Following the period under Article 50 of the European Union Treaty, both parties agreed to a transition period until 31st December 2020.
The long romance between the United Kingdom and the European Union (EU) comes to an end on 31st December 2020 at midnight (GMT), the point at which the withdrawal agreement comes into effect.
It may take some time for the citizens and businesses to adapt to this transition. However, even though some topics may continue to be uncertain, we highlight some of the changes that will indeed affect the current status quo of rules and laws applicable to situations that involve Portugal and the United Kingdom from 1st January 2021.
We can already confirm that at the end of the transition period (31st December 2020), UK citizens living in Portugal will see their right to residency protected by the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (withdrawal agreement) and vice versa.
However, British citizens that intend to reside in Portugal from 1st January 2021 will be considered nationals of a third country, being subject to the laws established in Law n.º 23/2007, of the 4th July (Immigration law), and the rules of the new British system will be applied to Portuguese citizens that intend to reside in the UK after this period. They will, in both cases, no longer benefit from freedom of movement to work, study or retire.
With regard to freedom of movement, for the purposes of tourism, the principle of reciprocal visa exemption will apply, similar to what happens for example between Brazil and Portugal, with British citizens entering Europe limited to a maximum stay of 90 days in each 180 days, having to have travel insurance with health coverage and prove that they have sufficient resources for their stay and also hold a return ticket to the United Kingdom.
On the other hand, EU citizens will be able to stay in the United Kingdom for up to six months, without the need for a visa.
Border control for workers is not completely defined yet.
It’s known however that Europeans will come to be treated in the United Kingdom in the same way as other foreign citizens, that is, they need a work visa and will have to pay a surcharge in order to access health services.
With regard to Britons that intend to reside and work in Europe, the need for a visa and/or residency authorisation will depend upon the valid legislation in the EU country in question, with Portugal the usual procedure is to request a visa at the Portuguese consulate in the country of residence in order to be able to travel to Portugal and, once in Portugal, to request a residency authorisation.
After the end of the transition period, which will occur on the 31st December 2020, the regime for posting workers to other EU member states will no longer be applicable to the United Kingdom.
Thus, directive 96/71/EC will no longer be applicable to EU businesses that post workers to the UK, as well as UK businesses that post workers to the EU.
As a result, from 1st January 2021, the United Kingdom will become a third country and national law will be applied to posted workers (taking into account the agreements made by the EU and the UK in the area of the General Agreement on Trade and Services) meaning that it will be necessary to issue a work visa.
With regard to the workers posted overseas by EU businesses to the UK before the transition period and by UK businesses to the EU, these will also no longer be covered by Directive 96/71/EC, which will have consequences on various levels. As an example, it’s noted that with the Directive no longer being applicable, the right to residency will no longer be conferred to workers, meaning that the right to remain in the receiving country after the end of the transition period ceases. However, the Withdrawal Agreement provides conditions so that posted workers may benefit from the right of residence, in agreement with national legislation.
With regard to the contracting of UK workers, this will no longer be covered by the special rules with regard to the contracting of EU nationals, with this becoming subject to the meeting of a greater number of formalities and procedures ranging from the content of the contract to the need for this to be registered with the Authority for Working Conditions (ACT). To this it’s added that contracting UK workers will only be possible if the principle of priority with regard to other citizens, that is EU nationals, is respected.
Following the end of the transition period, coordination of Social Security in line with EU legislation will no longer exist, with the signing of an agreement between the EU and the UK in this area being awaited.
4. Recognition and Execution of Rulings
The impact of Brexit on the recognition and execution of rulings will be different according to whether legal action was brought before or after the end of the transition period. In the terms of the withdrawal agreement, European regulations will still be applied the rulings handed down after the end of this period with regard to the recognition and execution of rulings handed down in EU member states. In other words, regardless of the moment in which the ruling was handed down, European Union rules will continue to apply when they were delivered with regard to a legal action brought before the end of the transition period. The same applies to rulings that had been declared enforceable, but which weren’t enforced before 31st December 2020.
