Brexit and the Audiovisual Sector
1. Brexit checklist
Early public affairs engagement
The transition from an EU-based trading platform to a global one will require skilled, intensive inter-governmental negotiation. The UK is a creative industry hub. Over 140,000 employees work in the sector, more than in any other EU state. IP intensive sectors contribute 4.7% to UK GDP. 75% of OFCOM licensed broadcasters serve non-UK territories. Engagement, directly and via industry bodies, will be essential to assist UK officials in negotiating trade terms that favour the industry's access to EU and global markets.
EU access for goods and services
Services: Access to the EU for cross-border media services is protected by EU law – inter alia the Audiovisual Media Services (AVMS), Cable and Satellite (CabSat) and e-Commerce Directives. Other international treaties, including the Transfrontier Television Convention, offer similar access rights. But they are not as comprehensive, and do not cover on-demand services. It will be important to consider the regulatory regime in destination states where the Transfrontier Television Convention does not safeguard access. So too the single-country-clearance for satellite broadcasts will no longer apply under the CabSat Directive. So the default IP position needs to be assessed in target markets..
Physical media: Content on physical media does not face tariff barriers from the EU27. But there will be import VAT. Again, the IP position becomes more complex since distribution will not benefit from regional exhaustion across the European Economic Area (EEA). Distributing physical media will require additional licences.
Licensing/syndication of content: Tariffs do not apply to licensing intangibles to and from the EU27. Relief from royalty withholding taxes under existing double taxation treaties (which are not EU-derived) will continue to apply.
Data Protection: If the UK is not in the EEA, it will need to negotiate an adequacy decision in respect to ex-EEA data transfers. A material change in UK data protection law is therefore unlikely post-Brexit. That said, the UK Information Commissioner has indicated that the UK may be able to take a more business-friendly approach to data protection even within that framework.
Tax & Talent
Third-party licensing: There will be no change in withholding tax position with respect to cross-border royalties from EU27 to UK licensors.
Intra-group licensing – royalty withholding taxes: The EU Interest & Royalties Directive requires Member States to exempt cross-border royalty payments to affiliates (>25%) from withholding tax. Post-Brexit, UK licensors will likely cease to benefit from this exemption, which means the EU27 will be entitled to impose withholding tax on royalties at the applicable rate in the double tax treaty between the UK and the state of residence of the licensee. Most major markets in Southern and Western Europe have agreed to exempt royalty payments from withholding tax under the applicable treaties with the UK. A notable exception is the 8% withholding tax applicable in Italy. Portugal, Cyprus and Eastern European countries, albeit lower value markets, would be entitled to charge withholding taxes at rates of between 5 to 10%. This may not represent an additional overall tax cost to UK licensors if they are able to fully credit the incremental withholding against their UK liability, but it will vary on a case-by-case basis. There will be no change in UK tax treatment of outbound royalties to the EU27.
Corporate group dividend withholding taxes: The EU Parent/Subsidiary Directive generally exempts cross-border dividends paid by subsidiaries to EU parent companies from withholding taxes within the EU. Post-Brexit, in some cases, UK parents will have to rely on less beneficial double taxation treaties (for example, a 5% German dividend withholding tax).
Restricted free movement for persons and business: Producers may necessitate permits for shooting, cast and crew moving between the EU27 and the UK.
Changes to labour laws: The UK may choose to offer greater employment law flexibility by amending EU based labour laws such as the Working Time Directive.
Loss of EU financial support: The sector will lose access to the Creative Europe EUR 1.46 billion support programme.
Greater national film subsidy/tax credits flexibility: EU state aid rules will no longer limit national film subsidies or tax credits.
European works: UK-produced works will remain "European works" for the purpose of filling broadcasters' European works quotas
High value or strategic agreements extending beyond 2019 should be reviewed:
Definitions: Territory definitions of the EEA and/or the EU should be reviewed.
Brexit clauses: Consideration should be given to inserting Brexit language to legislate for renegotiation or mutual assistance to achieve the same commercial objectives in light of the new EU27/UK trade and regulatory framework. Depending on the value of the deal, companies should consider legislating in advance for: (i) the IP position; (ii) rights clearance for satellite services; (iii) non-application of the Portability Regulation (expected in force by 2017); (iv) post-Brexit data protection.
