Implications for Australian businesses
Overview and next steps
On 23 June 2016, a referendum was passed in the UK for the UK to "Brexit" or exit from the European Union (EU). This will have significant implications for businesses in the UK and the EU, and also for businesses in countries, such as Australia, that have trade or investment arrangements with the UK and/or EU.
The UK and EU are important markets and trading and investment partners for Australia. Many Australian businesses have established operations in, or have trade or investment arrangements with, the UK and EU. In particular, some Australian businesses have established operations in the UK as their European headquarters and as a gateway to the EU, to allow them to take advantage of the EU single market which provides for the freedom of movement of goods, services, persons and capital between the member countries of the EU.
The results of Brexit referendum had an immediate impact on global equity, bond and currency markets and there will be further implications as the withdrawal process is implemented. The next stage involves the UK government notifying the European Council of the UK's intention to leave the EU, which commences a two year period during which the UK and EU will negotiate arrangements for the UK's withdrawal from the EU and its ongoing relationship with the EU. During this period, EU laws will continue to apply in the UK, and the UK will remain part of the EU single market. However, while these negotiations are being finalised there will be an extended period of uncertainty regarding the terms of the future relationship between the UK and EU and its implications for the UK, EU and countries that trade with them. This could have significant implications for Australian businesses who have operations in or trade with the UK and the EU.
Ultimately, the extent of these implications from a legal and business perspective will depend on a range of key factors that will need to be resolved during the course of negotiations between the UK and the EU, including:
The terms of ongoing arrangements between the UK and EU that will apply after the UK's withdrawal from the EU. This could range from a model whereby the UK remains part of the European Economic Area (EEA) and European Free
Brexit : Implications for Australian businesses
Trade Association (EFTA) (similar to current arrangements with Norway) to negotiating a series of bilateral agreements with member states of the EU (similar to the Swiss model). These and other possible variations are outlined in Annexure A.
The extent to which EU laws already form part of UK legislation, such as legislation giving effect to EU Directives. These EU laws which are embedded in UK legislation will continue to apply even after the UK's withdrawal, unless they are repealed or modified by the UK legislature.
The extent to which the UK is prepared to adopt other EU laws which are not embedded in UK legislation, such as those which currently operate through EU Regulations.
Although the full implications will only emerge once negotiations between the UK and the EU have progressed, Australian businesses with operations in or trading arrangements with the UK and/or the EU need to start considering the possible implications and plan ahead to be able to deal with the possible ramifications of the UK's withdrawal from the EU. Some of the more significant possible implications for Australian businesses are discussed below.
The UK has been an attractive jurisdiction for businesses from English speaking countries, like Australia, to establish their operations, and many have made significant investments in the UK as a gateway to the broader EU single market. If the UK exits the EU single market, this could result in additional customs duties, tariffs and import requirements for goods moving between the UK and EU. This could result in higher costs and administrative requirements for Australian businesses using the UK as a gateway to the EU. Therefore, Australian businesses may need to review their trading and contractual arrangements to seek and minimise such additional costs and requirements.
Some Australian businesses have been able to take advantage of EU based licensing and authorisations that allow for passporting throughout the EU whereby such businesses have been able to register and obtain licenses or authorisations in the UK and then sell goods or provide services throughout the EU. If the UK withdraws from the EU, these passporting arrangements may no longer be available, and Australian businesses may then need to consider seeking separate registrations, licenses or authorisations or even establishing a branch in an EU member country, to be able to continue their business and trade in the EU.
Australia currently is negotiating an FTA with the EU which is intended to facilitate and enhance trade and investment between Australia and the EU. Following its withdrawal, the UK will not be party to this FTA and Australia will need to consider negotiating a separate FTA with the UK.
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Given the possibility for different customs duties, tariffs and regulatory requirements to apply in the UK and the EU, Australian businesses which currently have EU wide contractual arrangements may need to consider modifying those arrangements to ensure that they can remain commercial viable and meet regulatory requirements in both the UK and the EU.
Depending on the extent of the impact of increased costs, regulatory requirements or other implications arising from the UK's withdrawal, there is a possibility that parties to contractual arrangements may try to rely on force majeure or material adverse change events to seek to modify or terminate such contractual arrangements, leading to the possibility of increased disputes and potential litigation.
Financial Services and Insurance
London is a major financial centre and many international financial institutions and insurance companies, including from Australia, have established their base of operations and have obtained their primary licenses and registrations for conducting regulated financial services and insurance businesses in the UK. This has allowed a broad range of financial institutions (including banks, investment firms, asset managers and payment service providers) and insurers to rely on passporting arrangements to carry on their businesses in another EU member state. If these passporting arrangements cease to apply, then these financial institutions and insurers may need to seek separate licenses or registrations or even establish a branch in another EU member state in order to be able to continue to provide financial or insurance products and services throughout the EU. There is already speculation that, in response to Brexit, some UK based financial services businesses are considering moving at least part of their operations to other European financial centres such as Paris, Frankfurt, Dublin or Amsterdam, which could allow them to continue to take advantage of the EU passporting regime.