Legal action taken after the end of the transition period will be treated differently given that European Union rules will no longer be applicable. In certain cases, relevant international conventions may safeguard the interests of the parties, although they have a more uncertain and reduced scope of application – for example, with regard to divorce processes initiated in a member state after the end of the transition period, the Hague Convention of 1970 on the Recognition of Divorces and Legal Separations is applicable, but currently only the UK and twelve member states are signatories of this. Where other international conventions are not applicable, the recognition and execution of rulings delivered by the UK or in member states of the European Union will be governed by the applicable national law. In Portugal they will cease to be automatically recognised and will have to be reviewed and confirmed by national courts.
Legal action brought after the end of the transition period as the result of a choice of court agreement in British courts will also not be able to benefit from the application of European Union rules. However, on 28th September 2020 the UK presented its instrument of accession to the 2005 Hague Convention on choice of court agreements, which will come into effect on 1st January 2021, allowing for a simplification of the recognition and execution of rulings handed down by British courts designated by these types of agreements. This convention is only applicable to the choice of court agreements concluded after the UK becomes a full member of it, meaning that if the agreement was signed before the aforementioned date and even in cases where legal action was brought after the transition, the solution will be the application of national law.
5. Citation and notification of proceedings
Another major legislative change will be with regard to the citation and notification of court and out-of-court proceedings of Member States, given that the Regulation (EC) n.º 1393/2007 will no longer be applied, which establishes rules such as the maximum timeframe of a month since the reception of a proceeding for its notification and citation.
From 1st January 2021, with this regulation no longer being applicable, the citation and notification of recipients headquartered or domiciled in the UK may take several months.
6. Legal aid
Up until now legal aid in the area of crossborder litigation has been governed by legislative acts of member states that transposed Directive 2003/8/EC to the respective legal systems, which establishes minimum common rules, aiming to improve access to justice. The transpositions of this directive have as their scope of personal application residence in a member state, which will no longer be the case for British citizens from the 1st January 2021.
At the moment there isn’t any other international convention that truly covers the themes handled by this Directive and its respective acts of transposition, even though the European Agreement of 1977 on the Transmission of Applications for Legal Aid of 1977, of which all member states and the UK are parties, covers some of the most relevant questions.
At the end of the transition period national law will be applied to legal aid conceded in crossborder litigation that involves the UK and member states of the EU. Member states will be able to sign agreements with the UK that attribute rights recognised up until now to British citizens, as long as the UK attributes equal legal protection to citizens of the member state in question, pursuant to the legislative acts of the member states that transposed the aforementioned Directive.
7. Real estate capital gains: total or partial exemption
In the terms of the Tax code on earnings of private persons (henceforth ‘CIRS’) capital gains resulting from the disposal of property may be totally or partially exempt from taxation, as long as the product of the sale is reinvested in the acquisition of another property intended for own and permanent use, and as long as other conditions are met on a cumulative basis.
Generally, if the property intended for own and permanent use is sold and the product of the sale is reinvested (between the 24 months prior to and the 36 months following the date of the sale) in the acquisition, expansion, improvement or construction of a new primary residence in Portugal, in another member state of the European Union (EU) or in a country of the European Economic Area (EEA) with which Portugal has signed an agreement of administrative assistance in tax matters, the capital gains may be totally or partially exempt of tax.
Considering Brexit and its consequences, namely the fact that the UK will no longer be a member of either the EU or the EEA, all of the situations mentioned above with regard to property assets intended for own and permanent use will no longer be covered by the exemption. As a result, the transaction will be taxed in Portugal.
8. Exit tax
In Portugal there is no exit tax for individuals that transfer their residence overseas, with the exception of the situation of shareholders that have participated in corporate restructurings in which they have benefitted from tax neutrality and in which the respective taxation on capital gains has been deferred.