Governing law/jurisdiction: English law and courts remains a viable commercial choice. There is unlikely to be any problem with enforceability of B2B agreements. But Brexit may see commercial pushback from EU27 partners, seeking to use Brexit as an excuse for having recourse to their law/courts.
Corporate structure planning
Diligence to inform public affairs and corporate planning: Knowing the post-Brexit fallback position will assist the company in its public affairs strategy (to feed into trade negotiations) and corporate/tax planning to ascertain the optimum location of business activities within and outside the EU27, for example:
- For broadcasting jurisdictional purposes;
- The country-of-uplink for satellite copyright clearances;
- Where to outsource physical media manufacture;
- To optimise access to EU and national film funds/incentives;
- The most tax efficient structure for (i) intra-group licensing to take advantage of double taxation treaties to avoid royalty withholding taxes; and/or (ii) location of the group corporate parent, to secure 0% dividend withholding tax from subsidiaries.
2.1 Business as usual in the short term
An Article 50 TEU notification will start the two year timetable for Brexit. Notification is unlikely to occur before end 2016, making Brexit unlikely before 2019 or later. During this time, EU laws (including those currently due to come into force) such as the Portability Regulation, AVMS Directive, SatCab Directive, e-Commerce Directive and the Single Telecom Market Regulation will still apply.
2.2 Piecemeal repeal of EU laws post-Brexit
Following Brexit, it is likely that the UK will amend the European Communities Act 1972 (the basis for adopting EU legislation) to: (i) grandfather pre-Brexit rights; (ii) enable the UK to selectively adopt new EU laws; and (iii) consider, on a case-by-case basis, whether to repeal prospectively EU laws. EU regulations, such as the Single Telecom Market Regulation or the Portability Regulation, apply without national implementing measures. They will cease to apply post-Brexit though we expect the UK to grandfather most of them in the short to medium term at least. The UK may let these regulations lapse or continue to apply them - in whole or in part - through some new statutory mechanism.
3.1 A new trading arrangement
The UK will negotiate a replacement trading arrangement with the UK. There are a number of potential models, some of which would require the UK to adopt EU law. EEA affiliation, for example, would require the UK to adopt many current EU laws applicable to the audiovisual sector. If that were to occur then there would be few substantive differences in the legal framework, and the audiovisual sector would largely enjoy the same access to the EU as at present.
The UK may conclude the EEA model is politically unacceptable, since it entails free movement of persons.1 The more likely outcome is a bespoke, sector-by-sector negotiated free trade arrangement. Other than the EEA model, access to audiovisual markets has proven difficult to negotiate in free trade arrangements. It involves hard-to-resolve issues of cultural policy, pluralism, viewer protection and access to information. Even free trade agreements promising deep integration between economies, such as the EU deals with Canada and the Ukraine, have carved-out the audiovisual sector. The contours of any bespoke EU27/UK arrangement will dictate what level of access the sector can expect to the EU27. The following analysis assumes that the UK does not affiliate to the EEA, but can largely determine its own legal treatment of the sector.
3.2 Content creation
Funding for content: Direct EU funding, including the EUR 1.46 billion 2014-2020 Creative Europe MEDIA programme, would not benefit the UK industry, though may be available indirectly via coproduction or similar arrangements with EU27-based producers.2 EU state aid and non-discrimination rules would cease to regulate UK subsidy and tax incentive regimes. The current UK tax reliefs intended to promote UK production of films, high-end TV shows and other content may become more restrictive as they may become more focused on UK- (as opposed to EU27-), production. On the other hand, the current conditions attaching to such tax reliefs, including whether the content contributes to the development of British culture, may become less restrictive. The UK could offer more flexible film funding support, assuming the UK were inclined to increase national funding to offset loss of EU funds.
