Legal articles

Briefnotes on Brexit

After the rollercoaster ride of the British referendum, Bregret – a major trending topic on social media – our own elections in Spain and the arduous formation of a government, it’s time to get back to normal and look at the political, legal and fiscal aftermath of the United Kingdom’s now inevitable, tentative exit from the European Union.

  1. United Kingdom exit procedure

Speculation aside, we must bear in mind the result of the referendum. From a procedural standpoint, the UK must invoke Article 50 of the Treaty on European Union to begin the exit process.

Contrary to popular belief, the Member State wishing to leave must serve notice of its intention to the European Council, not the other way around. Once the United Kingdom has formally submitted its notification, it will be the job of the European Council to authorise the commencement of negotiations and oversee the negotiation and agreement process.

The United Kingdom may not officially take part in the meetings or the decision-making of either the European Council or the Council of the European Union.

For the secession agreement to be valid, it must be approved by the European Parliament before the Council can make it definitive. The agreement would therefore need to be renegotiated if the European Parliament opposed it.

Finally, once passed by Parliament, the Council of the European Union votes to accept or reject the agreement with a qualified majority vote. A qualified majority requires the support of 72% of the Council’s members, representing 65% of the population of the participating Member States.

The exit procedure must be completed within two years of the United Kingdom’s formal exit notification. However, the procedure is expected to require the express authorisation of the Parliaments of some Member States and is therefore likely to take around four years, the necessary deadline extension being agreed cooperatively.

  1. Future scenarios for EU-UK relations

An appreciation of the likely legal consequences requires a knowledge of the different scenarios that govern EU-UK relations. Current relations with third countries usefully illustrate the possible outcomes:

Firstly, we have the so-called Norwegian option, by which the UK could join the European Free Trade Association (EFTA), whose members are currently Norway, Iceland, Liechtenstein and Switzerland. As a Member State of the EFTA, integration in the European Economic Area (EEA) would become a possibility. In that scenario, the UK would NOT be part of the EU, but it could take advantage of the Common Market.

However, the main problem lies in the considerable degree of transposition of EU law, which means that, in practice, the UK would be in a worse position in terms of national sovereignty, being obliged to incorporate regulations it has neither negotiated nor approved.

The second scenario is the so-called Swiss option, which involves multiple bilateral agreements focused on specific areas. Unlike the Norwegian option, EU law would not be applicable in the UK, only the provisions of the bilateral association agreements. It would mean, in fact, a different commercial relationship for each trading area, in which there may or may not exist a partnership agreement.

However, immigration was a key issue in the Leave campaign. Given the potentially destabilising effect of a Brexit, it is doubtful that the UK will be permitted to maintain an open bilateral relationship without agreeing to the free movement of persons.

The third and final option is the third-country option, by which the EU would not grant the UK a preferential relationship over other EU trading partners. One-off trade agreements could be negotiated via multilateral trade agreements, such as those adopted within the framework of the World Trade Organization.

This option would give the UK the most autonomy, but fewer privileges in terms of relations with the EU and its constituent countries.

  1. Legal and fiscal consequences of Brexit

It is clear, then, that the implications of a Brexit will be determined by the framework of relations the UK is able to negotiate with the EU under Article 50 TEU, about which nothing is currently certain.

For the purposes of a brief analysis of the consequences we are likely to face, we have to start from a situation in which no agreement exists.

When it comes to determining which legal regime is applicable in cross-border relations, it is common practice that EU regulations are applied even when one party is not a Member State. This means that any number of European legal instruments are applicable by the courts of law of the Member States, in relations with third countries as well as with other Member States. We see this in the context of contracts and extracontractual obligations referred to, respectively, in the Rome I and Rome II Regulations.

On the other hand, the Brussels I Regulation rules on jurisdiction, recognition and execution of judgements and lis pendens (parallel proceedings) are applicable, with some exceptions, only when the respondent is domiciled in a Member State. Judgements handed down by the British courts will not therefore benefit from automatic cross-border execution of judgements, and will require a Spanish court to issue an exequatur (ruling on the enforcement of a foreign judgement). There is no guarantee that a judge in a Member State will suspend (or refrain from ruling on) proceedings because of the existence of parallel proceedings in the UK whose judgement could be recognised.

Seceding from the EU would allow the UK to exercise full jurisdiction in the area of taxation, particularly with respect to VAT; special taxes on tobacco products, alcoholic drinks and fuels; and customs duties.

By not being subject to the regulations of free circulation of capital, the taxation of corporate groups could be seriously affected, given that these groups will no longer be able to take advantage of freedom of establishment and freedom to provide services to companies belonging to the same group, etc.

In terms of the Non-Resident Income Tax, physical and legal persons with no permanent residence in Spain will be taxed at a higher rate than residents of a Member State. Similarly, the European Court of Justice ruling of 13 September 2014, which overturned the discriminatory treatment between residents and non-residents resident in a Member State, will not apply.

In other areas, such as insurance and reinsurance, banking, competition law, data protection, electronic commerce, energy and telecommunications, the consequences are numerous and will depend on the framework within which EU-UK relations continue to be regulated.

  1. Political Consequences:

While a majority of Britons voted for the Leave option in the 23 June referendum, the political consequences remain to be seen, when the British people appreciate what it means to lose European citizenship: in other words, the loss of the rights contained within Article 24 of the Treaty on the Functioning of the European Union.

Much has also been made of the issue of Scotland, where the majority is pro-Europe and Scottish independence is an ever-present issue. It is very likely that Scotland will attempt to influence negotiations to remain in the Union when the UK leaves. But to do that, Scotland would need the international community to recognise it as a nation state, as well as the majority vote of the United Nations General Assembly. A vote of the General Assembly can only take place if the Security Council proposes it, and the United Kingdom, along with the U.S., France, Russian and China, holds power of veto.

Speculations abound, but little is certain. The controversial figure Boris Johnson – renowned for comparing the EU with Nazi Germany and other contentious remarks during the Leave campaign – and his appointment as head of the Foreign Office appears not to bode well for a speedy, orderly and mutually satisfactory exit, though many commentators see the move as a means of bringing about the failure of negotiations and paving the way for a second round, this time less Europhobic and more open to concessions. We live in hope!

We need to carefully monitor the negotiations as they develop and so be aware of the consequences of this irreversible (?) decision.

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