Over recent years there has been a significant harmonisation of EU based financial services regulations. Upon withdrawal from the EU, there is a possibility that the UK financial services and insurance regulations may begin to diverge from EU regulations, which may require businesses wishing to operate across the EU to implement additional systems and processes to be able to comply with any divergent or additional regulatory requirements.
One of the most contentious issues surrounding the referendum was the ability for the UK to better control its immigration policies and the movement of people into the UK. If this freedom of movement of people is curtailed and more stringent
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immigration requirements are imposed, this could impact Australian businesses with operations in the UK or EU by reducing their flexibility in being able to mobilise and utilise their workforces across the UK and EU.
International businesses, including from Australia, have been able to effectively protect many aspects of their intellectual property across the EU, including through EU wide trademark and design registrations. There is also a proposal to implement a unitary patent regime. If the UK ceases to be part of these IP regimes, then Australian businesses wanting to fully protect their IP throughout the UK and EU may need to seek additional registrations in the UK and/or EU. This could particularly impact Australian businesses operating in the pharmaceutical or biotech sectors.
There is a largely harmonised competition regime across the EU, including EU safe harbour legislation and block exemptions which allow businesses operating in the EU to undertake actions which might otherwise be considered anti-competitive. If the UK withdraws from this regime, then Australian businesses operating in the UK may no longer have the benefit of such exemptions, and may also face additional requirements if the UK decides to implement differing competition regulation following its withdrawal.
Australian and other international businesses undertaking major acquisitions of businesses which have an EU dimension and met certain thresholds have been able to utilise a one stop shop for competition merger notification and approval. If the UK ceases to be part of this regime, then Australian businesses undertaking mergers or acquisitions involving both the UK and an EU dimension, may be required to make additional merger filings and obtain approval in the UK as well as the EU.
A number of Australian companies have listed on UK exchanges as a means of accessing investors and capital across the EU. The EU Prospectus Directive and implementing UK legislation allows companies to access investors and capital across the EU under a prospectus approved by one member state which is passported and can be used in other member states. If the UK withdraws from this regime, then this may make the UK a less attractive option for listings by Australian companies, and may impose additional requirements and complexities for companies wanting to raise capital in both the UK and the EU.
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Many Australian and international businesses have established their headquarters in the UK given the favourable tax regime and the ability to rely on EU tax directives which exempt interest, royalties and dividends from withholding tax when paid by companies in one EU member state to companies in another member state. If the UK withdraws from this regime, then depending on the effect of any applicable double tax treaties, UK companies receiving interest, royalties or dividends from their group companies elsewhere in the EU may no longer have the benefit of such withholding tax exemptions. This may make the UK a less attractive location for a European holding company. Therefore, Australian businesses with European group companies may need to review their group structure if these tax implications eventuate.
If the UK withdraws from the EU, then in addition to uncertainties associated with the extent to which existing EU laws will continue to apply, there will also be uncertainties regarding the extent to which decisions of EU courts or past decisions of UK courts influenced by EU court decisions will continue to apply.
Currently, EU legislation facilitates the mutual enforcement of judgments made by the courts of one EU member state within other EU member states. If the UK withdraws from this regime, then the enforcement of judgments may become more complicated. Therefore, Australian businesses involved in disputes involving companies or assets across the UK and EU countries will need to more carefully consider their litigation and enforcement strategy in pursuing resolution of such disputes.
Plan ahead to deal with potential implications
The exact implications for Australian businesses as a result of the UK exiting the EU will only be able to be finally determined once the terms of the UK's withdrawal and ongoing relationship with the EU have been negotiated and finalised. In the meantime, Australian businesses operating in or trading with the UK and/or EU will face uncertainties and will need to consider implications for their businesses as further details of these arrangements become available and plan ahead to deal with the possible ramifications of the UK's exit from the EU.
Our Brexit website and client resources
As a leading global law firm, Baker & McKenzie is closely following Brexit developments and evaluating the implications of what this means for our clients, including Australian businesses.
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We have also developed resources to assist our clients to better understand and deal with the implications of Brexit on their businesses, which can be accessed via this link. We will be updating these resources as more information becomes available so that it remains a relevant and useful resource to our clients.
How we can help
Baker & McKenzie has extensive experience in assisting Australian and other international businesses to operate, trade and invest in the UK and EU. We have established a Working Group across a range of offices, practice and industry groups to monitor developments regarding Brexit and assist our clients to understand and manage the implications of the UK withdrawing from the EU.
If you have any questions or require assistance in relation to dealing with the implications of Brexit, please feel free to contact any of the key contacts noted below or members of the Working Group listed on our Brexit website.
Partner, Sydney +61 2 8922 5254 frank.castiglia @bakermckenzie.com
Partner, London +44 20 7919 1956 samantha.mobley @bakermckenzie.com
Partner, London +44 20 7919 1978 ross.denton @bakermckenzie.com
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Potential models post Brexit
UK joins the EEA and EFTA
A customs union with
Bilateral agreements between the UK and EU-27
Operating only under the
World Trade Organisation rules (WTO)
Access to EU Market for goods
Access to EU Market for services
Common external customs tariff
Contribution to EU budget
Free movement of persons/employees
Influence over EU legislation and trade policy
YES YES YES NO
YES full NO unless negotiated
NO NO NO
NO NO NO
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Brexit : Implications for Australian businesses