• <
  • >

Leaving London?

The UK’s departure from the EU looks set to leave London a less attractive European base for some companies. Contributed to article that examines the reasons to relocate and the reasons to stay put. Published on The Banker on June 2017 issue.

The UK’s departure from the EU looks set to leave London a less attractive European base for some companies. Stefanie Linhardt examines the reasons to relocate – and the reasons to stay put.

With the UK’s departure from the EU looming, many banks and companies are looking for the best strategies for relocating their European operations. Financial centres such as Paris, Dublin, Amsterdam and Frankfurt have been putting themselves forward as alternative destinations. But how do companies choose between them?

Despite decades of EU-led integration, the business landscape across Europe remains highly diverse. Employment, tax and insolvency regimes vary widely.

The European Commission (EC) is well aware of the challenges within EU member states and is pursuing a series of methods that will bring about better integration in an effort to align local practices. But in delicate areas of national concern such as labour law, taxation and the justice system, successful harmonisation is some way off. In the meantime, investors need to navigate both national and EU rules, as well as regional differences, when doing business.


The Banker spoke to experts and investors to get their views on the major challenges businesses face in relocating across Europe. What are the key factors to weigh up when deciding on whether or not to leave London for another European destination?

This article focuses on the legal issues rather than the softer factors such as schools, real estate and culture, which also play a role in location decisions.

No location ticks all the boxes. The UK itself has its drawbacks and may become less business-friendly in the run up to Brexit as political leaders try to take account of widespread anti-globalisation sentiments among the electorate.

The first area of focus is employment law.


“There are key commercial concerns [in a business location decision] about rights to access markets, the business licences that are required, the corporate tax regime,” says David Cummings, senior associate in litigation employment at international law firm Allen & Overy. “All of those broader commercial considerations are key but a big part of the decision making is the labour law landscape. Companies want to know how hard is it to restructure, how hard is it to sell and buy businesses from a labour perspective, and also how robust can we make our employment contracts to make sure that our key talent, our IT, our confidential information stays in our business and is protected and can be enforced based on local law.”

While as far back as 2003 the EC introduced the Working Time Directive, limiting working hours to 48 per week, the EU leaves most aspects of labour law to national governments. But this may change as Europe integrates further. In April the EC published proposals for a European Pillar of Social Rights, giving direction in areas such as work-life balance and access to social protection.

Firing an employee for poor performance or making someone redundant is often more difficult in European countries such as France, Germany or the Netherlands than in the UK. The rules must be followed to the letter, as failing to do so could delay strategic business decisions, especially where there is worker representation on company boards, as there is in a total of 12 EU member states. Interestingly, the UK’s Conservative government, led by prime minister Theresa May (who is widely expected to win the June 8 general election), has been emphasising the retention and expansion of EU-derived employment rights and has also discussed the idea of introducing worker representation on boards.


The presence of strong trade unions can be a deterrent for business.

Mustafa Kilic, Chief Financial Officer at Groupe SEB, a French consortium that owns brands such as Krups and Tefal, has worked across several multi-national companies within Europe. Between 2003 and 2013 he was involved in the strategic reorganisation of Italian home appliances giant Indesit.

He says: “In the past 18 years [Indesit] moved eight production plants from jurisdictions in western Europe to eastern Europe to lower our costs and to avoid having to deal with the very strong unions in France, Italy and the UK. We preferred eastern Europe even though the infrastructure is less efficient and it is not as easy to find talent.”

Mr Cummings adds: “When looking at selling or buying businesses or doing major workforce changes across a pan-European business, clients will often focus their attention initially on France, Germany and the Netherlands because they have in practice the most If you give too favourable conditions to companies to attract them to your country, it could be viewed as state aid by the EU François Masquelier prescriptive processes locally that you need to step through, and they are the countries, if you get it wrong, where it can delay or even scupper your initiative.”


France is usually singled out as a country with tough labour laws. Even when a company has a valid reason to restructure, the labour code in France can force an employer to pay up to two years’ worth of compensation due to strict termination rules. But reform could be on the way.

