After Brexit, companies must consider changed conditions for doing business. It’s important to take notice of the recommendations of the Government of the United Kingdom (UK) for e-commerce and whether your business is in scope of the new reality, where your service is based, what are the legal requirements, etc. We will take a closer look at how these changes impact e-commerce providers operating in the European Union (EU) and UK. Also, on which conditions would it be wise to establish a company in Estonia to continue doing business in the EU.
What Has Changed in e-Commerce
The eCommerce Directive no longer applies to the UK now that the transition period is over. Due to that, rules relating to online activities in European Economic Area (EEA) countries may newly apply to UK online service providers who operate in the EEA. The eCommerce Directive allows EEA online service providers to operate in any EEA country, while only following relevant rules in the country in which they are established. This framework no longer applies to UK providers as the UK has left the EEA.
If you are a provider of online services or dealing with e-commerce, you should take steps in response to these changes and check the following criteria.
1. Check Whether You Are in Scope
You should consider whether your services were previously in scope of the Directive, and if so, ensure that you are compliant with relevant requirements in each EEA country you operate in. Depending on the nature of your online services you may already comply with these requirements. This could mean that there are little or no immediate changes you need to make to be compliant.
The eCommerce Directive applies to information society services. These are defined as any service that is normally provided:
- for payment, including indirect payment such as advertising revenue;
- at a distance (where customers can use the service without the provider being present);
- by electronic means, and;
- at the individual request of a recipient of the service.
This covers the vast majority of online service providers, for example online retailers, video sharing sites, search tools, social media platforms, and internet service providers.
2. Check Where Your Service Is Based
The Directive refers to this as your place of establishment, and is the fixed establishment where you pursue your economic activity for an indefinite period of time. The UK Government intends to fully remove the eCommerce Directive’s Country of Origin principle from UK legislation, to bring EEA online service providers in scope of UK laws, which they were previously exempt from. As this principle is found in a number of pieces of legislation it will be removed at different points.
3. Check for New Legal Requirements
If you are established in the UK, you should check for any legal requirements in any EEA countries you operate in. The rules that you may need to start following are those that fall within the Directive’s coordinated field. This covers legal requirements in individual EEA states which apply to information society services, for example, rules relating to online information, advertising, shopping, and contracting.
UK online service providers may also become subject to prior authorisation schemes, such as licensing requirements, in EEA countries where they operate.
Bear in mind that the Directive does not cover:
- questions about agreements or practices governed by cartel law;
- certain gambling activities;
- personal data covered by the GDPR and e-Privacy Directive;
- legal requirements relating to goods such as safety standards, labelling obligations or liability for goods;
- requirements relating to delivering or transporting goods.
In addition, it is recommended to ensure that you have processes in place for ongoing compliance if individual EEA states change their requirements governing online activities. It’s always wise to consider legal or other professional advice.
Impact of the UK-EU Trade and Cooperation Agreement to Service Providers
The UK-EU Trade and Cooperation Agreement ensures that UK firms in a variety of service sectors can continue to access the EU market, including as business travellers and cross-border services suppliers or investors, while being treated no less favourably than either EU businesses or competitors from third countries.
While the Agreement sets out clear expectations of the treatment and level of access to each party’s domestic market, there will still be some changes for business as a result of no longer operating under EEA regulation covering cross-border trade in services. These changes are different for each sector and member state of the EU.
If you’re a UK business or professional providing services or investing in the EU, Iceland, Liechtenstein, Norway, or Switzerland, you’ll need to check the national regulations of the country you’re doing business in to understand how best to operate. Here are the guides to providing services to each country.
VAT on Sales of Digital Services
To use the UK’s VAT Mini One Stop Shop (MOSS) to declare sales of digital services to EU consumers, businesses need to register for MOSS in an EU member state. Find out more about paying VAT on sales of digital services.
From 1 July 2021, the MOSS will be extended to all business-to-consumer (B2C) services taking place in EU Member States where the supplier is not established. The new One Stop Shop (OSS) will apply also to all distance sales of goods within the EU and to certain domestic supplies of goods. The scheme will enable companies to register for VAT in one country, mainly in their own EU Member State, and resolve all tax-related issues in that same country. This improves the current situation where companies dealing with distance sales must register for VAT and declare it in the same state.
Another new scheme will be created for the declaration and payment of VAT on distance sales of low value goods imported from outside of the EU, called the Import One Stop Shop (IOSS).
Establishing and Structuring Your Business
If you have a UK business, you might face restrictions on your ability to own, manage or direct a company registered in the EU, Switzerland, Norway, Iceland and Liechtenstein. You should be prepared for additional requirements on the nationality or residency of senior managers or directors, as well as limits on the amount of equity that can be held by non-nationals. UK companies and limited liability partnerships that have their central administration or principal place of business in certain EU member states may no longer have their limited liability recognised.
If you were to establish a company in the EU and manage it from the UK, you must consider the rules for creating a permanent establishment, controlled foreign corporations and double taxation in the EU.
Data transfer and GDPR
As part of the wider UK-EU Trade and Cooperation Agreement, the free flow of personal data from the EU, Switzerland, Norway, Iceland and Liechtenstein to the UK will continue after 1 January 2021 for no longer than 6 months, until adequacy decisions come into effect. As a sensible precaution during this 6-month period, it is recommended to work with organisations who transfer personal data to you to put in place alternative transfer mechanisms to safeguard against any interruption to the free flow of EU to UK personal data. Here is guidance on using data in your personal business or other organisation.
Implications of Brexit to Company Establishment in Estonia
The key differentiating factor between e-commerce businesses that choose to set up their businesses in Estonia is whether they are already operating in the UK or not. Companies that are already operating must take a lot of factors into consideration while making the transition from a UK entity to an Estonian. On the other hand, setting up a new company negates all the Brexit challenges.
The transition from a UK entity to an Estonian one is not as simple as it seems and can take between 3 to 4 months to complete. Setting up an Estonian company is quite easy and the process itself is quick. Also, you can mostly do it while the UK company is still operating. The most challenging part starts once the Estonian company has been established as you must begin transferring legal ownerships, acquiring authorisations from different parties, setting up a Permanent Establishment, applying for a VAT number, shipping goods, etc.
In addition, businesses in e-commerce must consider the actions taken by impactful marketplaces during the transition period. For example, for Amazon FBA e-commerce businesses, there have even been cases where Amazon has suspended accounts due to inactivity as usually no sales are made during the transition period. Once the account is suspended, you must make an appeal to open it again. This has deeper consequences as the company must also withstand the period of costs and no sales revenue.
Previous information is to create awareness about the relevant aspects to businesses operating in the EU and UK. Due to that, it makes sense for some businesses to stay in the UK and continue their operations with the same company. Especially if their business is complex and they have operations up and running for a while already. They have probably invested a lot in it which makes the transition more difficult. These companies must continue to comply with the import, export, and VAT regulations established between the UK and the EU.
On the other hand, if you are launching your e-commerce business and know that most of your customers and partners are in the EU, it makes perfect sense to establish an Estonian entity as the set-up is straightforward, there is no risk in Amazon suspending your seller account, and in terms of time and money, it is not as costly as it is to make the transition from a UK entity to an Estonian entity. As mentioned before, starting a new business without the need to transfer anything negates essentially all the challenges that Brexit has brought.
If you are doing business with customers in the EU and UK, but don’t want to miss out on the privileges of the single market, feel free to drop a line to our advisors. They would be glad to assist on the legal details and help you out.