to the United Kingdom, we know that we should include catch-all clauses in new contracts to cover any additional costs incurred in this regard. We have considered the fact that a visa may be required to send workers to the UK after Brexit. 9 14
Contracts In new contracts, companies should agree that a party will have the right to terminate the contract should Brexit have a noticeable commercial impact. An alternative would be to enter into shorter contracts so the exact economic consequences of Brexit can be assessed in real time and incorporated into new contracts. 11. Brexit clause Notes Before concluding contracts, we will consider adding a Brexit clause in order to avoid any potential compensation payments. Corporate law According to an adjudication of the European Court of Justice on freedom of establishment, British businesses, such as private limited companies, with their head office in Germany must be recognised here. After Brexit, however, German law will apply: a British limited company will then be treated as a Partnergesellschaft [partnership] in Germany. Limited liability is thereby revoked. 12. Limited companies Notes Our company is already searching for alternatives. We are aware of the option to merge a British limited company with a German entity, such as a GmbH (limited liability company); in doing so, the rights and obligations of the limited company are transferred to the GmbH. In addition, individual assets of a limited company can be transferred to a German business and/or the limited company can be liquidated. Our company has reviewed whether it has business relationships with one or more limited companies in Germany and is in contact with them where applicable. 10 14
Taxation The UK currently has a low corporation tax rate of 19 per cent (17 per cent from 1 April 2020) and a wide network of bilateral double taxation agreements. At the moment, the EU Parent-Subsidiary Directive facilitates the cross-border distribution of profits between affiliated companies. This EU directive states that no tax will be deducted at source from the paying company and the receiving company will not be subject to minimum taxation. 13. CE mark Notes We are aware that there will be no tax-exempt cross-border distribution of profits after Brexit for now, which is why there could be higher tax burdens. We acknowledge that there will be no more tax-neutral cross-border mergers. We are aware that residence in the EU/EEA is a condition for application of many sections of the German Foreign Tax Law (German: Außensteuergesetz), for example, deferment of exit taxation, proof of exemption for family foundations abroad and so on. We are aware that participation exemption in terms of trade tax will no longer apply. We are aware that dividends paid to UK parent companies that have at least a 10 per cent interest in a German subsidiary will no longer be exempt from withholding tax in future. Therefore, capital gains tax will be deducted in Germany. We acknowledge that interest payments and royalties due to affiliated companies will be subject to withholding tax. We are aware that, when transferring assets to the UK, hidden reserves must be taxed immediately. We are aware that, when disposing of certain assets (e.g. property), profit can no longer be transferred without realisation for replacement investments. 11 14
Financial services and insurance Financial services At the moment, around 90 per cent of all derivatives traded in euros, especially interest derivatives and currency swaps, are traded in London. After Brexit, when executing business via clearing houses, for example, counterparty banks outside the EU will have to keep much more equity capital than before as a provision for risk. An increased equity capital commitment on the part of the banks will give them less freedom to extend loans, while at the same time increasing financing costs to business. 14. Financial services Notes We have examined how we are affected so we can adapt our business relationships to avoid disaster as far as possible. A new agreement on the protection of investments could take time For German investors, Brexit means that the protections for European investors enshrined in EU law will no longer apply. These protections include the general rule of non-discrimination, guarantees in terms of market access and the prohibition of restriction on the movement of capital and payments. Furthermore, there is no bilateral investment treaty (BIT) in place between Germany and the UK that could offer similar guarantees. 15. Investments Notes We are aware that, until such time as a protection agreement is concluded, there can be no guarantees for investments in the United Kingdom in terms of market access and the prohibition of restriction on the movement of capital and payments. Alternatives to British auditors After Brexit, natural persons recognised as auditors by the United Kingdom (auditors from the UK) will be classed as auditors from third countries and will no longer be viewed as auditors as defined by the Statutory Audit Directive. 17. Auditors from the UK Notes We know we need to consider alternative auditors in order to minimise any negative impact. 12 14
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