The newly elected president Emmanuel Macron, who was behind France’s most recent business-friendly reform to employment rights, the so-called Loi Macron introduced in 2015, has pledged to make further changes, although few concrete details were available as The Banker went to press.

Paris has been the most active among European financial centres in presenting itself as an attractive destination for firms leaving London. Its humorous advertising slogan is: “Tired of the fog? Try the frogs! Choose Paris La Défense.”

The merits of worker representation on the board, common in Germany, Sweden, the Netherlands and other countries, are much debated. Some investors feel the time and energy spent on consulting workers’ representatives prevents timely decision making, but other employers believe it helps to ensure the entire company is moving in the same direction.

In Sweden, Denmark, Slovakia and the Netherlands, employee representation on the board is required for even small businesses, meaning those with 25, 35, 50 and 100 employees, respectively. By contrast, German workers only receive representation rights in companies with 500 or more employees. However, German employees have the highest percentage of representation on the board: in companies with more than 500 employees, one-third of the supervisory board are employees, and this rises to half in businesses employing more than 2000 people, depending on the legal status of the business.

When the idea of doing something similar in the UK was floated in 2016, the business response was surprisingly positive. The chairman of UK building society Nationwide, David Roberts, told the Financial Times that he had become convinced of the merits of the idea while working at Austrian retail bank Bawag. “I admit to starting with a degree of scepticism. However, my experience was on balance pretty positive,” he said. Staff representatives had been “thoughtful”, “constructive” and “balanced”, he told the FT.


In the location business, corporate tax rates are the big headline grabber. After the Brexit referendum, the UK government suggested that if the country received a bad deal from Brussels, it could retaliate by further lowering its comparatively low corporate tax rate of 19% (which is already scheduled to fall to 17% by 2020) to attract business.

But would this be enough to compensate for the loss of passporting rights for financial firms? Judging by the plans being made to relocate jobs from London to within the EU, regardless of tax and other considerations, the simple answer appears to be ‘no’.

“Brexit is an opportunity for [EU] member countries to give their respective financial centres a boost,” says Andreas Dombret, a member of the board at Deutsche Bundesbank (see Viewpoint, page 14). “It is therefore no surprise that we are seeing some competition among European cities – and in some cases this is happening with various forms of backing from domestic public authorities.”

Germany’s finance minister, Wolfgang Schäuble, has warned against a race to the bottom in corporate taxation, and there has been much consternation in Brussels about countries using tax incentives in a way the EC regards as a form of state subsidy. The most high-profile case is the dispute over the tax treatment of Apple in Ireland.

“If you give too favourable conditions to companies to attract them to your country, it could be viewed as state aid by the EU,” says François Masquelier, honorary chairman of the European Association of Corporate Treasurers (EACT).

The UK’s 19% corporate tax rate is the lowest in both the G7 – where the average is 29.6% – and the G20, according to Organisation for Economic Co-operation and Development (OECD) data. “The UK says it will have the lowest corporate tax rate in the G20, and I think it means it,” former UK foreign secretary William Hague told The Banker in April, which suggests further cuts if US president Donald Trump’s proposed 15% corporation tax rate becomes a reality.


Among the current EU 28 countries when it comes to corporation tax, the UK ranks behind Hungary (9%), Bulgaria (10%), Ireland and Cyprus (12.5%) and Latvia and Lithuania (15%), according to KPMG data, against an EU average rate of 21.51%.

But even within corporate taxation there are differences that make regimes attractive to specific types of companies. “The UK is great for a holding company because there is an exemption for dividends received from your subsidiaries, an exemption from capital gain if you sell any of your subsidiaries, and there is no withholding tax on dividends that you pay out of the UK. So the UK is arguably the best place for a pure holding company,” says Dan Neidle, a partner specialising in the international tax treatment of corporate and financial transactions at law firm Clifford Chance.

“If you were looking at a financing company, the UK would be rubbish because it has complex restrictions on interest deductibility and [there is] withholding tax on outbound interest,” he adds. “For a financing company, people go to Luxembourg or the Netherlands, where the headline tax is higher than in the UK but the tax base can end up being just about nothing without too much difficulty.”