Coproduction eligibility for state support: To benefit from coproduction credits/support, films must meet certain criteria. These are established in bilateral treaties or conventions, including the European Convention on Cinematographic Co-Production, to which the UK and most EEA Member States participate. These are non-EU based instruments which will continue to apply.
Constraints on content production: UK producers wishing to shoot in or employ actors from the EU27 (and vice versa) will no longer benefit from EU freedoms to travel or do business across the EU. They will be required to make arrangements for travel, shooting and work permits for cast and crew. Conversely, the UK may choose to offer greater employment law flexibility by repealing EU derived labour laws such as the Working Time Directive.
European works: The AVMS Directive's European works quotas are similar to the obligation to promote European works in the Transfrontier Television Convention, to which the UK will remain signatory, albeit the Convention is more loosely worded.3 The revisions to the AVMS Directive tighten up the definition of, and obligations concerning, European works. So there may be a marginal advantage to being based in a Convention state rather than the EU27.
3.3 Content distribution by physical media
Free movement of goods will no longer apply. Under the default tariff position (assuming WTO rules are applicable absent a UK/EU27 trade deal), the distribution of physical media (e.g. DVDs, BDs) from the UK to the EU-27 (and vice versa) will not be subject to tariffs.4 But import VAT would apply when goods cross the border. The rate is set nationally. So on import into the UK, the rate would be 20%. This can generally be reclaimed, so it is largely a cash flow issue. Currently, copyright and any trademark rights are "exhausted" regionally across the EEA by first sale in the region. Post-Brexit rights holders may be able to object to distribution into the EEA or from the EEA into the UK as infringing copies. So rights holders would be able to grant exclusive rights to dealers in the UK which would not be undermined by ex-EEA imports.5
3.4 Cross-border broadcasting
Freedom of reception: The AVMS Directive requires freedom of reception, subject only to exceptions, across the EU for media services under the jurisdiction of one Member State. No destination state licence is required. Post-Brexit, media services from the UK into the EU-27 (or vice versa) will no longer be protected by the AVMS Directive. The Transfrontier Television Convention is a separate, non-EU, treaty which will remain applicable post-Brexit. It contains similar freedom of reception rights. However, several EU Member States (Belgium, Denmark, Greece, Ireland, Luxembourg, Netherlands, Sweden) have not signed and ratified it. Broadcasting in these EU Member States from the UK (and vice versa) may require licensing. In addition, the Convention applies only to linear services. On-demand audiovisual services are not covered.
Cross-border on-demand services: The Transfrontier Television Convention does not cover on-demand services.6 So on-demand service providers broadcasting from the UK will be subject to local regulation in every EU-27 Member State to which they provide their services. Few EU Member States require a license for on-demand services, being far less regulated than linear broadcasting. Though notification and registration formalities may apply.7
Transferring regulatory jurisdiction: Moving jurisdiction to the EU27 generally requires a substantial nexus to the EU27 territory in question, by reference to a series of criteria including head office, editorial decision-making and "substantial part of the workforce" location. But EU jurisdiction can be secured on a more ephemeral basis, if none of the other criteria for jurisdiction apply and the broadcaster uses a satellite uplink in an EU Member State.8
Satellite rights clearance: The SatCab Directive states that the communication to the public is made in the satellite uplink country. So the broadcaster need only acquire rights in the uplink state, obviating the need to clear rights multiple times. Post-Brexit, UK broadcasters will not benefit from similar legislation, albeit there may be arguments that this is implicit in the concept of "communication to the public" in light of recent "new public" jurisprudence from the EU Court of Justice.
Online content portability: The draft Portability Regulation requires providers of online content services to enable subscribers temporarily present in an EU Member State to access and use the online content. The Portability Regulation is likely to enter into force before Brexit is completed. This will allow consumers in the EU-27 to have access to their online content when travelling in the UK (and vice versa). The Portability Regulation will however have no effect post-Brexit. Consumers resident in the UK will not be able to benefit from portability when travelling across the EU-27 (and vice versa). Of course, online service providers will be in a position to negotiate with rights holders to retain the ability to also provide cross-border portability in the UK, notwithstanding the fact that the UK is no longer an EU Member State. However, this may involve a complex renegotiation of rights.
