Doing business in Europe: setting up an EU base

In this article we consider UK businesses doing business in Europe and the option of setting up an EU base. We weigh up the advantages and disadvantages of operating out of the UK when trying to maintain or penetrate EU markets post Brexit and the option of doing business in the EU directly from the EU.

Why should a UK company set up an EU base?

At one point, when there was talk of Brexit without the UK negotiating a deal with the EU, there were daily news stories of UK based companies planning to depart UK shores and set up shop (or warehouse or service company) in the EU. Reading beyond the headlines, even in those uncertain days, most UK based companies weren’t planning on abandoning the UK entirely but simply hedging their bets to try and ensure that their business didn’t just survive Brexit but thrived.

Dozens of UK companies did move their headquarters to an EU country or set up subsidiary companies in the EU in preparation for the end of the Brexit transition period. Those moving included huge multinational companies, such as Panasonic and Sony, who relocated their European headquarters from the UK to The Netherlands; iconic British names, such as insurance market Lloyds of London, which opened a subsidiary in Brussels; and lesser-known UK SMEs, such as London-based giftware designer and retailer Rex London. The entrepreneurial online trader established bases in Germany, The Netherlands and Belgium to help the company do business in Europe post Brexit.

We are now a long way from Brexit but the question ‘Should a UK company set up an EU base?’ remains just as valid. Whilst the Trade and Cooperation Agreement between UK and EU (TCA) and the European Union (Withdrawal Agreement) Act 2020 sets out the trading framework between the UK and the EU the reality is that:

• Goods, services, and data don’t move as freely between the UK and the EU as they did prior to the UK leaving the EU. The reasons are complicated. Many say that it is difficult to unravel the reasons because of the timing of the end of the Brexit transition period and Covid-19. Problems may not just be Brexit related but clouded by the impact of the global pandemic on imports into and exports out of the UK and supply chains across the world.
• The legal divergence - Whilst the European Union (Withdrawal) Act 2018 provides for retained EU law (so some pre-Brexit EU law continues to have force in the UK) the UK is making new legislation and regulations. Over time there is likely to be increased divergence between UK and EU law and regulations.
• Red tape - With the UK-EU red tape involved in a UK company trading in the EU the setting up a base or hub in the EU can make commercial sense, despite the initial increased overhead.
• Looking to the future - Setting up a base in the EU is a way of hedging your bets so if trade between the UK and the EU becomes more difficult (and that could occur for a whole host of reasons) your company already has an established EU base.
• Growth - For some industries the UK just isn’t the ‘happening place to be’. Sometimes setting up shop in a country or city with a thriving community of tech or digital companies gives your company the impetus for quicker innovation and growth. It can also provide you with a ready supply of skilled staff and the highly technical supplies you need on hand, plus the grants and other incentives to achieve EU market penetration in an incubator hub.

The advantages of setting up an EU base

The beauty of a UK company setting up a sister business in the EU or moving their headquarters to the EU is that:

• The company can declare that they are an EU company. That means while the goods and services that they transfer between the UK and the EU will be subject to the changes associated with Brexit, all the goods and services that they transfer within the EU can move around frictionlessly and tariff free. Read more about the tariff changes, and custom declarations in our guide: How will Brexit affect imports and exports.
• Having a base in the EU can reduce the level of bureaucracy and red tape and speed up the sales process and delivery timescales.
• An EU base, staffed with EU workers who have a thorough knowledge of local markets and trading conditions, can give a competitive advantage over UK businesses who elect not to set up a base in the EU.
• The cost of setting up a base in the EU may not be as prohibitive as you anticipate, especially when you factor in increased tariffs and transportation issues or other regulatory issues associated with operating wholly from the UK.
• A base or hub in the right EU country can be a spring board to further growth and expansion into the EU markets or a platform to leverage global growth through the advantage of being labelled an EU company. Some of the advantages of being labelled an EU company may reduce, depending on the industry you are in, as the UK signs trade deals that may give a UK company a competitive advantage over its EU subsidiary or EU competitor. 

Research remains the key to establishing whether setting up a business in the EU, finding a property to work from and staffing it and running it will be cost prohibitive. Every business must conduct its own analysis to be able to make informed decisions and weigh up whether the investment is worth the hassle and costs that it will save in both the short-term and potentially the long-term. It is vital to get costings for every element required to set up and run a business in the EU and measure this against the cost of running everything solely from your existing UK base.