Rates of personal taxation are also an issue. “A few years ago, when there was a 50% tax rate [on higher earners] in the UK, people were running away because of the personal tax. We don’t see that now with the 45% rate,” says Mr Neidle. “People inevitably respond to incentives of that kind, and we certainly saw relocation decisions being taken on the basis of personal tax rates.”


The harmonisation of tax rates among EU countries is a hot topic. Low-tax countries such as Ireland are resisting such moves, but there is recognition, at both EU and OECD level, that a race to the bottom will undermine revenues.

Following an international agreement on the Base Erosion and Profit Shifting action plan spearheaded by the OECD, in October 2016 EU officials relaunched a proposal for a common consolidated corporate tax base (CCCTB) that was first floated in 2011.

Pierre Moscovici, EU commissioner for economic and financial affairs, taxation and customs union, believes “companies need simpler tax rules within the EU” and that the CCCTB would help “drive forward our fight against tax avoidance”.

The aim of the CCCTB is to make it easier and cheaper for companies to operate across borders, according to the EC. This would mean that businesses would only have to deal with one set of rules for calculating their taxable profits and a single administration for filing their returns.

Once taxable profits of a group are calculated, they would then be shared across the EU member states where the company is active, according to a formula based on labour, assets and sales of the group in each state.

Companies would enjoy the stability and legal certainty of an EU-wide corporate tax system that is not prone to regular change, according to an EC spokesperson.

But not everyone thinks this is realistic given the current political climate across Europe. “No country will want to give up the ability to change its tax system,” says Clifford Chance’s Mr Neidle. “Tax systems change very frequently both in response to economic innovation and to ways taxpayers have found to avoid tax. Once you have a harmonised tax system you would need unanimity between member states to make any changes. Your tax system would, in practice, be frozen.”

He adds that the CCCTB would also be “a huge gamble for tax authorities” as they would not know for sure what their corporate tax revenues would be until the tax starts to come in. “That would be a huge risk for a government to take,” says Mr Neidle.

Luxembourg’s finance minister, Pierre Gramegna, told The Banker: “We need to make sure that the goal… to be maybe more converging in terms of tax base doesn’t mean that we make Europe less competitive.” He added that Luxembourg’s parliament “has clearly stated that we must make sure that the directive builds on subsidiarity and proportionality, so we should only decide [at EU level] on matters that we really need”.

A new system for resolving double taxation disputes within the EU was agreed by the European Council on May 23.


While an EU-wide taxation system is unlikely to find broad support in the near term, proposals to harmonise insolvency legislation and related justice systems might be closer to reaching an EU consensus. Any business setting up overseas needs to consider the worst-case scenario of what happens if the company fails and, currently, there are vast differences between insolvency regimes across Europe. Understanding how these regimes might work should things go wrong is of vital importance.

In November 2016, the EC published its proposal for a directive on harmonising restructuring frameworks which, among other measures, would set minimum insolvency standards across the EU and require parts of national justice systems to specialise in restructuring and insolvency proceedings.

“The judicial system is very important because any regulation can only be effective if all the relevant aspects are well understood and it is applied consistently,” says Gary Simmons, managing director of the high-yield division at the Association for Financial Markets in Europe (AFME). “Unfortunately, in many countries, some courts hearing insolvency cases don’t necessarily have the bankruptcy, financial and regulatory experience required to hear those cases, especially those that involve cross-border situations.

“Depending on which judge hears the case, or even in which area of the country the case is heard, you can have widely different results. More specialisation of courts and judges, and also educational and licensing requirements for insolvency administrators, is needed to make any legislation that is finally agreed upon more effective.”

AFME published its own research on how EU insol- vency law reform could boost economic growth across Europe in February 2016, and Mr Simmons, one of the authors, hopes the EC proposal will find support. However, he acknowledges that there is “some resistance to changing the structure of the judiciary [across countries]”.

Groupe SEB’s Mr Kilic underlines the importance of the framework for business decisions. “The insolvency regime was a key point when [Indesit] was looking at building up our trading company in Amsterdam,” he says.

