Brexit and the audiovisual sector
Blog BREXIT

1.    Brexit checklist

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2. Timetable

2.1 Business as usual in the short term

An Article 50 TEU notification will start the two year timetable for Brexit. Notification is unlikely to occur before end 2016, making Brexit unlikely before 2019 or later. During this time, EU laws (including those currently due to come into force) such as the Portability Regulation, AVMS Directive, SatCab Directive, e-Commerce Directive and the Single Telecom Market Regulation will still apply.

2.2 Piecemeal repeal of EU laws post-Brexit

Following Brexit, it is likely that the UK will amend the European Communities Act 1972 (the basis for adopting EU legislation) to: (i) grandfather pre-Brexit rights; (ii) enable the UK to selectively adopt new EU laws; and (iii) consider, on a case-by-case basis, whether to repeal prospectively EU laws. EU regulations, such as the Single Telecom Market Regulation or the Portability Regulation, apply without national implementing measures. They will cease to apply post-Brexit though we expect the UK to grandfather most of them in the short to medium term at least. The UK may let these regulations lapse or continue to apply them - in whole or in part - through some new statutory mechanism.

3. Implications

3.1 A new trading arrangement

The UK will negotiate a replacement trading arrangement with the UK. There are a number of potential models, some of which would require the UK to adopt EU law. EEA affiliation, for example, would require the UK to adopt many current EU laws applicable to the audiovisual sector. If that were to occur then there would be few substantive differences in the legal framework, and the audiovisual sector would largely enjoy the same access to the EU as at present.

The UK may conclude the EEA model is politically unacceptable, since it entails free movement of persons.¹ The more likely outcome is a bespoke, sector-by-sector negotiated free trade arrangement. Other than the EEA model, access to audiovisual markets has proven difficult to negotiate in free trade arrangements. It involves hard-to-resolve issues of cultural policy, pluralism, viewer protection and access to information. Even free trade agreements promising deep integration between economies, such as the EU deals with Canada and the Ukraine, have carved-out the audiovisual sector. The contours of any bespoke EU27/UK arrangement will dictate what level of access the sector can expect to the EU27. The following analysis assumes that the UK does not affiliate to the EEA, but can largely determine its own legal treatment of the sector.

3.2 Content creation

Funding for content: Direct EU funding, including the EUR 1.46 billion 2014-2020 Creative Europe MEDIA programme, would not benefit the UK industry, though may be available indirectly via coproduction or similar arrangements with EU27-based producers.² EU state aid and non-discrimination rules would cease to regulate UK subsidy and tax incentive regimes. The current UK tax reliefs intended to promote UK production of films, high-end TV shows and other content may become more restrictive as they may become more focused on UK- (as opposed to EU27-), production. On the other hand, the current conditions attaching to such tax reliefs, including whether the content contributes to the development of British culture, may become less restrictive. The UK could offer more flexible film funding support, assuming the UK were inclined to increase national funding to offset loss of EU funds.

Coproduction eligibility for state support: To benefit from coproduction credits/support, films must meet certain criteria. These are established in bilateral treaties or conventions, including the European Convention on Cinematographic Co-Production, to which the UK and most EEA Member States participate. These are non-EU based instruments which will continue to apply.

Constraints on content production: UK producers wishing to shoot in or employ actors from the EU27 (andvice versa) will no longer benefit from EU freedoms to travel or do business across the EU. They will be required to make arrangements for travel, shooting and work permits for cast and crew.  Conversely, the UK may choose to offer greater employment law flexibility by repealing EU derived labour laws such as the Working Time Directive. See Baker & McKenzie's insight on employment and immigration Brexit implications.

European works: The AVMS Directive's European works quotas are similar to the obligation to promote European works in the Transfrontier Television Convention, to which the UK will remain signatory, albeit the Convention is more loosely worded.³ The revisions to the AVMS Directive tighten up the definition of, and obligations concerning, European works.  So there may be a marginal advantage to being based in a Convention state rather than the EU27. 

