French regulations ease Brexit issues
In light of the March 2019 BREXIT deadline, the Paris Bar and French Government have independently taken steps to ensure stability for the French markets in a worst-case BREXIT scenario. Many US and UK law firms had established in France via a branch of a UK LLP, relying upon the EU Directive 98/5/EC (February 16, 1998) allowing firms exercising in an EU member country to establish an office in another EU member state.
Recognizing the challenges presented by BREXIT, both the Paris Bar and French Government have taken action to ensure the ability of these firms to maintain their position in France, and to maintain France’s position as a European legal center.
Transnational Agreements (“TNA”)
One of the many challenges presented by Brexit is how to maintain the governance and integrated global profit pools of the international law firms where direct ownership by non-EU attorneys is prohibited. The Paris Bar sought to ease some of these challenges through expanding the application of Transnational Agreements (“TNA”).
In December of 2018, the Paris Bar amended Article 49.4 of the Paris Bar regulatory code to allow French firms to enter into TNAs with non-EU entities. By amending Article 49.4, the Paris Bar took decided action to facilitate the participation of French lawyers with non-EU international firms. Thus, for the first time ever, a French firm may enter into a TNA with a US law firm (or a post-Brexit UK firm) if the following conditions are met:
- The firm is performing activities as a lawyer in France or abroad;
- The TNA has to be approved by the Paris Bar Council;
- Lawyers established in Paris that are members of the TNA should be registered with the Paris Bar;
- The members provide timely information to the Paris Bar Council on any changes that may be made to the TNA and/or to the partnership agreements of the law firms that are members of that agreement;
- Subject to specific legal or regulatory provisions, only lawyers may have an equity stake in the entities involved in the TNA. Outside capital is prohibited, as is any direct or indirect control by natural or legal persons that are not lawyers;
- The TNA may not include provisions which suggest to a third party that it is, by itself, a structure that performs the activity in France or that would correspond to the setting-up of a secondary office of the foreign entity who signs the TNA.
Grandfathering Redux
The first favorable act of grandfathering UK and US firms occurred almost 30 years ago. The Act of December 31, 1990 amended article 50 of the Act of December 31, 1971 (Act nb 71-1130 dated December 31, 1971, hereinafter, the “Act”), allowed American and English firms that were established and practicing in France as legal advisers to register automatically, by operation of the law, with a French bar while maintaining their legal form. Thus, a handful of firms were able to maintain their presence in France as a branch of the US partnership.
On January 17, 2019, French Parliament voted into law authorizing Government to take by ordinance measures to prepare for a UK withdrawal from the EU without a negotiated deal (i.e., a “hard BREXIT”). Councils of Ministers after consultation of the Supreme Administrative Court. That same day, the French Government also announced that five ordinances would be adopted. One of those ordinances, approved on February 6, 2019, provides in principle for UK firms established in France in regulated sectors (including lawyers) to survive post Brexit, thus allowing a sense of grandfathering for the structures that exist as of the Brexit date (March 29, 2019). This grandfathering is specific to the entity structures themselves, and other provisions would apply to the UK solicitors practicing in France (to be addressed in a subsequent communication). Although this provision will only apply in the worst-case-scenario of a hard Brexit, may UK and US law firms appreciate the creation of this back-stop with less than two months to go on the Brexit clock.
The Takeaway
Although this latest grandfathering option is only applicable if the UK departs the EU in a hard Brexit, it signals the French Government’s desire to maintain the status quo and provides a significant degree of comfort for firms. In the event a deal is reached between the UK and EU, thus negating the ordinance, it is our understanding at this time that US and UK law firms should have at least until December 31, 2020 to restructure their French operations, if required. At that time, TNAs may be considered as an alternative to maintain global profit sharing and office synergies, assuming full agreement of the taxing rights with the FTA. As the Brexit clock continues to tick down with the outcome likely to be certain in a mere 7 weeks, PwC’s Law Firm Services will continue to bring you updates on the latest developments affecting law firms.
