Following the legislative election and the victory of the Conservative Party, Brexit has become an inevitable reality. Indeed, Boris Johnson, the new British Prime Minister, announced the ratification of the Withdrawal Agreement Bill by the House of Commons in the nearest future and making sure that the UK leaves the European Union (UE) by January 31, 2020 at the latest.
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Following the legislative election and the victory of the Conservative Party, Brexit has become an inevitable reality. Indeed, Boris Johnson, the new British Prime Minister, announced the ratification of the Withdrawal Agreement Bill by the House of Commons in the nearest future and making sure that the UK leaves the European Union (UE) by January 31, 2020 at the latest. This milestone for Brexit negotiations brings back to the table the unresolved questions concerning the future legal grounds for UK – UE relations.
Officially, the trade deal with the EU is promised by the UK politicians by the end of 2020. The feasibility of such promise is however questioned by the UE officials. In the meantime, both British and foreign companies ask themselves what the consequences of Brexit on business exchanges will be.
As a matter of fact, after Brexit, UK will likely lose the benefit, partly or totally, of four fundamental freedoms: the free movement of capital, goods, persons and services. Therefore:
Is it worth keeping a foot in the European Union
by setting up a business in France before Brexit ?
Enforcement of the customs duties and non-customs costs on goods and services
If a hard border UK – EU was to be imposed, companies that once traded freely with the European markets would see their goods exposed to new costs each time they cross the Channel.
These costs could appear as both tariff and non-tariff barriers.
In such case, the UK seller to the EU clients would be certainly subject to customs duties. Additionally, hidden expenditure, in the form of non-tariff taxes, could may appear costly to business. The cost of trading with the UK-based company could also raise as a consequence of introduction of new compliance paperwork and other administrative requirements. Indeed, in a worst-case scenario, the UK would have to comply with the import procedures presently applied by the EU to all third countries.
Despite of the direct impact of the non-tariff measures, a much wider range of additional costs could emerge as companies would have to cope with divergences in technical standards and other regulations existing within the EU system.
Competitivity of the UK goods and services
At the moment, British and other UE companies can import and export within the EU, without the customers having to pay additional taxes. The EU has also free trade agreements with third countries such as Norway, Switzerland, South Africa and South Korea. Once outside the EU, the UK will have to negotiate new trade deals both with the EU and the third countries.
As a result, UK goods and services may become less competitive. This would be a direct consequence of beforementioned tariffs that would have to be added to the base price of products /services. None of those tariffs will be applicable to the remaining 27 countries.
Extension of the shipping schedules
As it is always the case with international shipping, border control and customs can pose a threat to the speed of the goods delivery.
Brexit can bring back the days of red tape and arduous documentation. This goes against the dynamic of international trade relations, which fluidity cannot accept undue stops or checks on the goods traded.
A more complex process of setting up of a business in France to the UK nationals
Up to now, UK nationals benefit from the same conditions as French ones when it comes to establishing an independent business structure in France.
In fact, if a UK citizen wish to start a business activity in France but does not intend to reside there, no specific formality is required compared to a French national. The British businessman is subject to no specific authorizations, except those applying also to the French professionals in regulated professions where some specific qualifications or diplomas are required (i.e. doctors, real estate agents, lawyers).
Equally, if a UK national wishes to reside in France, i.e. stay in France more than three months to incorporate et run his business, he is no subject to obtaining a resident permit or any additional documents. In theory, he has to declare it at the City Hall. Actually, neither company registered office, nor tax or social administration, demand the accomplishment of this formality.
This situation would likely change once UK becomes a third country which is in principle scheduled from January 31, 2020.
From then on, a resident permit may be required from any entrepreneurs wishing to open a branch or a subsidiary in France. Obtaining such a permit would involve following a complex procedure and numerous formalities. The main one would be receiving a long-stay visa which is subject to providing the administration with many documents such as the proof of residency, of income etc. Anyway, it is grated only in the cases provided by law and on the base of legal requirements to comply.
Moreover, to incorporate the most popular companies as French limited liability company (SARL) or a simplified joint-stock company (SAS), the subscribed share capital shall be paid on a particular bank account opened by shareholders on the name of the company. Currently, the process is quite complex for the UE citizen. Therefore, it will be drastically more demanding and rigorous facing a non-Community national once Brexit is effective.
Establishing a company in France as a way to maintain your business attractivity
Having a commercial partner or a direct representative entity close to your French and European clients could be a message attesting your anticipation of the transitional period. This would make you avoid the consequences of the confusion and unclarity resulting from unknown rules applicable to the UK-UE trade relations.
An even safer alternative would be setting up a subsidiary in France.
The choice of such structure would eliminate the risk of additional costs of planning and management of stocks and elongated shipping schedules that have already discussed above.
Also, having a subsidiary on the French territory would make it easier to adapt your products/services to the constantly evolutive EU standards and regulations.
Such an effective presence supported by a legal entity in France, close to your French customers, and in the heart of the European territory, would allow you to better understand their demands and centralize the activity of within the whole EU zone.
For those and other reasons a French subsidiary may give to your company a real competitive edge.
Ewa Kaluzinska Nicolas Renault
Verne Legal, Partner Verne Legal, Lawyer
Verne Legal provides a customized legal and tax advisory service to both French and foreign companies. It advises clients in running their business in France, offering strategic assistance enriched by multicultural sensitivity. For more information on the tax law in France, we invite you to download “Doing business in France” e-book and to contact our team at info@vernelegal.com.