3.3 Content distribution by physical media

Free movement of goods will no longer apply. Under the default tariff position (assuming WTO rules are applicable absent a UK/EU27 trade deal), the distribution of physical media (e.g. DVDs, BDs) from the UK to the EU-27 (and vice versa) will not be subject to tariffs.⁴ But import VAT would apply when goods cross the border. The rate is set nationally. So on import into the UK, the rate would be 20%. This can generally be reclaimed, so it is largely a cash flow issue. Currently, copyright and any trademark rights are "exhausted" regionally across the EEA by first sale in the region. Post-Brexit rights holders may be able to object to distribution into the EEA or from the EEA into the UK as infringing copies. So rights holders would be able to grant exclusive rights to dealers in the UK which would not be undermined by ex-EEA imports.⁵

3.4 Cross-border broadcasting

Freedom of reception: The AVMS Directive requires freedom of reception, subject only to exceptions, across the EU for media services under the jurisdiction of one Member State. No destination state licence is required. Post-Brexit, media services from the UK into the EU-27 (or vice versa) will no longer be protected by the AVMS Directive. The Transfrontier Television Convention is a separate, non-EU, treaty which will remain applicable post-Brexit. It contains similar freedom of reception rights. However, several EU Member States (Belgium, Denmark, Greece, Ireland, Luxembourg, Netherlands, Sweden) have not signed and ratified it. Broadcasting in these EU Member States from the UK (and vice versa) may require licensing. In addition, the Convention applies only to linear services. On-demand audiovisual services are not covered.

Cross-border on-demand services: The Transfrontier Television Convention does not cover on-demand services.⁶ So on-demand service providers broadcasting from the UK will be subject to local regulation in every EU-27 Member State to which they provide their services. Few EU Member States require a license for on-demand services, being far less regulated than linear broadcasting. Though notification and registration formalities may apply.⁷

Transferring regulatory jurisdiction: Moving jurisdiction to the EU27 generally requires a substantial nexus to the EU27 territory in question, by reference to a series of criteria including head office, editorial decision-making and "substantial part of the workforce" location. But EU jurisdiction can be secured on a more ephemeral basis, if none of the other criteria for jurisdiction apply and the broadcaster uses a satellite uplink in an EU Member State.⁸

Satellite rights clearance: The SatCab Directive states that the communication to the public is made in the satellite uplink country. So the broadcaster need only acquire rights in the uplink state, obviating the need to clear rights multiple times. Post-Brexit, UK broadcasters will not benefit from similar legislation, albeit there may be arguments that this is implicit in the concept of "communication to the public" in light of recent "new public" jurisprudence from the EU Court of Justice.

Online content portability: The draft Portability Regulation requires providers of online content services to enable subscribers temporarily present in an EU Member State to access and use the online content. The Portability Regulation is likely to enter into force before Brexit is completed. This will allow consumers in the EU-27 to have access to their online content when travelling in the UK (and vice versa). The Portability Regulation will however have no effect post-Brexit. Consumers resident in the UK will not be able to benefit from portability when travelling across the EU-27 (and vice versa). Of course, online service providers will be in a position to negotiate with rights holders to retain the ability to also provide cross-border portability in the UK, notwithstanding the fact that the UK is no longer an EU Member State. However, this may involve a complex renegotiation of rights.

Net neutrality and over-the-top (OTT) services: Under the recently adopted Single Telecom Market Regulation, the blocking or throttling of online content by ISPs is prohibited, though this is subject to a number of important and legally unclear exceptions. The Single Telecom Market Regulation currently applies in the UK, ensuring that the quality of OTT services is not degraded by vertically integrated media companies. Post-Brexit, the Single Telecom Market Regulation will have no effect in the UK. OTT providers will still benefit from EU net neutrality rules when serving customers in EU27 territories (subject to the freedom-of-reception analysis above). The UK may choose to apply different or more stringent net neutrality rules.

