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UK LLPs in Europe eye disruption in face of no-deal Brexit

Lucy TrevelyanThursday 19 November 2020

A United Kingdom parliamentary committee has warned that the country’s lawyers ‘may become unable to operate in the EU’ under UK-specific limited liability partnership (LLP) structures if a Brexit agreement with the European Union is not reached.

A House of Lords’ EU Services Sub-Committee report – published in mid-October – suggests that even if a no-deal Brexit is averted and a ‘Canada-style’ trade deal is struck, changes and the possible restructuring of UK-headquartered LLPs with EU offices are likely to be required.

This is because EU Member States can still use ‘national reservations’ to protect their services sector from competition under the EU-Canada Comprehensive Economic and Trade Agreement (CETA), and this could apply to a UK deal.

Possible restrictions could include requiring that foreign professionals become resident in the country they want to offer services in, that domestic corporate structures are adopted, or that services can only be offered by a UK professional if it can be proven that local talent is not available.

For clients the uncertainty of a no-deal Brexit brings new and changing regulations. They will be looking to their lawyers for clarity and calm

Melissa Davis
Member, IBA Law Firm Management Committee Advisory Board

The Lords’ Sub-Committee concluded that the UK’s professional sector – including accountants, lawyers and recruiters – has been ignored in negotiations with Brussels over future trade terms, putting numerous jobs at risk.

Guidance issued in mid-October by the Law Society of England and Wales advises law firms with existing operations in the EU/European Free Trade Association (EFTA) to use the transitional period to review whether their existing structures are in keeping with national company law and professional rules for legal practice in that country for third-country lawyers.

‘UK LLPs (or branches thereof) and other entities should review whether they can continue operating in the relevant EU/EFTA state, or restructure to become a national structure/branch of a firm headquartered in another EU/EFTA state,’ reads the Law Society’s guidance.

It adds that when reviewing firm structures, consideration should be given as to whether national rules authorise local (EU/EFTA) lawyers to practise together with third-country lawyers, as well as the potential impact on equity, profit sharing, limitations of liability and taxation.

Michael Hatchwell, a partner at Child & Child in London, says if no Brexit deal is reached, there should be no problem with a UK LLP establishing a subsidiary or new local partnership in an EU Member State for its local operation, on the basis that UK LLPs may no longer be recognised as such.

‘This will require some local restructuring but should not prevent operations,’ he says. ‘A number of firms have already restructured in anticipation of Brexit. In Germany some LLPs have converted to German partnerships or are exploring alternatives.’

The best form of structure for a UK LLP is unlikely to be the same in every Member State however, warns Hatchwell. ‘It will be necessary to choose the optimum structure to take account of local requirements, taxes and regulatory requirements,’ he says.

Indeed, some Member States have already contemplated the effect of a no-deal Brexit on UK service professionals operating in the EU. For example, the Spanish government approved a royal decree in March 2019 to address the situation of those UK citizens who practise a professional activity in Spain.

Claudio Doria is a Member of the IBA European Regional Forum Advisory Board and a partner at Doria Tölle & Asociados in Barcelona. ‘The decree enables [UK] lawyers who are registered and practicing in Spain to continue in their profession as before, provided they comply with the other conditions that are required for any other Spanish lawyer,’ he explains.

‘These measures will not be so strict provided that those lawyers file their petition prior to the date of departure of the UK from the EU, although it will also be a matter of reciprocity,’ adds Doria.

The main Spanish bar associations, as well as the Law Society of England and Wales, are trying to simplify and assist in this complicated process, he says. ‘However, the only safe haven now is to already be registered as a solicitor in the UK (for Spanish lawyers) or as a registered practitioner in any EU country,’ explains Doria.

LLPs will be able to continue to operate in Spain to the extent that the majority of their members and management are qualified lawyers under Spanish law, he adds.

Some firms not centrally located in the UK use the UK LLP structure to operate as a law firm in the EU. Such firms will have to reconsider that structure given Brexit, says Hatchwell.

‘In France in February 2019, some 1,600 lawyers were working for firms using the UK LLP structure,’ he notes. ‘So, it is likely that those firms have or will have to form French legal entities, absent a Brexit deal.’

As in other areas, Hatchwell says, the EU has not been a level playing field in terms of allowing UK lawyers to be able to practise law in other EU countries. Therefore, most UK LLPs operating in the EU are staffed by lawyers permitted and able to practise locally because they are locally qualified, and not simply because the UK was part of the EU.

Once the UK-EU Withdrawal Agreement ends on 1 January 2021, the UK will be viewed by the EU as a third country. EU Member States are represented by the European Commission in all international trade negotiations and Member States cannot negotiate their own trade arrangements with third countries.

However, professional bodies are allowed to engage in negotiations on agreements regarding the mutual recognition of qualifications and other regulatory matters, such as the authorisation of structures. If a no-deal scenario arises, the Law Society of England and Wales has pledged to continue engaging with EU/EFTA stakeholders, making the case for an open legal services market.

Melissa Davis, Member of the IBA Law Firm Management Committee Advisory Board, warns that law firms should not lose sight of the need to focus on their clients and people during the upheaval caused by Brexit.

‘For clients the uncertainty of a no-deal Brexit brings new and changing regulations,’ she says. ‘They will be looking to their lawyers for clarity and calm – they will need you to identify what their needs are, not just presume that your services are what they need.’