Brexit’s impact on the Romanian economy

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At the end of 2020, the European Union (EU) and the United Kingdom (UK) signed The Trade and Cooperation Agreement, a document that outlines the new way of collaboration between the companies and the citizens of the two territories. Almost half a year after the signing of the Agreement and a few years after the intentions for Brexit were expressed, the business environment is now forced to rapidly get through the stages of adaptation to the new political and economic context, analyzing and rethinking, where appropriate, business relationships established with UK business partners.

Although negotiations for the UK’s exit from the EU have lasted over more than 3 years, and although there has been a transitional period in which each EU Member State has taken steps to adapt to new conditions, the entry into force of the Agreement on 1 January 2021 marked the turning point in the evolution of trade and economic relations between the two hemispheres.

It is well known that, since then, the UK has lost its rights and obligations as an EU Member State – in the end, this status has translated into the fact that it no longer has the same fundamental freedoms as for the EU membership (such as the free movement of goods, individuals, and also common provisions of European treaties and directives) – or, at least, not without additional conditions and provisions (for example, when we refer to the movement of goods and their transfer between the two areas). Thus, with regard to these areas that govern economic and trade relations, new challenges and aspects to be analyzed have emerged, for both directions of the flows.

In this context, which shows significant variations in short time intervals, companies need to keep up with the many legislative developments that have broken the usual pace at which they carried out their activities. We have therefore launched, within the Mazars Group, the Brexit Radar – a free tool designed to guide companies in assessing the implications of Brexit on the business they run and the obligations they will have to fulfill in addition.”, mentioned Edwin Warmerdam, Partner, Head of Tax, Mazars Romania.

The impact of Brexit on the Romanian economy and companies

The new status of the UK – now a third party country in relation to EU Member States – is reflected and will continue to have implications especially over the degree of interest and profitability of the investments. Now, the flows of goods and services, the mobility of individuals, but also the flows of capital must be viewed through a new perspective – facts that were interspersed with the restrictions generated by the COVID-19 pandemic. Finally, we are talking about a major change, given that UK companies are no longer considered participants in the EU’s single market and beneficiaries of the free movement of people, goods, and services.

Following the Agreement, the UK and the EU have undertaken to ensure that service providers or investors who are nationals of both signatory jurisdictions (including those in Romania) will be treated as favorably as local ones, benefiting, at the same time, from more favorable treatment than normally accorded to third countries. This does not mean that, in the context of Brexit, Romanian companies will not have to make additional efforts to understand and then comply with the new administrative, procedural, or compliance obligations – which will materialise in additional costs.

In any case, for the local market players, the post-Brexit transition period represented an opportunity to analyze the business model practiced until 1 January 2021, as well as its feasibility or profitability, looking now towards future time horizons.

UK will also treat EU companies and Nationals based on the signed agreements. There will be a greater interest from EU citizens resident in the UK who will seek to exploit their residency in the UK to the benefit of the EU and open up possible trade links. UK citizens resident in the EU will themselves have to ensure that they continue to benefit from their residency in the EU. This may take time until the correct procedures are in place but will not place any greater burden on those UK citizens resident in the EU.”, mentioned Nicholas Hammond, Member & former Director, British Romanian Chamber of Commerce (BRCC).

Tax after Brexit – fiscal changes and implications

One of the biggest challenges for the Romanian business environment is certainly the almost real-time follow-up of the legislative changes that Brexit has brought, including from a fiscal perspective.

After 1 January 2021, several tax implications and changes have arisen with regard to relations and transactions with the UK, of which the following are the most significant.

As regards indirect taxes, the common provisions of the system of VAT, excise duty or customs formalities are no longer applicable at the UK level – the UK currently having the status of a third country in relation to the Member States of the Union. Important implications for the supply of goods and services appear, as the relevant coordinates in terms of value-added tax (VAT), customs duties, and excise duties have changed – so that, for example, a supply of goods to the UK is now an export, which entails the need to reanalyze the implications in the VAT sphere. There are also immediate effects on cross-border VAT refund requests as well as on the supply of goods and services to non-taxable consumers (B2C).

In the area of direct taxes, among the most important changes are those referring to the impossibility of continuing to benefit from the withholding tax exemption applicable to flows of dividends, interest, and royalties received from Romania by a company resident in the UK, under EU Directives also transposed into Romanian legislation. At the same time, we note that the more favorable provisions of the European Directives with an impact on other tax issues for direct taxation (e.g., the common regime applicable to cross-border reorganisations between EU states) are also no longer applicable. In this context, it goes without saying that investment decisions between Romania and the UK will have to be thought out and planned from the perspective of direct taxes.”, mentioned Andreea Ignătescu, Tax Manager, Mazars Romania.

Brexit impact on Romanian citizens

One of the controversial aspects of Brexit is the UK’s option to no longer allow the free movement of EU citizens to its territory. In the post-Brexit stage, all the journeys of individuals to the UK, but also from the UK to Romania, will have to be carefully analyzed in terms of the purpose of the trip, the duration, and the conditions necessary to be met.

For instance, Romanian citizens wishing to travel to the UK will continue to be entitled to short-term visits (up to 90 days in any 180 days period). The same rules apply to British citizens who want to enter Romania as tourists, being necessary to meet additional conditions only for stays exceeding 90 days. For them, the competent authorities recommend that, in any case, they must have a passport that is valid for at least another 6 months after entering one of the EU Member States.

On the other hand, for those who want to relocate to the UK (either for studies or to work there), this process has become more laborious, being conditioned by the fulfillment of several criteria applicable to immigrants, established by the internal legislation of the UK.

If we are to mention the access to the labor market of a Romanian citizen, although it was desirable that the recruitment system for companies in the Kingdom has been simplified, in fact, new conditions have been introduced to be able to access a job. Specifically, eligibility for access to the labor market will be granted only based on a criteria test and a minimum score to be obtained for the candidate. At the same time, employers in the Kingdom will think twice before starting recruitment in EU countries, given the new requirements for a detailed demonstration that the employment of a citizen of a Union state was not done randomly and to the detriment of the local workforce.”, mentioned Alexandru Rotariu, Tax Consultant, Mazars Romania.

At the same time, business travel between the EU and the UK will no longer be as easy as during the transition period, for example. Nonetheless, secondments of staff within the same company that is based in several countries, including the UK, benefit from a looser regime.

However, we remind you that Romanian citizens that are temporarily in the UK (as students, tourists, or on business visits) will be able to benefit from the necessary medical assistance based on the European health insurance card. In the event of longer stays, the legislation of the UK imposes additional requirements, such as the surcharge for healthcare as a condition for issuing a visa for entry and stay in the UK for more than six months. Similar issues will be faced by the UK citizens who are living in EU countries, regarding medical assistance.

Beyond all these technical aspects, the discussion boils down to how companies and individuals in Romania will experience all these overlapping and interconnected effects. On one hand, companies want at least to maintain the profitability they had achieved before Brexit; on the other hand, citizens seeking to relocate to the UK, for whatever reason, now face barriers that make it more difficult for them to achieve these goals on a personal level, but not impossible. If we are currently in the process of legislative and commercial transformations, with the clarification of the details that practical experience will require to be analyzed, the necessary settlements of information will appear, and trade relations will become more predictable and sustainable, as are currently the case with other third countries.

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