The United Kingdom is currently in the process of exiting the European Union through an unprecedented, extensive and uncertain procedure. On the 23rd June 2016, the United Kingdom voted to leave the EU and on 27th March 2017, the UK Government invoked Article 50 of the Treaty on European Union (TEU), initiating negotiations over the terms of the UK’s exit. While it was contemplated that the UK would finally cease to be a member of the EU on 29th March 2019, negotiations between the UK and EU proved unsuccessful and the exit date has been pushed back to 31st October 2019. If the UK does not agree a withdrawal agreement with the EU before this date, it is expected that there will be a ‘no-deal Brexit’. A no-deal Brexit means that the UK will simply leave the EU without any agreements on several matters, including trade and free movement for EU nationals.
Whilst many of the terms of Brexit are still unclear, there are consequences that other Member States, including Cyprus, should expect. This briefing addresses some contemplated effects, including those on acquired rights, the free movement of European Union nationals, the broader internal market, tax law, the desirability of litigation and arbitration in the UK and implications for commercial contracts. Finally it touches upon general economic effects and the effects (or lack thereof) of Brexit upon the British sovereign base areas (SBAs) in Cyprus.
Brexit itself will have a large number of immediate effects. Many of those will be highly dependent on the precise terms of the UK's exit and are therefore hard to predict. Some insight can be provided by the EU (Withdrawal) Act 2018, a law enacted by the UK Parliament. This cuts off EU law as a direct source of UK law while also ensuring that, during a ‘transition period’, already existing EU law is retained in UK law. However, after the exit, the UK is free to change its law. If the UK maintains its commitment to the internal market and the four freedoms, substantive changes will be limited. On the other hand, if the UK seeks to make a fresh start in these areas, the impact will be significant. There is also the issue of whether rights granted under EU law are ‘acquired’ and will be retained despite Brexit, whilst the UK Parliament will have to review a large body of law passed pursuant to EU law and consider how to replace EU regulations which will cease to apply directly.
Acquired rights are rights which are not automatically revoked if a treaty or law no longer exists, i.e. the rights cannot be removed once they have been exercised. Whether rights granted under EU law will be treated as such, is contentious; for example, whether British citizens resident in other EU states might lose their right to reside in that country. Article 50 TEU does not make any specific provision for acquired rights, nor does any other provision in the EU treaties. This contrasts with other international treaties where there is an obligation to consider acquired rights. Although the general principle of legal certainty might be relevant in that it contains elements of retroactivity and legitimate expectations, without EU law being applicable this is unlikely to protect acquired rights. As such, the only reliable way to protect acquired rights is for the UK to negotiate for this as part of its post-Brexit arrangement, but an agreement or adequate protection here cannot be guaranteed.
The freedom of movement and residence of European Union Nationals
The establishment of the internal market is a key objective of the EU, codified in both the TEU and TFEU (Treaty on the Functioning of the European Union). Under EU legislation, EU nationals have the right of entry, employment, and residence within the member states of the European Union. The consequences of Brexit on the aforementioned rights depend on what new arrangement is to be negotiated, with there being various options on the table. However, the UK may wish to regain controls of the rules here, and impose new admission restrictions on EU citizens. If the UK aims to determine its own migration, refugee, and asylum laws, these could be a far cry from the pro-citizen and pro-worker stance currently taken by EU institutions. A primary concern here is whether Cypriot nationals living in the UK and British nationals living in Cyprus will experience a shift and/or loss in their rights. The above discussion regarding the retention of citizenship rights is relevant here, although it should be noted that the close ties between Britain and Cyprus should limit any adverse effects regardless of what arrangement is made between the EU and the UK.
