Reunion Ltd's Expansion into the European Union

Memorandum

This memo relates to advice that may be given to Reunion Ltd regarding the most appropriate way of expanding their business into the European Union. This memo compares and contrasts the different entry strategies using both European Union law and the Trade & Co-operation Agreement.

Reunion Limited are UK-based furniture manufacturers with 5 people who hand-make items of household furniture for sale direct to the public through online forums such as Etsy and Instagram. Post Brexit, the company has found that sending their goods direct to customers leads to increased paperwork and bureaucracy. There are two options available to Reunion Ltd: the first option is to stay in UK and send goods into the EU from the UK. The second option is to open up a branch in France where they can make these goods and sell them to customers in France and other EU countries. seeking to streamline their operations along with mitigating the impact of Brexit. For businesses who are struggling with the same kind of post-Brexit challenges, seeking business dissertation help could provide the most valuable insights and strategies in place to navigate the changing landscape.

The Trade and Co-operation Agreement, is an agreement between the EU and the UK and regulates the trade of goods from the UK to EU. If Reunion Limited chooses to stay in the UK and export the goods to France and other EU countries, then the goods require customs declarations before they leave the UK as per the Trade and Co-operation Agreement. Article 2 of the Trade and Co-operation Agreement provides that there should be cooperation between the UK and the EU with regard to the customs declaration. Article 5 also provides that there should be some simplification of customs declarations but that these should be there. Other than customs declarations, there is also application of VAT rates and distance selling thresholds because these goods are not exports out of the UK to the EU.

The company would have to register for VAT in the ‘place of supply’ and charge and declare VAT at the rate set in the country to which the goods are being exported. These requirements make the process of exports from the UK to the EU countries to be burdensome because customs declarations and VAT would have to be applied. This is in contrast to the processes that were applicable to the UK as a member of the EU where the membership allowed goods to move freely within the EU without additional duties or checks. With regard to VAT, the goods sold from the UK are zero-rated and while UK VAT is not chargeable at the point of sale, the goods exported by the client would be subject to import VAT and the EU customers will have to be charged with that VAT. This would place burden on the customers of the client in the EU countries and may eventually impact the sales from the client to the EU customers.

If the client chooses to stay in the UK and export from here, there are two options available to it with regard to VAT. The first is to serve as the importer of record, which means that the client would need to pay import tax, and be registered and pay VAT in the country of export. Through this option, the company can continue to sell goods to other customers throughout the EU. The second is to enlist a freight company to act as the importer of record. This would mean that the client would pay a freight company to act as the importer of record but the client will not be able to recover any VAT charged on the imports. Also notable is the fact that with the coming into effect of new VAT package from 1st July 2021. The new VAT package allows the use of One Stop Shop (OSS) to charge VAT rates for where they sell goods and then declare that on their OSS returns. UK sellers can register as a non-union taxpayer in one of the EU member states, where they’d then have to submit tax returns along with their OSS returns. This is however only applicable to e-commerce sellers. As the client is selling goods through its website, it can count as e-commerce seller.

The options discussed above are related to the actions that can be taken by the client if they choose to remain in the UK and sell to EU countries. The important points to recall are that the client can allow its customers to be charged duties and VAT as per the country of export or register as the importer of record and be registered and pay VAT in the country of export or it can enlist a freight company to act as the importer of record. These options do involve bureacratic processes and the payment of VAT and duties. If the client chooses to open up a branch in France where they can make these goods and sell them to customers in France and other EU countries, then these processes can be eliminated. In the next part of this memorandum, the advice relates to how this option can be utilised.

The option of opening a branch office or subsidiary in France is one of the quickest ways to establish a presence within the EU. This process involves the registeration for VAT and EORI. The client can set up a registered office in France and register the branch with the Trade Registry. The option is considered to be useful for UK sellers even though the Trade and Cooperation Agreement and the European Union (Withdrawal Agreement) Act 2020 sets out the trading framework between the UK and the EU because there is not as much free movement of goods from the UK to the EU despite these agreements. The free movement of goods is hampered or impeded by the level of bureaucracy and red tape which can be reduced if the client opens the branch in France. There are certain legal aspects of the setting up of a base in France or any other EU country that can be considered here as well.

The first aspect is that the client would be treated as an EU company if it sets up an EU base. This means that the client would have the benefit of EU customs union and single market with the free movement of goods. Article 26(2) of TFEU defines internal market: “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured.” Free movement within the EU has been found to be necessary to build internal market and as such the TFEU protects these free movement rights which the client would also have the benefit of. The second aspect is that the Trade and Co-operation Agreement prohibits customs duties on goods originating in the UK and import and export restrictions provided that the goods being exported from the UK must originate in the UK under the Rules of Origin. However, there are exceptions to which goods can be exported without export duties due to which it may be advisable to set up a branch office in France. The third aspect is that if the client does decide to set up base in EU country then its products and services must meet EU regulations. For example, the EU Unfair Commercial Practices Directive 2005/29/EC bars unfair business to consumer practices and unfair commercial practices. As long as there is harmonisation between UK and EU regulations this would not be problematic, but this may change. The fourth aspect is that the client company would be subject to company taxation in the UK and the EU and the personal taxation issues for its executives.

The first aspect, which is related to free internal market benefits for the UK company that sets up an office in France is important and must be discussed here in greater detail because this is one of the primary reasons why a UK company would open up a branch office in the EU country. The Treaty on the Functioning of the European Union (TFEU) includes a number of provisions that simplifies movement of goods between EU countries; for instance, Articles 28 to 30 standardise inter-state customs regulations and provide equivalent effect to existing customs duties. In Commission v Italy, ECJ gave a broad interpretation of charges. Nevertheless, the UK company which establishes a branch office in France and sells to customers throughout EU would find it more economically feasible in terms of charges and duties chargeable on its goods as well as more amenable to free movement within the EU as per the provisions of the TFEU. Because the TFEU prohibits restrictions on intra-state trade between EU nations, the business which is based in EU nation would benefit from the prohibitions on restrictions on free movement of goods within the EU in a way that a UK company cannot benefit from since Brexit.

Article 34 relates to free movement of goods in EU Member States. One of the aspects of this rule is that there should not be discrimination between businesses and traders within the EU. In the important decision of Keck, the ECJ has established clarity on the scope of the free movement of goods. In Keck, the court held that the laws should be applied to all traders in the same way in order to be non-discriminatory. Similarly in Alfa Vita, the ECJ held that there should be no direct or indirect discrimination for traders, and additional costs imposed on goods that can impede trade be under scrutiny of the freedom of goods.

If the client opts to open a subsidiary or a branch office in France, it too will get the benefit of this rule of non-discrimination between traders, which will ensure that laws made by France or any other EU country applies to it in the same way as it does to the other EU traders. This would not be the case if the client continues to be a UK based company which exports goods to France and other EU countries.

To conclude this memorandum, the client may be advised that staying back in the UK would mean that the client would continue to be subject to bureacratic and red tape issues as well as customs declarations and VAT requirements. The client can opt to be registered as the importer of record or it can enlist a freight company to act as the importer of record. On the other hand, the client can open up a subsidiary or branch office in France and take benefit of the free movement regime in the EU law. Accordingly, the TFEU provisions for free movement of goods in Article 34 and other provisions will provide certain benefits to the client which it will not get if it is only a UK based business. The EU law prohibits restrictions on trade between EU states and it also provides that there should be no discrimination, direct or indirect, against any EU traders. This will provide benefits to the client if it opens a branch office in France. The client will accordingly be considered to be an EU seller and continue to derive the free movement of goods advantages in the EU law.

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