What Does Brexit Mean to Israeli Businesses?
By Gil Rosen, Adv.
On January 22, 2020, UK Prime Minister Boris Johnson had his Brexit deal with the European Union approved in Parliament and the Brexit Bill will come into force on January 31, 2020. So Britain’s long, slow and drawn out Brexit saga is moving on to the next phase.
Britain and Israel are important trading partners. In 2018, bilateral trade between the two countries reached a record breaking £8 billion and looked set to top £9 billion in 2019. Britain is Israel’s third biggest export destination after the U.S. and the EU as well as currently being the biggest trading destination within the EU. Therefore, there will be plenty of Israeli businesses wondering what Brexit means to them.
A Quick Look At What Happens Next With Brexit
On January 31, 2020 a transition period will begin that will end on December 31, 2020. During the transition period, Britain will remain in the single market and customs union and subject to EU law and British citizens shall still be able to move around Europe freely, but Britain will no longer have representation in the EU Parliament and Britain will have no power or say in the formulation of EU law. The EU Commission will also still have the power to investigate breaches of EU law committed by British individuals and businesses and impose fines.
At the end of the transition period, Britain’s departure from the EU will be legally binding with no possibility of stepping back or delaying further. Britain will have left the EU and what happens then is still very much uncertain.
In the transition period, Britain and the EU will negotiate over a trade agreement, with Britain seeking to obtain zero tariffs and quotas on its exports to the EU. Negotiations are likely to commence from February and 11 months is a very short time period in which to reach a trade agreement. Most trade agreements take years to negotiate and implement. If no trade deal is in place by December 31, 2020, then a “hard Brexit” will effectively be implemented in which Britain’s trade with the EU will be governed by the rules of the World Trade Organisation and each party will be able to set trade tariffs and quotas on each other’s exports.
What Does All of this Mean for Israelis?
Until December 31, 2020, Brexit should not have any discernable effect on Israeli businesses. EU law shall continue to apply and the UK shall still be within the framework of the EU’s trade agreement with Israel.
On February 18, 2019, Israel and the UK signed a new trade agreement in order to formalise trade between the two countries following Brexit. As a sign of the importance to Britain that trade with Israel represents, this agreement was the first trade agreement Britain entered into with another country in order to formalise post Brexit trade relations. Among other things, the agreement provides that the two countries will continue to trade on the same terms as they do now while the UK is still in the EU, with no additional tariffs or other barriers to trade. This agreement will take effect upon the UK’s withdrawal from the EU becoming effective. So in terms of trade barriers, the effects on Israeli business should be minimal. Additionally, the trade agreement provides certain tax advantages for Israelis investing in UK companies and Brits investing in Israeli companies.
However, the UK’s break from the EU will impact Israeli businesses in other ways in much the same way it will impact other nations. While British standards and regulatory requirements for goods and services to meet when sold in the U.K. will initially be the same as those of the EU, in time the requirements of the EU and Britain are bound to diverge to some extent. Quite how and when is impossible to know for sure and will largely depend on whether or not the parties succeed in hammering out a trade deal prior to December 31, 2020, but in time, businesses that trade in both the EU and the UK at least in certain sectors will find that their products and services will need to meet different standards for each market. Some differences will be minor while others will inevitably lead to increased costs and complications.
Similarly, UK subsidiaries of Israeli companies selling into the EU and vice versa will lose the benefits of trading within a single trading block and could well become subject to tariffs and other barriers, the extent of which will depend upon whether or not a UK-EU trade agreement is reached prior to Brexit. In some cases, Israeli businesses may decide to move their UK enterprises to the EU or vice versa or they may decide that they require operations in both the EU and the UK depending on various Brexit related factors.
Just as with all other businesses in the EU and UK, Israeli enterprises based in either the EU or the UK will need to examine how their compliance with various laws and regulations will need to change following Brexit. For example, the transfer of personal data of EU based individuals is highly regulated in the EU by the General Data Protection Regulation (GDPR). Until Brexit, transfers of the personal data between Britain and the EU are considered as transfers within the EU. Upon Britain’s exit from the EU, transfers of personal data to the UK from the EU will require greater scrutiny and subject to more regulatory safeguards that businesses will need to be ready to comply with.
Another example is in connection with exports of controlled dual use goods and technology. Prior to Brexit, no export licenses are required to trade in these goods and services between countries within the EU block and the UK. Following Brexit, EU based enterprises will need to obtain export licenses to export controlled dual use goods to the UK and UK exporters will need export licenses to export dual use goods and technology to EU countries. The precise export control restrictions will only be known once a trade agreement is in place – or not as the case may be. The UK’s Export Control Joint Unit (ECJU) has issued an Open General Export License that will come into effect in the case of a hard Brexit, which all UK based businesses will be able to use for exporting dual use goods and technology to the EU without having to make independent export license applications for dual use goods and technology. However, this will require the exporter to register with the ECJU’s online licensing system – SPIRE and become subject to audits, reporting requirements and visits of the ECJU that they were not subjected to prior to Brexit. EU based businesses exporting to the UK will have similar export control issues to contend with. These are just two examples of how Israeli businesses with operations in the UK and the EU will be fundamentally affected by the changing regulatory environment caused by Brexit.
While the main effects of Brexit will not be felt for another 11 months, it is not going to be easy for Israeli businesses (like anyone else) to plan ahead with complete clarity to minimize those effects. While the Israel – UK trade agreement certainly puts at ease a great deal of worry Israeli businesses will have had about how Brexit might affect trade with the UK, for those businesses that have bases of operation in the EU and UK, they will need to keep their fingers on the pulse, keep a very close eye on developments and be sure that they are able to react quickly enough when required.
Gil Rosen is a partner with Joseph Shem Tov & Co. He is licensed to practice law in Israel and England and works with businesses in both jurisdictions.