Now that the British parliament has rejected the Brexit deal in a vote last week, fears of a lawless exit of the UK from the EU are growing daily. In anticipation of this no-longer-unlikely scenario, the Austrian government is preparing for a "hard Brexit".
How did we get here?
As it stands, the UK will – following the outcome of the 2016 referendum and the country's sovereign decision – withdraw from the EU on 29 March 2019. Even though negotiators on the EU and the UK side agreed on a draft withdrawal agreement to set out a framework for their future relationship, to become effective such a "Brexit deal" needs to be approved by the British parliament (as well as by the European Parliament and the European Council).
Among others, the withdrawal agreement foresees a transitional period until 31 December 2020, in which Union law will be applied in the UK and will continue to treat the UK as a Member State. In the absence of a Brexit deal, however, Union law will cease to apply to the UK after 29 March 2019, leaving UK companies as third-country companies. Given the extensive freedom of movement of EU companies and the partly harmonised corporate law in the EU, a "hard Brexit" could have dire effects on UK companies doing business in the EU.
The draft bill for corporate law
Last week, the Austrian Ministry of Justice published a draft bill for the Brexit Accompanying Act 2019 – Justice Part. This draft is subsequently to be merged with matters under the responsibility of other ministries if the UK withdraws from the EU without a binding withdrawal agreement to form a joint legislative proposal (a "Brexit Accompanying Act 2019"). Besides corporate law, the draft also sets out rules for the continued practice of UK citizens as lawyers in Austria as well as for UK companies as law firms in Austria.
For corporate law, a special federal law is foreseen to be applicable until the end of 2020: the federal law on the conflict-of-laws assessment of companies registered in the United Kingdom of Great Britain and Northern Ireland with their administrative seat in Austria. Under this legal act, companies registered in the UK but having their administrative seat in Austria will provisionally continue to be treated as if the UK were still a Member State of the EU.
Transitional period for UK companies
In case of a "hard Brexit", this law will apply to companies registered in the UK but with administrative headquarters in Austria, especially those having a registered branch in Austria. Such companies are recognised as UK companies under the freedom of establishment (formation theory) based on the case law of the European Court of Justice (ECJ). In relation to third countries, the formation theory established by the ECJ does not apply, but instead Section 10 of the Austrian Act on International Private Law (IPRG), which prescribes the domicile theory under which such companies would no longer be recognised in Austria. An unregulated withdrawal from the EU thus threatens UK companies with administrative headquarters in Austria, because their recognition as foreign legal entities would end. The personal liability of its shareholders could ensue.
Thanks to the transitional period according to the current draft bill, such companies would have the opportunity by 31 December 2020, for example, to contribute their operations to a domestic corporation or to merge the company into an Austrian corporation under applicable cross-border merger laws. Through such measures, UK companies can migrate to a corporate law safe harbour.
No changes for "true" UK companies
Branches of companies which qualify as UK companies also pursuant to Section 10 IPRG (i.e. have their administrative headquarters in the UK) will be able to remain registered in the Austrian Commercial Register even after Brexit. Their recognition as legal entities will be left unchanged.
We will be watching the news closely over the next few weeks. A political compromise may eventually enable the adoption of the withdrawal agreement between the EU and the UK. But preparations for a "hard Brexit" at the EU and national level must be seen as viable fall-back solution.