Free Movement of Goods and Services within the European Union: the Internal Market
The impact on freedom to trade without barriers depends on whether the UK wishes to remain a member of the internal market and maintain adherence to the associated rules, or if it decides or is obliged to pursue fresh trade deals with the other member states. If the UK remains part of the internal market there will be little change in this area. Furthermore, if the UK remains party to the European Economic Area (EEA) Agreement, there will be little change in the status quo. This is because the provisions of this agreement are interpreted to conform with European Court of Justice (ECJ) rulings, and so mirror what happens in the EU. Even if a new arrangement is made, the full court of the European Court of Justice has expressed an opinion (Opinion 2/13) which demonstrates how it is keen to protect its autonomy, powers, and supreme position over the internal market. Thus it is unlikely to agree to a diluted position. On the other hand, around 16% of EU goods exports are to the UK and so there would be pressure on the EU to offer a relatively generous and comprehensive trade agreement. In the event of a no-deal Brexit, the UK will revert to World Trade Organisation rules on trade, which will lead to tariffs being imposed on trade between the UK and the EU.
If the UK were to reject remaining in the internal market, there would be a significant impact. The current rules on the free movement of goods and services comprise ‘negative’ provisions that prohibit domestic regulation that is in breach of EU law, and ‘positive’ harmonisation where EU rules are invoked in place of Member State legislation. The law here is extensive, and moving away from the internal market may allow the UK to impose customs duties and quotas, restrict the provision of services, and more closely regulate the rules on product safety, amongst others. There would also be a greater scope for self-regulation by industries, regulations on harmful products, and the offering of state aid. The UK is one of the least regulated countries within the ‘Group of 7’ (Canada, France, Germany, Italy, Japan, UK, US, and the European Union), and so a clean break may confer greater freedom on businesses.
Other Basic Freedoms affecting European Union Nationals
It is also worth noting that there are further rights provided for by EU law that may no longer be exercisable with regard to the UK which will affect both UK and Cypriot citizens: for example, the right to buy property abroad and the validity of UK driving licences in Cyprus. Firstly, the right to buy property abroad may be subject to further regulation by the UK, depending on what agreement is reached with the EU. The EU (as part of the free movement of capital) protects the right of EU citizens to purchase property in other Member States, which helped facilitate British investment in Cyprus. However, post-Brexit this will be governed by domestic Cypriot law. Whilst rights to ownership are safeguarded without discrimination under this, foreigners will need to obtain the permission of the Council of Ministers prior to the purchase of any property. Obtaining this permit can take up to twelve months, although occupation of the property is allowed in the interim period. Once the permit is granted, no restrictions are imposed on the foreign property owner.
Secondly, a practically important matter is whether UK driving licences will still be valid in Cyprus. The UK Department for Transport recently issued guidance on this topic. UK citizens already living in Cyprus can convert their driving licence into a Cypriot driving licence that will allow them to drive in all EU countries. However, the situation is different for tourists. In the event of a no-deal Brexit, UK tourists in Cyprus will need extra documentation in the form of an ‘International Driving Permit’ (IDP). This does not affect the position of Cypriot tourists to the UK: EU and EEA licence holders visiting the UK can continue to drive on valid EU and EEA licences.
Being a member of the EU has had a significant impact on the tax regime in the UK and it is likely that the UK will have greater autonomy in this area going forward, depending on what arrangement is made with the EU. However, whether the UK will actually exercise this freedom is questionable – it would not want to make the UK unattractive for foreign businesses, and is thus still subject to many external pressures. As such the UK might maintain the tax system as it currently is, rather than reforming the law so as to favour domestic companies. If the UK were to implement tax legislation discriminating against entities from other Member States, then those states could equally introduce rules that discriminate against UK entities. It is also worth remembering that certain transactions, such as cross-border mergers, are often performed outside of EU provisions. Regardless, the UK may suffer from not being easily able to challenge the tax regimes in other Member States anymore, or from losing its influence over tax developments within the EU.
Changes in tax may affect how desirable the UK is as a destination for companies. It may be able to offer state aid going forward (e.g. tax favours), which might encourage companies to relocate to the UK. Conversely, companies may be fearful of the UK government having greater power in the setting of tax rates, and of losing the benefit of exemptions for entities established in other Member States.
