France: A French Look At Brexit: Should They Stay Or Should They Go

Last Updated: 24 June 2016
Article by Jessie Gaston

In an article published in Tax Notes International on May 23, Jessie Gaston discusses the potential tax and economic consequences for France if the United Kingdom leaves the European Union:

Next month, the British people will vote on whether they want to remain members of the European Union or exit from it. This event is now widely referred to as Brexit, similar to Grexit, which was heading the news in 2011 at the height of the Greek economic crisis. Brexit could potentially put an end to 43 years of treaties and protocols signed by the United Kingdom in matters as diverse as customs, bank regulations, immigration, and, of course, taxes.

Curiously enough, while the gravity of Brexit would have consequences throughout Europe and could even open the door to an exit from the EU by other countries, up until recently talk in Europe about the Brexit proposal was rather limited. In some circles one could hear phrases such as ''those Islanders are at it again,'' ''fighting to mark their difference and for their own sake instead of accepting to think as Europeans,'' and ''the U.K. is fighting against windmills,'' but no real mention of a doomsday scenario. (Prior analysis: Tax Notes Int'l, Mar. 14, 2016, p. 903.)

In contrast, Grexit, which would have pushed Greece from the eurozone based on its inability to regulate its monetary and tax systems and a soaring debt, generated impassioned press and analysis for months, predicting the end of the European Union as a whole if Greece were to step out of the common monetary system — these consequences, from a country that represents about 2 percent of the European GDP. Time will tell if there was a bit of an overdramatization.

As a French tax professional with numerous clients and transactions in and with the U.K., I regard the prospect of a Brexit as anything but an anecdotal event. But until recently, it seemed to me improbable.
The roots of the crisis are based on European policy disagreements. Ever since the U.K. entered into the European Economic Community in 1973, it has constantly (and often with success) challenged European policy, always with the threat of leaving all or part of the EEC.

In February I traveled to London to visit clients and colleagues. I was surprised that the most recurrent topic of conversation was the realistic possibility of Brexit and the consequences it would have for the United Kingdom.

In London, I met with lawyers from several firms, a few bankers, and some listed and unlisted English companies with sizable cross-border business. They all mentioned that it was more likely than not that the U.K. would vote to leave the European Union. The dramatic economic consequences of that event were already being anticipated by internal contingency plans and briefings. Some had timelines to restructure what would potentially need to be changed, cash impacts were being assessed, and worst-case scenarios were being contemplated.

If London were voting on Brexit alone, my contacts believe the vote would be overwhelmingly to stay in the EU. However, the Brexit threat that Prime Minister David Cameron got elected on has become an out-of control demagogic machine embraced by radical parties.
Debates among voters are now essentially driven by immigration issues and protectionism. Curiously enough, Cameron seems to have assessed the economic consequences of an exit and is now actively campaigning for the U.K. to stay in the EU, but it could be too late. I realize now that Brexit is a realistic possibility.

Impact on France

What would be the consequences for France from a tax and business perspective if the United Kingdom exited the European Union?

To respond to this question, let's briefly discuss what is at stake. The European Union is, from a legal perspective, essentially a web of interlocking treaties in different domains (taxes and customs, but also banking regulations, securities exchanges, monetary policy, social security, immigration, and agriculture) that aim to facilitate the free movement of capital, persons, and commercial trade among the 28 EU member countries and also to restrict access to the advantages of this union to the economies of the rest of the world through strict market regulations and trade barriers.

France is effectively the first source of foreign direct investment into the U.K., as French capital is invested in that country either directly or indirectly through intermediary holding countries, such as the Netherlands, Ireland, and Luxembourg (all three of which are members of the EU). The U.K. is France's third-largest commercial trade partner, a situation favored by the EU free trade market and regulatory framework. The U.K. is effectively the first source of foreign capital for French companies, whether through the stock market or through the U.K.-based financial institutions.

If the U.K. exits the European Union, it would become less attractive to French investors because it would become more costly to sell merchandise and services to the U.K. because of customs restrictions, VAT regulations, increased commercial profit taxes, and potential branch taxes. It would be more costly to have part of a European supply chain based in the U.K., which would affect key U.K.-France industries such as energy, automobile, and aerospace. It would considerably complicate Internet trade to and from the U.K. since most of the tax and commercial barriers for this market have been removed within the EU. (Those barriers remain, however, with countries outside of the EU.)

The U.K. is a gateway to investment in Europe for some countries, including the United States, because of cultural and language proximity and an efficient tax treaty based on internal U.K. rules (for example, the U.K. does not apply withholding taxes on dividends paid outside its borders, regardless of the country of destination of the dividends). Half of the headquarters of non-European firms based in the European Union are located in the U.K., with the U.K. hosting more headquarters than Germany, France, Switzerland, and the Netherlands put together.

