Brexit - Malta solutions
Updated: Jan 10, 2019
Brexit will impact businesses differently depending on the country where they are based, the sector they operate in and the location of their clients.
The majority of UK firms are already dealing with the key issues. Multinationals and highly regulated firms are definitely more prepared than the smaller and/or unregulated ones. It is difficult to predict the end of this however there are political issues between one departing member and the remaining ones and any further negotiations will be difficult.
What happened so far
The journey began on 24 June 2016 when the UK voted to leave the EU, followed by the triggering of Article 50 on 29 March 2017, this effectively starting the process to leave the EU. The Brexit negotiations were put forward to the EU and the EU voted in favour on 25 November 2018. The UK Parliament is now to take a vote during mid-January 2019 and the following are the possible options resulting from such vote.
1. Withdraw the exit decision
There is an increase drive to have a second referendum asking the British people to vote again as to whether the UK should remain in the EU. Such option could overturn the earlier exit vote, enabling the UK to withdraw the notification to leave the EU.
2. Be an EEA member with a customs union
EEA membership would ensure that goods and services sold in UK will be freely sold in the rest of the EU. The UK would need to retain membership of a customs union with the EU and would not be allowed to have separate trade deals with other countries.
3. Customs union with flexibility
A customs union with the EU would give the UK autonomy over its services, while keeping its membership of the single market in goods and agriculture. Although a possible compromise the EU would not want this outcome.
4. Hard Brexit
The UK would not retain full access to the single market and customs union with the EU. It will obtain full control of its borders and be in a position of making new trade deals. Initially, the UK will have to fall back on World Trade Organisation rules for trades with its former EU partners and will have an uphill of trade deals to be agreed on with third countries.
Effects on UK entities
There are different negative estimates on the UK’s GDP and businesses caused about by the different Brexit options, and the following are the key likely effects, particularly accentuated by a hard Brexit:
Increased bureaucracy and higher administrative expenses;
Higher foreign exchange rates fluctuations;
Supply chains re-evaluation, this effecting costs, delivery times, standards and stock levels;
Possible import duties with direct impact on selling prices and marketing;
EU protectionism and difficulty by UK to continue entering its main market;
Risks for freedom of movement for workers with negative consequences on production.
UK based licensed entities
On 12 July 2018, the European Securities and Markets Authority issued a public statement to raise awareness amongst market participants on the importance to prepare for the possibility of “no agreement” between the EU and the UK on Brexit. This implies that there is no assurance that a transition period will be agreed upon and thus impacted entities need to consider the hard Brexit scenario taking place on 30 March 2019.
Through this scenario UK regulated entities would not be unable to market in the EEA and the likes of fund managers would be unable to continue marketing UCITS and AIFs across the EEA. The impact on the larger UK investment managers would be minimal since most of them already have substance in the EEA. However, the smaller players which are typically relying on passporting UK-domiciled funds and services into continental Europe would need to consider moving sufficient substance to an EU jurisdiction.
There will probably be an increase in the operating costs and time to market and this can have a negative impact, particularly on the smaller ones. UCITS and their managers need to also be EEA domiciled as otherwise the UCITS would become subject to the AIFMD additional restrictions and would also be unavailable for sales to most types of retail investors.
Regulated entities such as fund managers need to fully understand the new reality and should trigger their contingency plan to submit the necessary applications to an EU jurisdiction, such as Malta, enabling them to continue providing services in the EU27.
A number of firms have already done so, evidenced by the fact that a number of authorisation requests have already been submitted to the EU27 authorities.
Malta is a financial services hub, with a number of UK licensed and unlicensed entities already operating from here. It is a cost-effective jurisdiction with unrivalled tax structuring opportunities allowing companies to reduce the effective tax rate to 5% through a shareholder’s refund from a corporate tax of 35%. In case of funds, generally speaking, there is no capital or income gains tax at fund level and non-Maltese investors are not subject to tax in Malta.
Fiduscorp has extensive experience in the structuring of corporate and regulated entities. We can guide and help you seamlessly adapt to this change and in the process can also review your operations for potential tax efficiency.