Chapter 4: Rights of establishment
The importance of rights of establishment
69.Industry witnesses emphasised the importance of securing a UK-EU agreement that preserves the ability for professional and business service providers to operate via a commercial presence in the EU—the ‘right of establishment’.
70.The ongoing COVID-19 pandemic is likely to have a significant impact on businesses’ approach to delivering services abroad, including establishing offices overseas and the mobility of professionals. The evidence for this inquiry was collected throughout June and July 2020 and the effects of changing working patterns are yet to become clear.
71.As with cross-border supply, our witnesses’ main concern was that in the absence of a UK-EU agreement that locks in sufficient liberalisation, UK professional and business service providers could face a wide range of national requirements. As Professor Sarah Hall and Martin Heneghan put it:
“In addition to it being more difficult to establish branches in the EU from a third country, at the end of the transition period, UK businesses will also have to address the fact that what they are permitted or required to do in one EU member state may not be the same in another.”92
72.The PBSC provided various examples of such barriers to establishment including:
- Caps on the amount of equity held by foreign investors;
- Requirements on the establishment of joint ventures with local partners;
- Restrictions relating to the corporate form of a service suppliers;
- Residency and nationality requirements for certain business personnel; and
- Economic needs tests.93
Such constraints could have a particular impact upon the legal and audit sectors.
Legal sector
73.In the absence of bespoke UK-EU arrangements, UK legal professionals and firms would stand exposed to a range of establishment and investment barriers across the EU and EEA. The PBSC and TheCityUK noted, for example, that Member State lawyers are prohibited from partnering with third country lawyers in France, Spain and Sweden.94 Under Danish law, Professor Sarah Hall explained that 90% of the shares of a law firm “must be owned by lawyers with a Danish licence, lawyers qualified in a member-state of the European Union and registered in Denmark, or law firms registered in Denmark”.95
74.Without a UK-EU agreement, UK lawyers may become unable to operate in the EU under UK-specific corporate structures, in particular Limited Liability Partnerships (LLP). One of the countries where LLPs could no longer be recognised is Austria. Edward Braham, Senior Partner at law firm Freshfields Bruckhaus Deringer LLP, noted that his firm’s “Austrian lawyers [would] not be able to operate under the English LLP, which is effectively the holding partnership of the group”.96 Professor Sarah Hall also pointed to the example of Germany, where “third country law firms are not able to establish as LLPs”.97
75.The Law Society of Scotland highlighted that “availability of different forms of practice, particularly recognising limited liability … is an important issue”.98 TheCityUK pointed to the “great operational, regulatory and tax advantages” associated with the use of LLPs.99
76.The Law Society of England and Wales explained that the continued use of LLPs across the EU would require bespoke UK-EU arrangements on “recognition of legal forms in force in the UK”, which should also preserve the ability for UK law firms to “employ local lawyers” and “continue using their usual name”.100
Audit sector
77.TheCityUK indicated that “in the absence of an agreement on corporate forms … joint UK-EU ownership of audit firms will no longer be permitted” in certain Member States.101 Agreement would also be required on “the equivalence of professional qualification[s] leading to statutory audit rights”—which is governed, within the Single Market, by the EU Statutory Audit Directive.102 Dr Ilias Basioudis, Senior Lecturer, Aston University Business School, concurred:
“A UK professional audit firm that wishes to own part of, or be part of the management body of, an EU firm will no longer be recognised among the required majority of EU qualified owners or managers.”
Similarly, “only [EU] owners or managers with equivalent qualifications recognised in the UK will count towards the majority of appropriately qualified owners or managers of a UK professional audit firm”.103
UK and EU negotiating positions
78.The negotiating parties’ proposals on establishment and cross-border investment are outlined in Chapter 10 of the Government’s draft legal text and Chapter 2, Title VI, Part Two, of the Commission’s draft partnership agreement.
79.Simon Davis described the parties’ published positions as “positive”, noting: “both have broadly put in provisions that would prohibit restrictions on the limit of foreign capital, restrictions on shareholding requirements and restrictions on legal form”.104 The Minister confirmed in July that there was “broad convergence” between the UK and EU in these areas.105 Nonetheless, as noted above, there is a risk that Member States might request carve-outs through their national reservations—indeed, CETA contains reservations on corporate forms, which the Bar Council described as “limiting”.106
80.The Government indicated that it was proposing a novel solution regarding the “ownership, management and voting rights” of audit firms.107 The Minister told us: “The proposal requires regulators in the EU and the UK to treat one another’s auditors and firms equally when deciding whether an audit firm is approved to practise.” He argued that this would be mutually advantageous, as it would avoid “disruption to firms in both the UK and the EU, which may otherwise need to restructure their management or reallocate voting rights”.108 He noted, however, that the Commission’s initial reaction had not been encouraging.
81.The Government is also proposing that “UK law firms [should] have the right to establish branch offices in the EU to advise on the law of their home jurisdiction and international law under their home title”.109
82.Without a UK-EU agreement ‘locking in’ adequate liberalisation, UK professional and business service providers would become subject to a broad range of restrictions, including caps on the amount of capital they may hold in an EU company, requirements to partner with a local investor or service provider, and restrictions on the types of corporate forms that they may use when establishing a commercial presence in the EU. We urge the Government to ensure that an agreement with the EU minimises these barriers. Member States may also seek carve-outs from any liberalisation commitments agreed between the UK and EU through national reservations. This further underlines the importance of engagement with the EU and individual Member States to minimise such reservations.
83.Restrictions on corporate form would particularly affect the legal and audit sectors in the UK. We strongly encourage the Government to continue to seek an agreement that removes the potential for limitations on corporate forms, such as LLPs.
102 Ibid.