It would be more costly to do business with the United States to and from Europe as many European headquarters of U.S. companies are based in the U.K. as an efficient entry port into France and the EU, since it would become more expensive to repatriate profits from Europe to the U.S. because of withholding taxes on dividends, interest, and royalties going through the U.K.

If the U.K. were to make a full exit from the EU, the main tax consequences for France could be the following:

  • The EU parent-subsidiary directive, 90/435/EC (or participation exemption directive), would no longer apply to the U.K., which means that dividends streaming from France to the U.K. would suffer withholding taxes at source, and dividends from the U.K. to France would be treated as standard taxable profits in France at 33.33 percent (versus as low as 0.33 percent currently).
  • The EU savings directive, 2003/48/EC, would no longer be applicable with the U.K., which means that loans and facility agreements to and from the U.K. toward France would now suffer withholding taxes at source on interest payments. U.K. banks are traditionally one of the most important sources of finance in Europe. The interest and royalties directive, 2003/49/EC, would also cease to apply.
  • The EU VAT directive, 2008/8/EC, would no longer be applicable, meaning that the commercial trade with the U.K. from France would be excluded from free trade quotas, from intermediary VAT-suspension regimes on goods imported from outside the EU, and from VAT-suspension measures on storage and excise warehouses. Products and services to and from the U.K. would effectively become more expensive and more difficult to trade.
  • The EU mergers directive, 90/434/EEC, would no longer apply with the U.K., which means that intragroup reorganizations involving the U.K. would no longer be neutral and would likely require taxation of latent gains and profits and the need for advance rulings.
  • EU social security directives would no longer apply with the U.K., meaning that it would become costly to send French and European employees to the U.K. because of overlapping social security taxes and immigration quotas.
  • EU tax case law would no longer be applicable to companies in the U.K., so many recent favorable reforms would no longer apply to and from the U.K., including lifted restrictions on tax consolidation groups with European subsidiaries, the consolidation of cross-border group losses within the EU, and the nonapplication of specific taxes on dividends paid to EU companies.
  • Some taxes on capital and real estate would be levied at a higher rate. For instance, U.K. individuals selling real estate that they own in France would now be taxed at 33.33 percent, instead of 19 percent.
  • Whatever pathway is chosen by the U.K. to exit the EU — and there are many — the bilateral tax treaty between France and the U.K. would prevail. However, the tax treaty is in most situations less favorable than EU tax regulations.

On a positive note for French business, experts predict that Brexit would strengthen France's position in real estate investments (the U.K. is a competitor market to France in real estate, and Brexit would increase prices in the U.K.). In the sports sector, particularly football, immigration quotas and employment restrictions would make the U.K. a less attractive country for foreign professionals (which compose the elite of the U.K. championship). Also, foreign investment in football clubs would suffer and investors would relocate to France or other EU countries.

More important, France dreams of inheriting the role of the financial trade center of Europe as it is predicted that London would lose influence following Brexit. A part of the U.K. financial market would probably come to France, but the larger share of that market would likely go to Frankfurt before Paris.

In the event of Brexit, the United Kingdom could exit the European Union in different forms: Between a full membership to the EU and an absolute exclusion from it, there are many things that could affect to a greater or lesser degree the situation of France.

There is, for instance, the European Economic Area model, which provides for the free movement of persons, capital, and commercial trade within the internal market of the European Union between its members. Liechtenstein, Iceland, and Norway participate in several EU treaties as members of the EEA, but they contribute to the EU budget, which is something the U.K. no longer wants to do. There is also the ''favored nation'' model, which Switzerland benefits from by having signed on a bilateral basis EU treaties. Switzerland, however, has no influence on the vote of those treaties, and EU country-by-country vetoes can exclude it from the treaties or impose harsher conditions.

If an exit were to occur, it is expected that the process would be spread over two to 10 years, depending on the form of exit and considering the necessary changes that the U.K. would need to enact in its internal legislation to compensate an exit from the European web of treaties.

Cameron has recently decided to campaign for the U.K. to remain in the EU, but the scandal surrounding his Panama ventures is quickly compromising any credibility he has with the U.K. voters. (Prior coverage:
Tax Notes Int'l, Apr. 11, 2016, p. 107.) President Obama is now supporting the ''stay'' campaign led by Cameron. Even if Cameron survives the Panama scandal, a June 23 vote to exit the EU would likely weaken his government, which some people say would force him to resign. That could open the Tory doors to the notorious Eurosceptic Boris Johnson, the former mayor of London.

With one in five U.K. voters still uncertain as to how they will vote, uncertainty about a Brexit is stronger than ever and objectively bad for business.

France and Britain can agree to disagree on European policy in general, but history has shown that when these countries act in tandem, they are the engine of Europe. 

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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