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Building abroad

Building abroad

Whether you create a branch or subsidiary in the EU largely depends on the sector you operate in, says Tim Sarson, KPMG's value chain management expert.

Tim Sarson

Partner and Brexit Tax & Location Lead

KPMG in the UK


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Building abroad

Regulatory passporting, rising tariffs, worker restrictions and a shifting tax regimes. Brexit issues like these could lead UK businesses towards establishing new bases inside EU member states, or at least beefing up existing ones. But should you do that today, 18 months out, or should you wait until the outlines of a political deal emerge? Waiting might save time, expense and effort, but could mean skirting closer to a potential Brexit cliff-edge.

Who must act when, depends chiefly on what you do. While many firms face inconvenience or cost from Brexit, it will be highly-regulated industries such as banking, pharmaceuticals or aviation that could come to a grinding halt without the correct physical presence in Europe. 

Some need to act now

The financial services sector is the most widely-used example of an industry needing to establish fully formed operations in the EU. These firms need to go further and faster than others, and by and large they have. However, what I’m seeing is that many firms in other regulated industries are coming late to the party. They face a similar crunch on 29 March 2019 and will need to be ready to act by January or February 2018 to avoid a cliff-edge. 

Some have wrongly assumed that they are covered because they have a subsidiary or branch in the EU. The issue is that these are not the principal trading entities that the EU or national regulators demand. Many companies will have to substantially expand these entities in scope and complexity – or establish new operations altogether – and that’s an operation that will take months, if not longer.

Look at pharma. They produce one of the most regulated products in the world and anyone who wants to manufacture, import, distribute or sell them inside the EU needs regulatory licences and marketing authorisations. Regulators will want to be sure their supply chains are watertight (as drug giants from non-EU member Switzerland have discovered). Like their Swiss counterparts, British companies will soon have to:

  • Check the exposure of their regulatory footprint
  • Analyse the right location based on logistics, geography and supply chains 
  • Assess whether a branch structure is sufficient (versus a separate subsidiary)
  • Check their tax exposure exiting the UK
  • Locate, build and buy new infrastructure 
  • Relocate UK staff and employ locals… and more.

Putting in place as much of this as possible today improves the chances of a soft landing when Brexit truly begins.

Everyone should ask the question

If you operate in a less-regulated industry, the picture is more nuanced. For you, the issue is less around a cessation of trade with the Continent and Ireland but the risk that trade is slower, more costly and more complicated without an EU base. You need to ask yourself whether your product still conforms to EU standards; whether you face a potential hike in customs charges; and whether you are compliant with the EU’s new data privacy laws (especially since the GDPR comes into force well before Brexit, in May 2018).

With negotiations ongoing, the picture around market access is painted in shades of grey. Without doubt, you should already have detailed contingency plans mapped out. Regulated or not, you need to create "optionality” across the Brexit planning process. You also need contractual certainty – be that with your banks, insurers, suppliers or customers – in order to manage commercial risks.

My message is to give yourself as many options as you can but, where possible, hold off making actual changes until 2018. 

Why wait? First, whether you are subject to passporting or not, you need to understand what sort of regulatory equivalence the two sides are going to grant each other. If the UK remains inside something akin to the Single Market with common rules in many areas, this looks a lot easier. And even if it doesn’t, it will probably be some time before EU and UK regulations diverge. The task for companies will be keeping tabs on that divergence.

There are some big issues for organisations to resolve. Start with these:

  • Know which camp you are in: You may have no option but to make significant changes to your European operations. For regulated industries, it is not a question of expense or inconvenience, it’s simply about permission to trade. You cannot afford to be late on this.
  • Thinking strategically: Don’t view it as an issue in isolation. Rather than making it an EU licencing issue, use this moment to take a holistic look at systems, supply chains, hiring etc. 
  • Be in the running: You may need to set up a subsidiary or a European headquarters now in order to try to influence future EU policy. Firms which rely on public procurement, such as defence, infrastructure or outsourcing could be excluded from bidding competitions if EU members are no longer compelled to include companies from the UK.
  • Gain brand permission: Even before Brexit, think about whether you want customers in Europe to perceive you as European? The UK brand may suffer in the coming year or two, depending on the course of political events. As a result, you may need to consider a wholly separate brand strategy aimed at your European customer base.

© 2020 KPMG LLP, a UK limited liability partnership, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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