With Brexit negotiations continuing in the United Kingdom (UK), there is little clarity as of yet on how businesses will be able to operate both in mainland Europe and cross border once the UK leaves the European Union (EU) in March 2019.
As a regulated profession, law firms potentially face greater uncertainty -- the regulations directed by each individual bar association must be carefully considered in conjunction with any agreement reached between the UK and the EU.
Brexit remains high on law firms’ agendas, particularly with respect to the uncertainty surrounding firms being able to provide legal services as normal after March 2019. Conversations around restructuring have been brought to the forefront.
Many law firms, UK-headquartered firms in particular, are approaching their final accounting period of trading before the two year Article 50 process expires in March 2019. For some businesses, it is therefore impractical to wait to see how Brexit negotiations progress and how local countries’ bar associations respond. Any action is likely to take a period of time and require HMRC (and potentially other) clearance or clarification.
Each business will need to consider its current legal structure, the tax and regulatory rules (including around management, control and profit sharing) in the locations in which it operates, and the profitability of the local offices.
Some firms will wish to restructure, and those most likely to consider restructuring may have:
Despite Brexit primarily affecting UK businesses, it is important to note the impact that this may have on US-headquartered law firms. As a result of current regulations, US-headquartered law firms usually operate as a UK LLP, or a branch of the US LLP depending on the EU country in question. However, a by-product of Brexit could see the harmonization of regulation across EU territories so it is possible that neither of these structures will be permissible post-March 2019.
While not certain, to the extent that any grandfathering provisions are introduced there may be benefits in a firm being established in the appropriate country(ies) in the appropriate form before March 2019.
It should be noted that it is possible that a firm may wish to restructure twice: the first time to satisfy the applicable regulations during an interim period to ensure continuity of operations, and once again after a final agreement has been ratified to give a more permanent solution. As we approach the March 2019 deadline there is likely to be an increasing need to have plans in place to manage the uncertainty and satisfy stakeholders.
PwC UK has noted that firms currently considering restructuring their EU operations may consider transferring their EU book of business into a separate EU legal entity. This could involve a demerger of a business within a UK LLP, which poses a number of UK tax considerations, including:
It is clear that restructuring, if necessary, could result in both “dry” tax charges and an acceleration of tax, which may provide challenges around funding for both the firm and the individual partners.
Tax Partner, PwC United Kingdom
Director, PwC UK Tax Leader for US Law Firms, PwC United Kingdom
Tel: +44 7803858518
Gary M. Pogharian
Partner, PwC US
Partner, Law Firm Services Tax Leader, PwC US
Tax Managing Director, PwC US
Tax Director, PwC US