Net neutrality and over-the-top (OTT) services: Under the recently adopted Single Telecom Market Regulation, the blocking or throttling of online content by ISPs is prohibited, though this is subject to a number of important and legally unclear exceptions. The Single Telecom Market Regulation currently applies in the UK, ensuring that the quality of OTT services is not degraded by vertically integrated media companies. Post-Brexit, the Single Telecom Market Regulation will have no effect in the UK. OTT providers will still benefit from EU net neutrality rules when serving customers in EU27 territories (subject to the freedom-of-reception analysis above). The UK may choose to apply different or more stringent net neutrality rules.
The EU Court of Justice Murphy case-law: The Murphy case found that a UK public house was entitled to receive Premier League match broadcasts from a Greek satellite pay-TV broadcaster, and that any contrary contractual provisions were unenforceable under EU competition law.9 As to territorial licensing, this may create greater flexibility on territory restrictions given Murphy's focus on an intra-EU broadcast under the one-stop-shop pan-EU SatCab Directive regime. The rationale of the ongoing pay-TV investigation and e-commerce sector inquiry into blocking of cross-border broadcasts would also be deprived of substance in relation to the UK.10
3.5 Licensing/syndication of content
Tariffs do not apply to licensing intangibles to and from the EU27. Relief from royalty withholding taxes under existing double taxation treaties (which are not EU-derived) will continue to apply. But note also the position for intra-group licensing below.
3.6 Corporate group structure
Dividend withholding taxes: The EU Parent/Subsidiary Directive generally exempts subsidiary-to-parent dividend payments from withholding taxes within the EU. Post-Brexit, UK parents will have to rely on, in some cases, less beneficial double taxation treaties (for example, a 5% German dividend withholding tax).
Intra-group licensing royalty withholding taxes: The EU Interest & Royalties Directive requires Member States to exempt cross-border royalty payments to (>25%) affiliates from withholding tax. Post-Brexit, UK licensors will likely cease to benefit from this exemption, which means the EU27 will be entitled to impose withholding tax on royalties at the applicable rate in the double tax treaty between the UK and the state of residence of the licensee. Most major markets in Southern and Western Europe have agreed to exempt royalty payments from withholding tax under the applicable treaties with the UK. A notable exception is the 8% withholding tax applicable in Italy. Portugal, Cyprus and Eastern European countries, albeit lower value markets, would be entitled to charge withholding taxes at rates of between 5 to 10%. This may not represent an additional overall tax cost to UK licensors if they are able to fully credit the incremental withholding against their UK liability, but it will vary on a case-by-case basis.11 There will be no change in the UK tax treatment of outbound royalties to the EU27.
3.7 Choice of law
English contract law will be largely unaffected by a UK withdrawal from the EU as the bulk of English contract law is governed by English common law, and not EU law. English common law is often considered attractive commercially. It promotes the principle of 'freedom to contract' between businesses and aims at giving effect to the bargain agreed between the parties, with minimal judicial interference for public policy or other reasons. Both the Rome I and Rome II Regulations require EU courts to respect the parties' choice of law in a commercial relationship and the Rome Regulations apply whether or not a party is located in the EU. EU courts should therefore continue to respect English governing law clauses in the same manner as currently.
3.8 Choice of court
It is likely that the UK and the EU will agree to continue the application of the Recast Brussels Regulation. It is in no state's interests to risk parallel proceedings due to inconsistent application of jurisdiction agreements. Even without such an agreement, there are various possible treaty-based options for the UK to pursue, such as the existing Brussels, Lugano, or Hague Conventions. Whilst these differ from the Recast Brussels Regulation in some details, the overall aim of the Conventions is the same: consistent application of jurisdiction agreements and mutual recognition of judgments. In particular, the Hague Convention on Choice of Court Agreements has already been signed by the EU on behalf of the UK and it would be open to the UK to sign on its own behalf, post-Brexit.