Thus, in the terms of the current legislation and upon the fulfilment of determined conditions, there is a deferment of capital gains tax resulting from a neutral corporate restructuring transaction, until the moment of the transference of the related residence to a member state of the EU or EEA with which Portugal has signed an agreement of administrative assistance in tax matters, following the express request of the individuals.
In contrast, if the shareholders that carry out the transaction as described transfer their residence to a third country, that is, a country that is outside of the EU or the EEA or for a country of the EEA with which Portugal hasn’t signed an agreement of administrative assistance in tax matters, there won’t be a deferment of taxation in such cases.
Therefore and given that the UK is no longer a member state of the EU nor the EEA, individuals that transfer their residence to that country will be immediately subject to tax on the capital gains obtained in a transaction such as that mentioned above.
We note, at the same time, that individuals that intend to transfer their residence to the UK should proceed to nominate a fiscal representative, given that once again the UK is not a member state of the EU nor of the EEA.
9. Social Security Contributions
As a general rule, Social Security contributions are owed in the place in which professional activity is exercised.
However, in accordance with the European legislation in matters of coordination of Social Security systems of the European Union, EEA and Switzerland, expatriates can maintain their contributions in the country of origin, not having to pay contributions to the Social Security system of their respective host country.
Generally, in situations of postings overseas, employees maintain contributions for the Social Security system in their country of origin (in the cases in which, on a cumulative basis
the posting does not exceed 24 months, which may be extended, nor is it intended to replace another posted employee). Additionally, for the posting to take place, the power of management over the employee must remain in the sphere of the entity of origin or else run the risk of distorting the posting and transforming it in a new pure employment relationship.
With Brexit, the UK will no longer be included in the list of countries covered by European legislation in matters of coordination of Social Security systems. As a result, alternatives should be considered in order that the contribution relations between Portugal and the UK are not excluded from any legal coverage with regard to Social Security.
In this regard, Portugal may sign in the future an agreement on Social Security matters, in the same way as happens with other countries. Until that point, the situation may be problematic, given that with the lack of an agreement on the applicable legislation, both states may arrogate to themselves the right to subject the situation to the scope of application of their respective legislation.
However, given that Portugal has legislation that allows the coordination of its own system of Social Security with those of third country or outside of the EEA with which it doesn’t have a bilateral agreement, the situation of UK workers in Portugal will not entail any contributory obligation during a 12 month period, as long as the individual proves that it continues to be subject to the British Social Security system.
In the same way, if the Portuguese worker posted to the UK is able to prove that it is making UK National Insurance contributions, then they won’t be required to make contributions in Portugal.
10. Public and private application of the rules on restrictive competition practices
Unless it is considered “appropriate to act differently in the light of certain circumstances”, the UK’s competition regulators and courts will continue to be bound to the obligation of ensuring that there isn’t any “inconsistency” with the jurisprudence of the EU pre-Brexit in competition matters when interpreting national rules.
Practices which infringe both UK competition legislation and that of the EU post-Brexit will continue to be subject to separate investigations by the Competition and Markets Authority (CMA) and the European Commission and the latter will not have powers to carry out searches and seizures in the UK (it will have to send a request for information, in the same way as happens currently for foreign jurisdictions).
The decisions of the European Commission adopted before 31st December 2020 will continue to be valid, including for the purposes of follow-on damages claims and EU courts will continue to maintain exclusive jurisdiction over the decisions of the European Commission on the respective appeals. However, with regard to the decisions of the European Commission issued after the transition period, UK courts will no longer be legally bound to the declarations of infringement to the right of competition issued by these decisions.
11. Control of monopolies
When a transaction fulfils the jurisdictional requirements of both the EU and the UK regimes, it will have to be evaluated by the two entities.
The decisions of the European Commission post-transition will not be applicable, meaning that if the requirements of the UK are met, the CMA will have jurisdiction to investigate the transactions in question.
12. State aid
The European Commission will continue to investigate pending cases opened before the 31st December 2020 and will have the purview to, up until 31st December 2024, initiate new investigations on the measures of British aid conceded before the Day of Conclusion.