As the Brexit process approaches its extended 31 October 2019 deadline, UK and EU companies and their employees are focusing on the key employment law and tax questions that will shape business and the world of work in the post-Brexit landscape. Do I need to reorganise my business? Should I relocate from the UK to an EU member state? What will be the arrangements for transferring employees to and from the UK? What are the tax implications of reorganisation and relocation?In this CMS guide, we highlight the key considerations for companies and employees. We take a close look at developments in France, Germany and Luxembourg – three EU jurisdictions competing to attract new or expanded business from ‘Brexodus’ relocations and reorganisations.

The European Merger Directive 90/434/EEC provides for a tax deferral regime for reorganisations taking the form of a merger, a division or a transfer of business in exchange for shares issued by the recipient company. In legal terms, this is a “a contribution in kind”. Most of the EU member states have implemented the Merger Directive in their domestic law. This regime allows cross-border reorganisations to be achieved without any capital gains tax liabilities resulting from the businesses transfer. The regime is also applied to domestic reorganisations. However, in the case of Brexit transfers, UK companies have been reluctant to use these applicable forms of transfers, opting for simplified ways of transferring employees. Valuation of the business in question is a key issue. UK groups find it difficult to assess any goodwill attached to the activities being transferred, even though the business activities were profitable. Two main arguments are put forward. First, Brexit means it is no longer possible for a UK-regulated company to perform its activity from the UK, due to the loss of the licence required to operate throughout the EU. For this reason, the activity to be transferred cannot be considered to be valuable. Second, clients cannot be considered to be specifically attached to any company or local branch of the UK group. Converting a UK company’s local branch into an EU company’s branch in the same group should therefore not be regarded as transferring any turnover or business. In our experience, the UK groups performing Brexit reorganisations are often achieving their transfers simply through the movement of employees, without structuring them through a contribution in kind or even a sale of business. Some companies are seeking rulings from the tax authorities of the EU member states involved in the transfers to get comfort on using very low values attached to the business transferred. In France, a specific office was dedicated to reviewing the methodologies used by UK groups to achieve proposed transfers. In the UK, intensive discussions on valuations are ongoing with HMRC, the UK tax authority. Brexit is being used as an argument to try and convince the tax authorities not to refer to fair market values for transferring the businesses to another country or to another legal entity. At this stage, it is impossible to foresee whether these transfers with very low compensations for the UK entities, when not approved through prior tax rulings, will pass through future tax audits without any dispute. It is worth noting that VAT is not an issue, as movements of entire businesses from an entity to another, including in cross-border transfers, do not trigger any VAT liability (under to the concept of TOGC – transfer of a business as an ongoing concern).

The UK’s withdrawal from the EU has multiple consequences for domestic tax rules, depending on the location of a person, a legal entity or an investment. For now, however, it is impossible to assess all these consequences, country by country. Given ongoing uncertainty over the exact timing of Brexit and the content of the withdrawal deal, only a few European countries have passed legal provisions to temporarily deal with the consequences of a possible no-deal Brexit. In Belgium, a Brexit Act was passed on 28 March 2019 containing measures in various fields, including economic, social and environmental. On tax, it provides that the UK will be assimilated until 31 December 2019 as a member state of the European Union. EU Directives will therefore remain applicable until that date. In France, several measures included in the Finance Act for 2019 provide for this assimilation for an interim period. But that is the extent of the provisions for now. On VAT, the EU member states have made some progress. On 27 March 2019, the European Commission VAT Committee issued a working paper describing interim measures for the application of VAT, that should apply in the event of a no-deal withdrawal by the UK. The EC indicated that the 28 EU member states “almost unanimously” agreed to these measures. Income taxes are a different story. For the time being, it appears that each member state would rather play its own game. In that context, a general overview of the current situation of several EU countries – in terms of corporate income tax, personal income tax and patrimonial taxation – is helpful in identifying the pros and cons of a relocation choice. mediumThis analysis shows that while there is tax competition between the member states, there is a tendency towards the convergence of tax rates. The chart compares France, Germany, Luxembourg, Belgium, the Netherlands, Italy and Spain against four general tax-related decision-making criteria for companies: CIT rates; specific taxation of financial income; the possibility of deducting amortisation of goodwill; and the existence of a large tax consolidation regime, including the possibility to form a fiscal unity between sister companies when their ultimate parent company is established in an EU member state. Key observations include:on CIT, there is a general trend to reduce the rate towards a standard level of around 25 %. Luxembourg, Belgium and Spain are leading the way. financial income is basically taxed in the same manner in each country. amortisation is allowed in all the countries except France, but at very variable rates. tax consolidation exists in all countries. However, in Germany, it is only open to groups with a vertical holding chain, whereas in the other countries, it includes the possibility of horizontal ones, i.e. between sister companies held by the same parent company located in another EU member stateThis analysis shows that while there is tax competition between the member states, there is a tendency towards the convergence of tax rates. mediumThe second chart provides an overview of the taxation of individuals under four important tax criteria: the personal income tax rate; the existence of a wealth tax; the specific taxation of financial income; and the existence of an incentive regime for inpatriates. It shows that there are still some disparities between countries. All the countries have quite a high level of taxation for individuals. France has the highest rate because social contributions at the flat rate of 17.2% are added to the progressive rate of taxation. Most of the countries have abolished wealth tax. It still applies in France – on real estate property – and in Spain, but not in all the autonomous regions. Financial incomes often benefit from a reduced rate of taxation or from specific exemptions. An incentive inpatriate regime exists in almost all the countries, except Germany. The content of these regimes varies from a country to country. A common feature is the exemption of foreign-source income for a certain period.

Relocation to other EU member states is a key Brexit question for companies and employees, particularly in the banking, financial and insurance sectors. In these and other highly regulated sectors, Brexit will end the automatic right of UK-based operators to distribute products and services freely across the EU. Relocation is taking place both physically and legally. UK-based employees are in the process of transferring their residence to countries where they are entitled to operate, such as Germany, France, Luxembourg, Belgium or Ireland. At the same time, UK company branches established in European countries are being converted into branches of companies domiciled in EU member states other than the UK. This means employees located in these branches will move from one legal entity to another, while remaining resident of the same country. These ongoing movements raise two types of tax issues.1. How to qualify legally the transfer of employees from an entity to another. Should it be considered for tax purposes as the sale of the UK business, which would involve a price to be paid to the UK company?2. Which is the right country to establish, from a tax standpoint?

Tax and employment law factors in France, Germany and Luxembourg This article sets out views from CMS lawyers in France, Germany and Luxembourg. From the perspective of lawyers in those jurisdictions...