There might also be a tax impact on UK headquartered groups with Cyprus subsidiaries. This is because the UK companies will lose the benefit of EU rules, meaning that they do not have to pay withholding tax on interest, royalties or dividends received from a wholly owned Cyprus subsidiary. This might be mitigated through the withdrawal agreement or a subsequent arrangement. If not, then it may be necessary for the parent company and headquarters to move from the UK to another EU member state, for instance through an ‘inversion’. As such there might be an increase in companies being headquartered in Cyprus, with the UK company becoming the subsidiary.
Direct and indirect taxation
In terms of changes to substantive law, it is important to distinguish indirect taxation (e.g. VAT) and direct taxation (e.g. corporation tax). Indirect taxation is subject to significant EU control and interpretation, with UK VAT law being entirely determined by an EU Directive. Here the UK can now set its own rates, but would be regarded as a “third country” by other EU Member States, which may affect cross-border supply chains. A report from the European Commission in January 2018 clarifies that goods which enter the EU coming from the UK or vice versa will be charged with VAT at importation, while exporters will be exempt from VAT. This will effect Cyprus because statistics issued by the Republic of Cyprus in July 2018 state that the UK is one of the top three export destinations of Cyprus, and one of its top four import origins. Consequently it is certain that Cyprus will be affected by changes in indirect taxation law post-Brexit.
Although direct taxation is generally left to the Member States already, the EU has still had an impact here. For example, group relief rules where a non-UK company can surrender losses to a UK company, or rules governing the withholding of tax on the payment of dividends between associated companies in different states. However, for all of these, it is important to note that the UK has a wide network of tax treaties already which it would remain subject to, and so in practice change will be limited.
Brexit will have a wide-reaching impact on commercial contracts, and thus requires close attention. It is unlikely that Brexit was taken into account during the negotiation and drafting of existing contracts. At a fundamental level, Brexit might frustrate the purpose of a contract, for example by reducing a company’s access to foreign staff. This is a narrow risk, especially in the light of a recent case in the UK that held that only in extreme circumstances would Brexit frustrate a contract. In addition, the value and thus balance of bargain within a contract might also be affected as a result of changes in exchange rates and the value of currency. Also, provisions referring to the EU in a geographical sense would also be affected – if the UK no longer falls within this, then it may drastically change a party’s obligations.
Thus Brexit may in fact provide grounds for terminating an existing contract if Brexit renders it significantly more difficult or impossible to perform. This could take place via various legal doctrines, which would depend on how the contract is interpreted. A material adverse change clause would probably not apply here, as these do not cover circumstances known to the parties when the contract was entered, and the possibility of Brexit was well known. As such it would be sensible to insert explicit provisions into contracts dealing with Brexit and how responsibility should lie. After Brexit has been completed, illegality provisions might also be triggered if a businesses’ licence depends on EU legislation, which might not apply anymore. Generally, the changes here bring with them undesirable uncertainty, and so there may be a surge in arbitration so as to ensure that transactions are a known quantity.
More broadly, it would need to be made clear when contracting what the applicable law is, how disputes will be resolved, and who is responsible for keeping on top of changes in the governing law. Currently, if the contract were stipulated as applying “English law” as the governing law, this would be taken to include the relevant EU law. However, this would no longer be the case post-Brexit, and this might have a substantial change on the nature or meaning of a contract. However, it must be considered whether the law in an area is harmonised at an EU level – if it has not been, then the English law may be different anyway, and so Brexit will not matter. If the law is harmonised, it depends on whether the underlying rule is a Regulation or a Directive. Regulations apply rules that bind Member States directly, and so the UK can deviate from these, besides regarding any procedure it had put in place to accommodate Regulations. Conversely, Directives have to be implemented by the Member State, and so this will continue to operate through the domestic legislation unless these are repealed.