The disadvantages of setting up an EU base

The major disadvantages of setting up an EU base are:

• Over extension of your company finances to set up the base. Sometimes, with careful research, costs can be minimised. For example, grants to set up base in incubator cities or use of serviced commercial premises or rent-free deals for an initial period with strategically agreed lease break clauses. Your business will need to assess whether the investment in an EU base is worth the hassle and cost. The only way to do this is to get detailed costings for every aspect of setting up and running a business in the EU and measure this against the cost of running the company from your existing UK base. You should not forget to factor in any additional UK costs if you elect to continue to operate purely from the UK. When conducting this exercise don’t just focus on the short-term costs and hassle but balance any long-term gains in terms of less customs and tariff hassle and reduced transportation costs (if relevant).
• Taking your eye off the ball in the UK could be a major risk if you are reliant on the UK company profit to fund the set-up costs of the EU branch in its early days. Alternatively, sending key senior executives from the UK to the EU could leave your UK operation exposed- it is a balancing game.
• Fear of the unknown from worry about Covid-19 related business closures to recession and inflation concerns. There is an argument to say that setting up an EU base helps spread those risks.

You set up in an EU country without sufficient research and replicate your UK base but locate it in the EU. That may be the right decision for some companies but others should use EU expansion to rethink their business model and ensure its right for the EU country you relocate to, in terms of where you operate from, how you are staffed and how you gain maximum leverage from being based in the chosen EU country or countries.

Legal points to consider when setting up an EU base

When you are thinking of setting up a base in the EU the legal points to consider can seem overwhelming but to put them into context if you don’t open a base in the EU, you potentially face ongoing issues with exporting goods from a UK company into the EU or the option of restricting business growth and focussing your energies on the UK market.

The legal points your business and your supporting legal and accountancy teams need to consider are:

• Tariffs - If you set up an EU base with the right legal structure your EU base will be treated as an EU company that can benefit from the EU customs union and single market with the free movement of goods, services, people, and capital. If you have markets outside the EU, it may be preferable to export to those countries from the UK rather than from your EU base, depending on the trade deal comparisons between the UK and the EU and the third-party countries. Alternatively, further expansion of a base outside both the UK and EU may be called for.
• Duties on goods - When the UK and the EU negotiated their trade deal there was talk that some UK companies had been too rash in setting up EU bases as there was no need as the TCA prohibits customs duties on all goods originating in the UK or in an EU country. The agreement also prohibits import and export restrictions, subject to some exceptions. However, commercial solicitors say that to benefit from the prohibition, the goods being exported from the UK to the EU must originate in the UK under the Rules of Origin. All those issues fall by the wayside if you set up an EU base to supply your goods and services to EU countries. However, it is essential to take corporate legal advice to ensure that your business is classed as an EU legal entity and thus entitled to reap the rewards and privileges of EU status.
• Product regulation - Setting up an EU base means your products and services must meet EU regulations. That may not be an issue for you if there is current harmonisation between UK and EU regulations but this could be subject to change. Working with two sets of product regulations could be a headache as you can't produce a lower or unacceptable specification of your goods in the UK if you want to sell any excess goods from your EU base.
• Commercial contracts - Your UK commercial contracts may be fit for purpose but they will all need to be rewritten and made compliant with EU law to ensure your company gets the maximum benefit of setting up an EU base.
• Digital trade and data protection - Every company needs to protect its data, facilitate digital trade and act within the law. You can only set up an effective EU base if intellectual property (IP) is protected, personal data transfers authorised and your digital trade can continue. For more information on the complexities of GDPR read our article: GDPR and Brexit: what does it mean for your business?
• Premises - There are numerous options such as no physical presence, serviced offices, commercial lease, or the purchase of commercial property. There is no hard and fast rule on which is the best option but accountancy advice is vital so the most cost and tax effective decision is made.
• Taxation - No run through the issues involved in setting up an EU base would be complete without mentioning tax. That includes company taxation in the UK and the EU and the personal taxation issues that might arise for senior executives if transferred to the EU base.

People points to consider when setting up an EU base

At Harper James our commercial solicitors are here to ensure that your company achieves business growth, whether that is in the UK, EU or elsewhere. We are experts in helping companies plan for and navigate the challenges that come with growing a successful multi-national business. Our business immigration solicitors are specialists in global mobility.

