Do ‘Centros’ and ‘Inspire Art’ apply to trusts?

Trusts and the freedom of establishment: a bad marriage?

In a previous post we tackled the question whether the common law trust may be regarded as a ‘legal entity’. We concluded that this was rather doubtful.

Nevertheless, in the Olsen-case (7 July 2014), to which we referred in our earlier blogpost, the EFTA-Court ruled that a trust, as an entity, may fall within the scope of Articles 31 and 40 of the Agreement on the European Economic Area (‘EEA-Agreement’). The practical consequence of this ruling was that trusts may come under the scope of the so-called freedom of establishment and the free movement of capital in the EEA (and therefore also in the EU).  The remainder of this blogpost will focus on the question under which circumstances a trust may be brought under the scope of the freedom of establishment and some of the possible consequences as far as the member states’ private international law- and property law-systems are concerned.

Trusts and the scope of the freedom of establishment

In order for the freedom of establishment to apply in any specific case, it is presupposed that the given case can actually be brought under the scope of this fundamental freedom. Especially in relation to trusts, this is not self-evident. It is submitted that the freedom of establishment applies to ‘nationals of a member state’ of the EU or the EEA. From the EFTA Court’s ruling in Olsen, it can be deduced that the freedom of establishment needs to be interpreted broadly, and that, in the view of the EFTA Court, trusts, as ‘legal entities’ also come under the personal scope of the freedom of establishment. Trusts are thus treated, in a certain way, as ‘nationals of a Member State’, provided that they were formed in accordance with the law of a Member State and have their registered office, central administration or principal place of business within the EU or EEA. However, it is difficult to equate trusts with the corporate entities to which the freedom of establishment normally applies.

Regarding the personal scope of the freedom of establishment, it can be observed that, while it is not possible to incorporate a corporate entity in a given state (even if it is an ‘incorporation state’), while choosing the law of a third state as the applicable lex societatis, it is entirely possible to appoint an English trustee with regard to goods situated in England, while choosing the law of any other trust state as the governing law (Art. 6 of the Recognition of Trusts Act 1987). This is so, even when all the trust assets are located in England. Because English private international law allows such a choice, perhaps such trusts can be considered to be formed ‘in accordance with English law’, as English law will generally hold such trusts to be validly constituted. The matter seems, however, far from clear. While the corporate equivalent of nationality and domicile is the lex societatis, it seems, at least in this respect, harder to determine the ‘nationality’ of such a trust.

More uncertainties arise when we take into account the material scope of the freedom of establishment. It is generally accepted that, in order to fall under the material scope of the freedom of establishment, the primary or secondary establishment of a ‘national of member state’, four cumulative conditions must be satisfied: there must be (i) an actual pursuit of an ‘economic activity’, (ii) through a fixed establishment, (iii) for an indefinite period (iv) in another Member State (CJEU C-221/89, Factortame, 25 July 1991, s. 20).

Interestingly, in Olsen, the EFTA Court considered that:

“[t]he essential feature of real and genuine business activities that constitute establishment is that a person or an entity carries on a business, such as by offering services, which are effected for consideration, for an indefinite period through a fixed establishment.” (section 97 of the Olsen-judgment)

It follows that, once that it is established that the trust in question satisfies these requirements, it also falls under the material scope of the freedom of establishment. Even though it would go beyond the scope of this blog post, a seminal question in this regard is whether trusts are actually suited to perform qualifying ‘genuine economic activities’. Due to a lack of clear case-law of the CJEU, this remains an open question (for a more detailed discussion, see: N. Appermont, ‘Adrift between Scylla and Charybdis? The trust caught between a civil law rock and a fiscal hard place’, Trusts & Trustees 2016, Issue 10, 31p).