The EU Court of Justice Murphy case-law: The Murphy case found that a UK public house was entitled to receive Premier League match broadcasts from a Greek satellite pay-TV broadcaster, and that any contrary contractual provisions were unenforceable under EU competition law.⁹ As to territorial licensing, this may create greater flexibility on territory restrictions given Murphy's focus on an intra-EU broadcast under the one-stop-shop pan-EU SatCab Directive regime. The rationale of the ongoing pay-TV investigation and e-commerce sector inquiry into blocking of cross-border broadcasts would also be deprived of substance in relation to the UK.¹⁰

3.5 Licensing/syndication of content

Tariffs do not apply to licensing intangibles to and from the EU27. Relief from royalty withholding taxes under existing double taxation treaties (which are not EU-derived) will continue to apply. But note also the position for intra-group licensing below.

3.6 Corporate group structure:

Dividend withholding taxes: The EU Parent/Subsidiary Directive generally exempts subsidiary-to-parent dividend payments from withholding taxes within the EU. Post-Brexit, UK parents will have to rely on, in some cases, less beneficial double taxation treaties (for example, a 5% German dividend withholding tax).

Intra-group licensing royalty withholding taxes: The EU Interest & Royalties Directive requires Member States to exempt cross-border royalty payments to (>25%) affiliates from withholding tax. Post-Brexit, UK licensors will likely cease to benefit from this exemption, which means the EU27 will be entitled to impose withholding tax on royalties at the applicable rate in the double tax treaty between the UK and the state of residence of the licensee. Most major markets in Southern and Western Europe have agreed to exempt royalty payments from withholding tax under the applicable treaties with the UK. A notable exception is the 8% withholding tax applicable in Italy. Portugal, Cyprus and Eastern European countries, albeit lower value markets, would be entitled to charge withholding taxes at rates of between 5 to 10%. This may not represent an additional overall tax cost to UK licensors if they are able to fully credit the incremental withholding against their UK liability, but it will vary on a case-by-case basis.¹¹ There will be no change in the UK tax treatment of outbound royalties to the EU27.

3.7 Choice of law

English contract law will be largely unaffected by a UK withdrawal from the EU as the bulk of English contract law is governed by English common law, and not EU law. English common law is often considered attractive commercially. It promotes the principle of 'freedom to contract' between businesses and aims at giving effect to the bargain agreed between the parties, with minimal judicial interference for public policy or other reasons. Both the Rome I and Rome II Regulations require EU courts to respect the parties' choice of law in a commercial relationship and the Rome Regulations apply whether or not a party is located in the EU. EU courts should therefore continue to respect English governing law clauses in the same manner as currently.

3.8 Choice of court

It is likely that the UK and the EU will agree to continue the application of the Recast Brussels Regulation. It is in no state's interests to risk parallel proceedings due to inconsistent application of jurisdiction agreements. Even without such an agreement, there are various possible treaty-based options for the UK to pursue, such as the existing Brussels, Lugano, or Hague Conventions. Whilst these differ from the Recast Brussels Regulation in some details, the overall aim of the Conventions is the same: consistent application of jurisdiction agreements and mutual recognition of judgments. In particular, the Hague Convention on Choice of Court Agreements has already been signed by the EU on behalf of the UK and it would be open to the UK to sign on its own behalf, post-Brexit.

4. Impact on the EU Digital Single Market agenda

Brexit comes at a time when the EU legislative framework is in flux. The EU flagship strategy – the digital single market ("DSM") – proposes many changes to the industry's legislative framework:

1. portability of online audiovisual services within Europe;
2. extension of CabSat Directive country of origin principle to online transmissions;
3. greater European works obligations on on-demand media services, and country-of-destination levies;
4. extension of the AVMS Directive to video-sharing platforms.

As a hub for the creative industries, the UK was expected to play a central role in shaping DSM legislation, inter alia via the UK's EU presidency in July 2017, and to be an important counterweight to less free-market-oriented countries. The UK will de facto cease to be an influential voice in shaping DSM and may decline its 2017 presidency.