Brexit – What now?

The starting point

The United Kingdom got serious nine months after the Brexit vote. On 29 March 2017, the British Prime Minister Theresa May signed the official declaration about Great Britain leaving the European Union. Pursuant to Art. 50 EU Treaty, the two year negotiating period began with this declaration. On 25 November 2018, the European Council of the heads of state and government in the EU accepted the result of the negotiations. The formal approval of the United Kingdom was supposed to originally be given in December 2018. However, even shifting the vote to 15 January 2019 was not able to secure a majority for the deal in the British Parliament. The British head of government and her European negotiating partners suffered the media referred to as a "thunderous" defeat of 432 to 202 votes, and the British government and the Europeans must now find a way out of this dilemma. Potential scenarios extend from Great Britain remaining in the EU to additional negotiations or a new vote to a unregulated "hard" exit of Great Britain from the EU.  

The effects

How the relationship between the UK and the EU will be structured in the future depends decisively on whether the British Parliament approves the exit treaty after it was approved by the European Council.  In the case of a positive vote, the final version is supposed to be ratified by the end of March 2019 and be adopted in the European Union by the Council after approval by the European Parliament.  A transition phase will then follow until 31 December 2020.  The current provisions will continue to apply during this time in accordance with the exit treaty, although the United Kingdom will no longer be represented in the bodies of the EU and will lose its rights to be involved.  After the transition period, a political declaration is supposed to be added to the exit treaty.  Both parties will try to achieve close partnership in the context of a free trade treaty for the time after the transition phase.  However, the EU emphasizes that Great Britain, as a non-Member State, cannot enjoy the benefits of a Member State without fulfilling duties.  The British idea concerning the common market – the use of free movement of goods while simultaneously restricting freedom of capital, personal freedom and freedom to provide services, is then not easily capable of implementation. 

If the negotiations fail or if they are not ratified in a timely manner, Great Britain will still leave the EU as of 30 March2019 ("no-deal scenario").  In the case of such an unregulated exit, the United Kingdom will become a third party country with regard to the EU starting on 30 March 2019.  The customs provisions for third party countries will apply at the borders, and general rules of international law and the World Trade Organization will apply for commercial relationships.  

Remaining in the EU or extension of the deadline in Art. 50 EU Treaty

According to the recent judgment of the Court of Justice of the European Union in 2018 (C 621/18), the British government is free to stop the process of the exit and withdraw its declaration of withdrawal until 29 March 2019. This would have to occur without any restrictions and without any conditions, but it would not need any consent or ratification by bodies in the EU or its Member States. The relations between the EU and Great Britain would not change in this event. In light of the intent of the British government to implement the Brexit vote, however, it appears unlikely that the British government will use this option.

In order to gain more time for resolving the dilemma, the British government could apply to the EU to extend the time period in Art. 50 EU Treaty. In order to be successful, the application would have to be unanimously accepted by all 27 European Member States. There is no certainty about what would occur at the end of such an extended exit period.  Although a regulated exit currently appears to be more likely than the no-deal scenario, companies should still address the various exit scenarios early.  The following areas will especially be affected by the Brexit:

Additional negotiations

In order to save the "deal", there could be additional negotiations between the British government and the EU. However, both the Commission as well as the other European Member States have so far categorically rejected restarting negotiations. Which section of the exit treaty would apply in such a situation is accordingly not foreseeable. Especially the regulation of the border between Ireland and Northern Ireland and the political declaration outlining the future relationships between Great Britain and the EU are subjects that could be raised in further rounds of negotiations.

A new vote

After the British head of government was able to survive a vote of no confidence after the Parliament rejected the "deal", it is also possible that there could be a new vote about the "deal". In the case of a positive vote, the final version would be ratified by the end of March 2019 and would be adopted in the European Union by the Council after a vote of the European Parliament. This would be followed by a transition phase lasting until 31 December 2020. During this time, the current provisions would continue to apply under the framework of the exit treaty, although the United Kingdom would no longer be represented in the bodies of the EU and would lose its rights to participate. The political declaration which is supposed to be added to the exit treaty would provide information about the time after the transition period. Both parties are looking for a close partnership in the context of a free trade agreement. However, the EU emphasizes that Great Britain, when it is not a Member State, cannot have the benefits of a Member State without fulfilling the duties. The British idea with regard to the European market, involving access to free commerce in goods while simultaneously limiting the free movement of capital, people and services, therefore, cannot be easily realized.  

The "no deal" scenario

The so-called "no deal" scenario would have the greatest consequences. Although it appeared at the end of last year that such an unregulated exit of Great Britain from the EU was unlikely, this will soon be the situation in two months. If there is no exit treaty that regulates the relationship between the EU and Great Britain, the United Kingdom will become a foreign country with regard to the EU starting on 30 March 2019. The rules for customs applicable to third parties will apply at the border, and general rules of international law and the World Trade Organization will apply with regard to the commercial relationships.  

Analysis

Companies should prepare for the eminent possibility of an unregulated exit of Great Britain from the European Union on 30 March 2019. The following areas will be affected by the Brexit: 

  • employment law, social insurance and residence law (residency and employee status depending on the results of negotiations, in the case of a stay in Great Britain or Germany, there is a possibility to apply for permanent residence status; it is possible that the German-British Convention on Social Security of 1960 will be relevant for social insurance claims)
  • tax law (possible realization of silent reserves)
  • consumer tax law (EMCS will no longer apply; in the case of transport of goods which are subject to consumption tax, an exit filing and an electronic administrative document (e-AD) will be necessary; VAT reimbursement will not be governed by the Directive 2008/9 EC and instead by Directive 86/560 EEC)
  • corporate law (loss of the legal form in the case of a corporation established under British law which has its administrative headquarters in Germany, above all in the case of an Ltd.)
  • acquisitions of enterprises (actual conduct of the transaction (due diligence) will be influenced by future developments and must be taken into account in clauses in the contracts)
  • foreign trade and customs law (filing of customs declarations in transport of goods between the EU and the United Kingdom; requirement for an export permit for dual use goods; licenses will apply in the case of import of products which are subject to licensing)
  • trade (change in process for evaluating conformity, British manufacturers will become importers and must designate responsible individuals domiciled in the European Union in specifically regulated situations, e.g. Art. 14 Directive 93/42/EEC (
  • IP, IT and data protection (possibly the filing of a national trademark in the United Kingdom in addition to the European trademark, possibly additional requirements for transmitting data to the United Kingdom)
  • real estate (the consequences of Brexit must be reflected in contracts)
  • banking and finance law (no access to the internal European market using the "EU passport", branches of British securities companies in the territory of the EU must satisfy national and European requirements for branches of securities firms from foreign countries)

Our attorneys will analyze your issues in light of the various exist scenarios and help you to establish the correct path in advance for your business and business relationships in and with the UK.

Key Contact

Dr Lothar Harings
Lawyer
T +49 40 35922-278
l.harings@gvw.com