Some commercial law firms forget that behind every company there are people involved. At Harper James we look at the wider picture so here are some personal points to consider when setting up an EU base:

• Will you or the senior executives in your UK company be heading up the EU base? If so, what immigration rules apply in the EU country or countries where you are planning to set up a base? Will you or your senior employees need a visa and will you meet the eligibility criteria to secure entry clearance in your chosen EU base?
• Most key company officials come with families and they will want their family members to join them in the EU country. Will family members require a dependant visa and what is the eligibility criteria?
• If UK staff are relocating to the EU to help set up the new base what are the laws on them purchasing property in the chosen EU country or the taxation implications of them either owning property in an EU country or receiving an income via the EU base?
• If you are planning to recruit senior staff to oversee the EU base from the EU country, how will they be supervised?  Will key staff at the UK base need to spend time in the EU country to ensure that there is continuity of procedures between the UK and EU bases? Will UK staff need business visas to enter the EU country for that purpose? If the plan is that your EU based workers will visit the UK to learn about the operation of the UK company will the EU workers require a visa, such as a visitor visa which allows permissible business activities, or would an intra company transfer visa be more appropriate?
• Will language or cultural barriers or lack of recognition of UK professional qualifications in the EU be an issue for the recruitment or transfer of existing staff to the EU base?
• If existing UK senior executives will be transferred to the new EU base will the company need to recruit to replace them in the UK? How easy will that be in your industry or sector? Will the new UK points-based immigration system enable you to recruit senior executives from overseas?

Setting up a company in the EU

If you plan on trading in more than one European country, you may find it best to set up a European company or SE.

SE stands for Societas Europea in Latin. An SE company is a public limited liability company that enables you to run your business under a single European brand name in multiple EU countries, while following one set of rules.

To set up an SE company, you must:

1. Locate your registered office and your head office in the same EU country.
2. Have a subscribed capital of at least €120,000.
3. Have a presence in at least two EU countries.

Some EU countries have extra requirements for a SE so it is vital to check the specifics for the country you are planning to be based in.

There are alternatives to setting up a Europewide SE company. You can also set up a company in individual EU countries. For example, you can set up a GMBH company in Germany.

Your accountancy and legal team can help you explore these different EU business avenues and should be able to explain the pros and cons of each.

There are also business consultancies who will assist you with the paperwork involved in setting up a company in the EU, plus the ongoing admin required for doing business in the EU directly from the EU, such as book-keeping, accounts, and tax obligations. Before signing up for such a service, check their legitimacy.

Where should you base your new EU entity?

Several EU countries are continuing to encourage UK businesses to set up bases within them. Many have government-backed websites that explain why you should seek to create a company on their shores to penetrate EU markets post Brexit. Here are some examples:

• IDA Ireland offers support for foreign companies looking for a European base in Ireland.
• Invest in Holland helps foreign businesses create a base in The Netherlands.
• Germany Trade and Invest supports foreign firms looking to operate in Germany.

All the above websites really sell the advantages of setting up a European base in their individual countries, but it is essential that you explore several different EU business avenues before deciding where to locate your EU based business.

Where you base your new EU entity should be dictated by your business’s needs. For example, if most of your business is in France, it makes sense to be based in France, unless your research reveals that the financial and other incentives of an innovator hub in a nearby EU country gives you close physical proximity to your current market share and greater long-term potential and advantages. Much may depend upon the nature of your business and your transportation costs if you supply bulky goods. If being in an English-speaking country is key, the Republic of Ireland will be your natural choice.

You may find the World Bank Doing Business Ranking useful, it ranks different countries around the world according to how easy they are to conduct business in. The UK ranks at eight but that may change if the impact of Brexit continues to bite or may improve given the UK is now seen as unshackled from some of the worst aspects of EU red tape. The factors it considers for the rankings include: the local regulations, how easy it is to start a business, availability of electricity and how easy it is to register a property.

Can I set up an EU business without having a physical presence in the EU?

Several EU business consultancies will set up a company for you in the EU registered to their own business address. They will take care of the documentation and arrange bank accounts and they will provide office space for you as and when you need it. You normally must visit them in their country at least once to complete the paperwork. Before using any of these services, make sure that the company you use is reputable first.

If you don’t want to have to visit the EU at all, the Republic of Estonia’s e-Residency programme is worth considering. This scheme allows foreigners to set up and manage an EU company online from anywhere in the world, subject to checks. You fill out an online application form, pay a fee and wait for your application to be approved. Once you’ve set up your EU company through Estonia’s e-Residency scheme, you can operate it entirely remotely.