European Union: Brexit From A German Legal Perspective

If the UK decides to leave the EU in June, German businesses could be affected in a number of ways.

The wide range of European legislation aimed at setting up and securing the Single European Market, which has harmonised many laws in the UK and Germany alike, has helped strengthen the economic relationship between the UK and Germany.

The impact of Brexit on Germany is likely to depend largely on what arrangement replaces the current one between the two countries, but some major areas which might be affected should Brexit take place would, from a German perspective be likely to include the following:

Imports and exports

Due to the common membership of the customs union, both UK and German companies can trade goods with each other without having to pay customs duties or other charges. While there are various options for the UK to share an internal market with EU Member States post Brexit, for instance, by joining EFTA, it is by no means certain that such accession will take place. Given the export focus of German industry as well as the fact that the UK ranks third in the list of countries to which Germany exports (and ranks second in the list of countries from which the UK imports), the mere absence of a foreseeable future customs status may affect strategic decisions across the UK and Germany. The same is also true, of course, for exports from the UK to Germany.

Finance

Today London is the leading European city for financial services and a number of major German banks have substantial operations in London. If the 'legal gap', in particular in relation to the regulation of banks and capital markets were to widen, with domestic regulatory frameworks drifting away from harmonised EU law, we may see the banking and capital markets industry of the European mainland shift towards Frankfurt (currently the second most important financial centre in Europe). US investment bank Goldman Sachs has already announced a partial move from London to Frankfurt in the event of Brexit. Having said that, the UK could also use the increased margin for manoeuvre to create a more generous legal environment. If this happens, some industries might even move operations to the UK and London might enter into competition with other banking hubs such as Zurich. While it is difficult to predict what will happen in the long term, legal uncertainty in the immediate aftermath of Brexit is likely of present obstacles to the free flow of capital between the financial centres of Europe in the short to medium term (see more on financial services and Brexit).

Corporate structures and tax

More than 2,500 German firms have subsidiaries which are based in the UK, employing around 370,000 people. Brexit may necessitate a review and potential revision of the corporate structures of these subsidiaries, not least in light of ensuing tax implications. Whether or not the potential discontinuation of the application of European legal standards to employment law in the UK will have any impact on the attitude of German business to investment in the UK remains to be seen (see more on the likely impact of Brexit on UK employment law).

Competition and state aid

One of the sectors in which the EU is most active in terms of regulation is the field of competition, including antitrust law and state aid law. One prominent example of the latter is the European Commission's recent decision to investigate a tax deal with Google in the UK. In the event of Brexit, the direct application of some existing and all new EU legislation will potentially end, and it is still uncertain if and by what it may be replaced. For German companies operating in the UK, this would be unchartered territory. In the medium term, there might be benefits for German companies. In the short term, however, this may give rise to insecurity and result in an investment hiatus (see more on the likely impact of Brexit on competition law).

Contracts

Under the Rome I Regulation, contracts are normally governed by the law chosen by the parties. However, there are situations in which a consensual choice of law may be deemed invalid if the law to be applied contravenes public policy or certain mandatory legal principles (e.g. consumer protection or the rights of employees) of the country in which the court case is to be decided or in which a judgment is to be enforced. It follows that Brexit, depending on the form it would ultimately take, could also have a bearing on the continuity of existing contracts. Again, while the mid to long term effects are hard to predict, the short term impact of Brexit could be one of hesitation affecting existing trade relations.

While Brexit has enormous potential for affecting the cross-border business relations between the UK and Germany, the ultimate effects are hard to predict at the time being. However, even though the state of relationship between the UK and the EU post Brexit is unknown for the time being, in light of the longstanding economic partnership between the UK and Germany we would expect that partnership will continue to prosper in one way or the other.

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.