4. Impact on the EU Digital Single Market agenda
Brexit comes at a time when the EU legislative framework is in flux. The EU flagship strategy – the digital single market (DSM) – proposes many changes to the industry's legislative framework:
(a) portability of online audiovisual services within Europe;
(b) extension of CabSat Directive country of origin principle to online transmissions;
(c) greater European works obligations on on-demand media services, and country-of-destination levies;
(d) extension of the AVMS Directive to video-sharing platforms.
As a hub for the creative industries, the UK was expected to play a central role in shaping DSM legislation, inter alia via the UK's EU presidency in July 2017, and to be an important counterweight to less free-market-oriented countries. The UK will de facto cease to be an influential voice in shaping DSM and may decline its 2017 presidency.
1 Articles 112-114 EEA Agreement permits safeguard measures restricting free movement only under limited circumstances "[i]f serious economic, societal or environmental difficulties of a sectorial or regional nature liable to persist are arising, a Contracting Party may unilaterally take appropriate measures…" The safeguard provision is strictly interpreted and allows other EEA states to reciprocate with restrictions in kind if they consider an unfair imbalance results. Liechtenstein's protocol on accession to the EEA Agreement refers to the possibility of safeguard measures in relation to free movement of people due to the small size of Liechtenstein, its rural nature and the limited number of jobs available in its economy.
2 As of 2015, besides EU Member States, a number of other countries also participate in the Creative Europe MEDIA programme (e.g. Norway, Albania, FYROM). However, these are either EEA members or EU accession candidates. Depending on its relationship with the EU, the UK may find it difficult to negotiate similar access to funding.
3 Note that to remain qualified as European works, the UK should not discriminate against EU27 works. So UK preferences for UK-produced works would be constrained to that extent.
4 Tariffs for imports from outside the EU single market into the EU were eliminated as of 1 July 2016. Previously the applicable rate was 3.6%
5 The UK would have the option to apply "national", "regional" or "international" exhaustion in its IP laws post Brexit. National exhaustion allows the rights holder to object to importation even if it has licensed sale in another country (in any part of the world). Regional exhaustion would enable the rights holder to object only if a licensed sale takes place in a country outside the relevant region (for example, an EEA regional exhaustion rule would mean that a sale in Germany exhausts the right to object to importation into any other EEA state, but a licensed sale in Russia or China does not). International exhaustion means that no objection can be made to importation after first sale by the rights holder or with its consent anywhere in the world
6 The AVMS Directive definition of "European works" - including those from Transfrontier Television Convention states - applies to both linear and on-demand services under the AVMS Directive.
7 In Italy, for example, non-EU on-demand service providers must notify the Communications Regulatory Authority and register with the Registry of Communications Operators. This entails a (modest) fee and the provision of certain pro-forma information annually concerning the service provider.
8 Article 2(4) AVMS Directive.
9 The EU Court of Justice has also recently provided clarificatory rulings on copyright which will continue to be important for the UK domestically, regardless of whether there is a cross-border element in them. For example, the Meltwater judgment addressed the question of whether internet browsing is copyright infringing activity. Whereas UK courts may choose not to follow cross-border/free movement elements of EU case-law (such as cross-border exhaustion or cross-border limits on the specific subject matter of rights), EU rulings that deal with the substance of copyright would likely retain precedential value.
10 It is notable that the EU has only taken objection to restrictions on passive sales between EEA states in its statements on e-commerce and the pay-TV inquiry. It has not objected to ex-EEA restrictions.
11 For example, a US licensor licenses its UK subsidiary with a TV series. The UK subsidiary is the hub for licensing other European subsidiaries, including Italy. The UK licenses-in from the US at £90 and licenses out to Italy at £100 (£10 profit). The UK licensor pays UK corporation tax on its profits at 20% (£2). Pre-Brexit, under the EU Interest & Royalties Directive, no withholding tax is payable in Italy. The effective tax rate of the UK/Italy leg of this intra-group transaction is 2% of the royalty. Without the Directive, withholding tax is payable in Italy at 8% (£8) and will only be partly credited by the UK tax authorities to the UK licensor (to reduce the UK corporation tax from £2 to zero). The effective tax rate of the UK/Italy leg of the transaction therefore increases fourfold to 8% of the royalty.