Trusts and private international law

Empirical research showed, as a consequence of the CJEU’s ruling in Centros, an increase in the number of English limited companies being used in both Germany and the Netherlands (M. Brecht, C. Mayer and H. Wagner, ‘Where Do Firms Incorporate? Deregulation and the Cost of Entry’, Journal of Corporate Finance 2008 241; WG Ringe, ‘Corporate Mobility in the European Union – a Flash in the Pan? An Empirical Study on the Success of Lawmaking and Regulatory Competition’, European Company and Financial Law Review 2013, 230). When the rulings of the CJEU in Centros and Inspire Art are applied to the situation of trusts, it becomes clear that it is or should be permissible for nationals of EEA Member States to ‘establish’ a trust in a ‘trust state’ within the EEA, thereby only retaining a formal link between the trust and its state of establishment, for example the applicability of its laws to the trust or the mere fact that the trustee is established in that trust state, even though all other elements of the trust (situs of trust assets, residence of the settlor and beneficiaries, place of management, …) are more closely connected to a ‘non trust state’.

This conclusion is seemingly at odds with certain private international law rules regarding trusts, which are applied in different (EU and EEA) states. For example, under the Hague Trust Convention, it is perfectly permissible (not but required) for Member States to refuse the recognition of foreign trusts because of the mere reason that all of the trust’s ‘significant elements’ are more closely connected with states that do not know of the institution of the trust. In Belgian private international law, an even stricter rule can be found in paragraph one of Article 124 of the Belgian PIL Code, as the existence of such a trust will normally not be recognized by Belgium.

For example, because the trust is not incorporated or even a freestanding ‘legal entity’, the necessary (minimal) link between its state of ‘nationality’ and the trust itself may be found in the person of the trustee, through the trustee’s principal place of establishment. It should, therefore, be possible for a Belgian settlor to transfer goods situated in Belgium to a trustee established in England, in order to conduct activities in Belgium in favor of Belgian beneficiaries, even if the actual management of the trust assets takes place within Belgium. This would, however, already seem to go further than would be allowed under the Belgian PIL Code.

Trusts and property law

More uncertainties arise when we take into account the consequences of the use of foreign trusts as far as the different national property law-systems are concerned. One of the main reasons why states generally demand that there be enough ‘international elements’ before recognizing a foreign trust, is because, if it were indeed possible to establish a wholly ‘internal trust’, this would upset their national property law systems. This problem does not disappear in the case where the only link between the trust and its state of ‘establishment’ would be the place of establishment of the trustee, as this formal link is very easy to manipulate. A mere choice in favor of a foreign trustee would suffice. If all actual activities are being conducted in a ‘non-trust state’, the latter state’s system of property law might be just as upset.

For example, how would one qualify the right of ownership of the trustee with regard to the trust assets? How does one qualify the rights of the trust beneficiaries vis-à-vis the trust assets? What legal consequences would arise when a trustee deals with third parties? To be sure, in Centros, the CJEU held that, because a limited company will indeed appear as an English company, its creditors will be notified of the fact that this company is governed by a different lex societatis than they would normally expect (CJEU, C-212/97, Centros, 9 March 1999, s. 36). But if the trustee fails to disclose this capacity towards third parties, the latter parties will not be on notice. Combined with the strong tracing rights of the trust beneficiaries and the form of asset-partitioning inherent to trusts, creditors and third-party acquirers may thus be adversely affected. Apart from the fact that trusts are not incorporated, the fact that third parties interact with the trustee and not the trust itself, again constitutes an important difference between trusts and most corporate entities.

Conclusion

Even though the Olsen-case primarily concerned Norwegian tax law, the decision of the EFTA-Court may have considerable ramifications for other branches of the law as well. It is rather how this will play out in the future. A next step in these developments will probably be made by the CJEU itself, as a case similar to Olsen is currently pending before the CJEU (Case 646/15).

This blogpost is based on: N. Appermont, “Adrift between Scylla and Charybdis? The trust caught between a civil law rock and a fiscal hard place”, Trusts & Trustees 2016, Issue 10, 31p.

Niels Appermont

Author: Niels Appermont

Aspirant FWO - Vlaanderen / Hasselt University. Tax Law Research Unit.

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