The Court of Justice of the European Union (“CJEU”) rendered on the 14th of September 2017, for one of the first time, a Judgment in a Trust related case.
The main issue of the case concerned proceedings between the Trustees of the P Panayi Accumulation & Maintenance Settlements (‘the Panayi trustees’) and the tax authority on the taxation of unrealised gains in value of the assets comprised in a trust on the transfer of its trustees’ place of residence to a Member State other than the Member State of origin.
In order to solve the case the CJEU had to deal with several notions of Trust law (as developed by the laws of United Kingdom) and their implementation under EU law.
The findings of the Court can be summed up as follows.
The notion of Trust: an entity enjoying the freedom of establishment under EU law
- The CJEU held that, according to national law, the assets placed in trust form a separate fund of property, distinct from the property of the trustees, and the trustees have the right and the obligation to manage those assets and to dispose of them in accordance with the conditions laid down in the trust instrument and in national law;
- According to the national legislation applicable to the case at stake, (Section 69 TCGA - Taxation of Chargeable Gains Act 1992 – in the version applicable then), the trustees are regarded under national law as a single and continuing body of persons, distinct from the persons who may from time to time be the trustees. Section 69 also provides that that body is to be treated as being resident or habitually resident in the United Kingdom unless the general administration of the trusts is ordinarily carried on outside the United Kingdom and the trustees or the majority of them are not resident or habitually resident in the United Kingdom. On the other hand, under Section 80 TCGA, when the trustees of a trust cease at any time to reside or habitually reside in the United Kingdom, they are deemed immediately before that time to have disposed of the assets comprised in the trust and to have immediately reacquired them at market value;
- Trusts have no charitable or social purpose and that they were created in order that the beneficiaries might enjoy the profits generated from the assets of those trusts (profit-making entities).
Therefore, an entity such as a trust which, under national law, has no legal personality but possesses rights and obligations that enable it to act in its own right, and which actually carries on an economic activity, may rely on freedom of establishment under EU law (as such entity enters in the definition of a ‘company or firm’ under Article 49 of the TFEU).
A trust can thus enjoy free movement in the European Internal Market.
EU law prohibits the taxation of unrealised gains in value of the assets held in trust in the event of a transfer of the place of management of a trust (to another Member State)
- In the case at stake, the unrealised capital gains would not have been liable to taxation in the United Kingdom if the newly appointed trustees had been resident in that Member State.
- Consequently, it is clear that the effect of the national legislation at issue is that a trust which retains its place of management in the United Kingdom and a trust whose place of management is transferred to another Member State, because the place of residence of its new trustees is in that other Member State, are treated differently.
- That difference in treatment is liable, first, to discourage the trustees, who manage the trust, from transferring the place of management of the trust to another Member State and, second, to deter the settlor, in so far as the trust instrument permits, from appointing new non-resident trustees. That difference constitutes, therefore, a restriction on freedom of establishment.
- Such hindrance can be justified only if it relates to situations which are not objectively comparable or if it is justified by overriding reasons in the public interest that are recognised by EU law. It is further necessary, in such a case, that the restriction is appropriate for ensuring the attainment of the objective that it pursues and that it does not go beyond what is necessary to attain it (in the case at stake, the CJEU held that, if the litigated taxation is well a suitable means of ensuring the preservation of the allocation of powers of taxation between the Member States, since the former Member State loses its power to tax those capital gains following that transfer, it goes beyond what is necessary to attain that objective).
Therefore, the provisions of the TFEU relating to freedom of establishment preclude, in circumstances where the trustees, under national law, are treated as a single and continuing body of persons, distinct from the persons who may from time to time be the trustees, legislation of a Member State which provides for the taxation of unrealised gains in value of assets held in trust when the majority of the trustees transfer their residence to another Member State, but fails to permit payment of the tax payable to be deferred.
Laura Marcus, The Notion of Trust in EU law, Actualité du 15 novembre 2017, disponible sur www.ceje.ch