Regarding the legal sector, English law and its courts have been popular with businesses as the UK was part of the EU mutual recognition system on jurisdiction and enforcement under the Brussels I Regulation. This incentive to have matters settled in the UK might slip away, although this depends on whether there is a new rule or agreement to replace this. It is also worth considering conflict of law rules – currently the EU Rome I and II Regulations determine the law applicable to contractual and tortious disputes respectively, and ensure that courts in Member States apply the same law to disputes. In September 2018 the UK Government published guidance noting that it wished to retain Rome I and Rome II. Upon the UK’s exit from the EU, Rome I and Rome II, and the domestic legislation that gave effect to these EU Regulations, will be retained under the European Union (Withdrawal) Act 2018 but will contain deficiencies that need correcting in order for the rules on applicable law to continue to work effectively as UK domestic law. These deficiencies were remedied in December 2018 by the creation of a legal instrument entitled ‘The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2018’. This instrument ensures that, subject to technical amendments, Rome I and Rome II apply post-Brexit. Therefore the effects of Brexit in this area have been minimised.
Jurisdiction and enforcement of judgments from other Member States would be largely unaffected if the UK joined the Lugano Convention, to which the EU is also a party. Alternatively, the Hague Convention on Choice of Court Clauses (to which the EU is a party) would provide recognition across the EU for UK judgments where parties have agreed that the UK courts shall have exclusive jurisdiction (but not where the UK merely has non-exclusive jurisdiction). Otherwise, the UK would be free to determine the jurisdiction of its courts, perhaps returning to the preceding situation or enacting the equivalent of the EU rules. The UK deposited its instrument of accession to the Hague Convention in December 2018 with the intention that the Convention would come into force for the UK on 1 April 2019. However, on 12 April 2019, with the extension to 31 October 2019, the depositary communicated that the accession remains suspended until 1 November 2019. Therefore, as above regards Rome I and Rome II, it appears the effects of Brexit will be minimal provided that the UK does join the Hague Convention.
Conversely, the Brussels and Rome Regulations Regime meant that a consumer could go to their national court to enforce national consumer rights and this protection discouraged some companies from selling into the UK for fear of excessive claims. As such, there might be growth in exports to the UK because of reduced consumer protection.
There may also be some impact on the proceedings themselves. Firstly, interim injunctions obtained in the UK may not be applicable in other Member States, and so a separate order may be required. Meanwhile, it is currently mandatory to give evidence in a cross-border situation, but this requirement may change, and so it might be harder to force witnesses to appear as needed.
The court which has jurisdiction over a given case will also become more contentious going forward, especially in areas where the idea of “exclusive jurisdiction” is in play. One problem area is accidents involving tourists or other consumers. There is currently a Directive (the Motor Insurance Directive) that allows tourists to sue in their own country for an accident that happened in another Member State. Post-Brexit, one would struggle to sue in Cyprus for an English incident, although the converse would not pose problems.
When multiple courts have jurisdiction over a given case, the claimant may choose to proceed in the court they believe will treat their claim the most favourably. Such parallel jurisdictions can arise where there are multiple causes of actions, or where the issue happens in one Member State but the claimant or defendant is a citizen of another state. This is known as forum shopping. The courts of England and Wales are currently a popular destination for this. The impact of Brexit here can be predicted with regard to several different contexts.
Firstly, the fact that European Commission decisions will no longer be binding on these courts post-Brexit might cause those involved in competition litigation to switch jurisdiction to one where the decisions retain value. Next, regarding insolvency and restructuring, the UK is currently seen as being creditor-friendly, and thus attracts insolvency proceedings. The EU had been pushing towards harmonization in this area, so as to remove the worth in “forum shopping”. Post-Brexit the UK will be able to maintain its current stance, but risks the EU-wide regime acting against its interests.