“We understood that there is an insolvency regime, which allowed us to protect the company rights in a better way than, for example, in Italy, where local regulations are not always easy. In Amsterdam, there are more quick and efficient solutions that help you to pursue your interests.”

Across Europe, the UK’s insolvency and justice system is regarded as one of the better models although regimes in countries such as Finland, Belgium, the Netherlands, Denmark, Ireland, Germany and Austria are also considered as “relatively effective”, according to AFME’s Mr Simmons, while in some jurisdictions reform needs to go further, especially in parts of eastern Europe. In Italy the average length of a repossession process ranges from two years to close to eight years depending on the district and respective tribunal.

Despite these differences in insolvency regimes, shareholder rights across European countries have become relatively similar as corporate law has converged, according to Lucy Fergusson, a corporate partner at law firm Linklaters. Yet, for all the similarities, listed companies have the most stringent requirements in the UK where there is transparency of directors’ remuneration, and even a provision for shareholders to have a vote on executive pay.

While the EU is converging towards similar rules in this area, with the adoption of the EC’s shareholder rights directive in April, EU member states still have two years to incorporate the new provisions into domestic law.

“A great advantage of the EU is that at least we are trying to work with the same rules,” says EACT’s Mr Masquelier. “The regulation is decided directly by Brussels and all directives should be implemented into the national legislation of the member states. This should mean that at the end of the day, we have more or less the same rules. Of course, this makes our life easier when doing business.”


For all the hard realities of employment law, taxation and insolvency regimes that must be considered before making a location decision, the softer factors will still play a crucial role in the outcome.

“A lot of banks, if they are moving [out of London], they are moving to Frankfurt in part simply because of the European Central Bank,” says Michael Mainelli, executive chairman at Z/Yen Group, whose Global Financial Centres Index compares international financial centres across the world. He adds that Berlin is receiving a boost to its financial centre thanks to a focus on luring fintech businesses to Germany’s capital. “The UK is not a particularly good place for doing fintech for the retail sector – the retail banking and insurance sectors are too concentrated – while there are numerous opportunities in Germany for retail fintech businesses because of the enormous number of players.”

Meanwhile, Ireland’s similarities in culture and language with the UK are also attracting businesses wary about post-Brexit market access. In the field of insurance, Luxembourg has wooed businesses.

Yet for all the advantages of being in the EU, there are times when the case for being outside is overwhelming.

Mr Kilic notes that when he was involved in the strategic repositioning of Indesit’s business, the decisionmaking process included numerous arguments, but the company eventually centralised operations from 16 European countries in non-EU Switzerland.

“Indesit is an Italian company and for sentimental reasons it did not want to move the headquarters, but we moved the majority of the activities,” he says. “It was the speed of the jurisdiction, the transparency, the efficiency at government level. Disagreeing with the government is OK in Switzerland: you can pursue your case, there is not as much politics behind it.”

Linklaters’ Ms Fergusson adds that, alongside hard factors, “in particular for subsidiaries, softer aspects such as real estate, talent pools, whether the place is a nice place to live, whether there are international schools, all those other aspects play into where is a good place to do business”.

While it is the purpose of the EU to converge rules, “aspects such as history, culture, competences, approach and flexibility are very different [across European countries],” says EACT’s Mr Masquelier, who adds that when companies decide to move their activity, a lot of “objective and subjective factors” are taken into consideration.

“That is why there is tax competition between different countries and competition to attract the larger companies that can create a lot of jobs. We are within Europe but we still have competition between the different countries,” says Mr Masquelier.

Brexit is the cause of the current shake-up, with firms that had chosen London needing to reconsider their strategies. But when the dust has settled, choosing where to be in Europe will remain a matter of weighing up both hard and soft factors and deciding the best outcome on balance. For some, being inside the EU will be vital, but for others the global attractions of London and Zurich could be of even greater importance.

Tax systems change in response to economic innovation and to ways taxpayers have found to avoid tax. Once you have a harmonised tax system you would need unanimity between member states to make any changes Dan Neidle

Download the article and share your comments at the link attached