Structures

Brexit – do all roads lead to legal entity challenges?

Following the UK’s vote to leave the European Union in June 2016, businesses have already started to think about how their legal entity structure may need to change. 

Over the last few years corporate entities have typically been looking to simplify their group structure in order to reduce costs, improve risk management and transparency, reduce the burden of regulation, enhance value in a divestment or to implement a tax efficient structure   but Brexit has added another critical dimension to these issues.

Whilst it was tricky to fully develop and implement a revised legal entity structure and operating model prior to invoking Article 50, businesses had already begun considering their options in the light of potential exit scenarios, particularly in heavily regulated sectors such as insurance, banking and asset management. 

In those sectors, loss of EU passporting rights, currently available under EU wide regulation, would likely require branches, legal entities or even entities with significant local operations to be set up to enable access to the EU market. 

Businesses are therefore considering issues including the following:
 
  • Will the change require new branches or legal entities to be set up in EU jurisdictions?
  • Will it be necessary to move operations, including staff and infrastructure, to new locations or will letterbox entities suffice?
  • Would it be most efficient to exit the UK completely and wind down and eliminate UK legal entities?
  • Which are the jurisdictions that will best fit the requirements of your business?
  • How would a project to design and implement a revised legal entity structure be undertaken?
  • Is there any opportunity to benefit from a change to the legal entity structure and/or operating model and how do potential benefits affect the business case?
While final decisions cannot be made until the negotiations have begun to take shape, businesses can start to discuss scenarios and options for potential operating models and legal entity structures in existing and new jurisdictions. 

It is important that these discussions encompass key issues such as the regulatory environment, tax and transfer pricing, the availability of staff and infrastructure, the operational structure, the legal framework and the risks and benefit involved in restructuring the business. This does not require major investment but will enable boards to start to consider potential costs and benefits and enable them to be agile as the issues develop.