However, Brexit may in general help facilitate forum shopping. Under the Brussels I Regulation, the first court seized of a matter should be respected and the case heard there (unless there is an agreement in the contract that a particular jurisdiction only will hear the case), with the second court having to stay proceedings until the first court issues judgment. This measure aimed to reduce the potential for forum shopping. Now, it will be easier for parties to hear the case in England and Wales regardless of the nature of the claim, unless an equivalent rule is introduced into English law.
It is important to note that arbitration is expressly excluded from the Recast Brussels Regulation. As such it is unlikely that Brexit will have much of an impact on the resolution of disputes via international arbitration. This is largely because of the New York Convention 1958, to which the UK and all other EU Member States are parties, but which is independent from EU membership. The Convention imposes reciprocal obligations on parties to recognise arbitration agreements and to recognise and enforce foreign arbitral awards. As such, arbitration clauses in existing contracts will remain valid and arbitral awards made by a London tribunal are enforceable in any of the other states that are party to the Convention, and vice versa. It is likely that there will be a growth in arbitration so as to mitigate against uncertainty in court litigation and the content of English law. However, one uncertain area is whether the English courts will remain able to protect arbitration agreements by granting anti-suit injunctions regarding court proceedings brought in other Member States.
General economic consequences for Cyprus
Brexit may also have a relatively high direct impact on Cyprus’s economy due to both its significant exposure to UK tourism and its lack of ‘policy space’.
Firstly, around one in every two tourists going to Cyprus is from the UK. Therefore, if travel to Cyprus from the UK and the ability of UK tourists to remain in Cyprus is rendered more difficult, this could greatly affect Cyprus’s economy. Furthermore, after the EU referendum in 2016 the value of the Great British Pound decreased, and since then it has continued to decrease. Further devaluation will increase travel costs for UK tourists, which risks further harming the tourism industry in Cyprus. Therefore it is highly likely that Brexit will hinder Cyprus’s economy in this respect unless a deal is reached.
Secondly, the fact that Cyprus has less ‘policy space’ increases the credit implications. Cyprus’ high existing debt levels and elevated gross borrowing requirements for 2016 also put it in a more precarious position; Member States with a stronger fiscal position are better able to withstand any economic pressure.
However, not all effects are necessarily negative. There are some potential, albeit small, benefits through financial and corporate linkages, and from companies relocating from the UK. Whilst this depends on how the UK companies regard the business environment of the other Member States, Cyprus is already closely integrated with the British economy, especially with regard to financial services. Thus an effect on Cyprus’s economy is certain, most likely a negative impact on the tourist industry, however there may be room for positive growth if the aforementioned relocations occur.
British Sovereign Base Areas in Cyprus
Under the Treaty of Establishment of the Republic of Cyprus 1960, the UK retained two SBAs in Cyprus: Akrotiri and Dhekelia. The draft Brexit withdrawal agreement from 14th November 2018, later rejected by the UK Parliament, contained provisions confirming that Brexit would not disrupt the everyday lives of an estimated 11,000 people who live and/or work within the SBAs. For example, Article 1 of the Draft Agreement clarified that any provisions of the law of the Union on the protection of personal data, or in relation to access to any network, information system or database is applicable to and in the SBA. This draft agreement built upon a Protocol that was agreed between the Republic of Cyprus and the UK on the legal status of the SBAs, a protocol which predates the before the Brexit negotiations between the UK and EU. This Protocol restated the validity of EU law to the SBA in specific sectors and after the expiry of the Brexit transition period.
However, the future is unclear following the UK Parliament’s rejection of this draft agreement. Nonetheless, any future withdrawal agreement should also build upon this Protocol, and it is hoped that this cooperation will prevail even in the event of a no-deal Brexit.
The effect of Brexit on Cyprus law may be far-reaching. While there are measures in place to limit some consequences, such as the confirmation of the continued effect of Rome I and Rome II, the precise extent of the impact in many areas remains unclear for the time being.