On September 14th 2017, the CJEU ruled on the Panayi Trust case (Case C-646/15), to which we have already referred in an earlier blog post. The CJEU’s ruling in the Panayi Trust case will provide ample opportunity for debate and reflection in the near future, especially with Brexit coming into view.
However, in this blog post we will restrict ourselves to a brief presentation of the case and some first observations regarding the question whether trusts can indeed come under the scope of the freedom of establishment.
Context of the case
The Panayi case concerns an English capital gains tax levied on the transfer of the trustees place of residence for tax purposes from the UK to Cyprus. According to Section 69 of the UK Chargeable Gains Act 1992, the “trustees of the settlement [i.e. the trust] shall for the purposes of this Act be treated as a single and continuing body of persons (distinct from the persons who may from time to time be the trustees)“, for purposes of determining whether ‘the settlement’ in question is tax resident in the UK or abroad. A similar rule can be found in Section 474 of the UK Income Tax Act 2007. For clarity’s sake, it should be emphasized that these rules constitute fiscal fictions and are not part and parcel of UK trust law as such.
Further, Section 80 of the Chargeable Gains Act 1992 states that when the trustees of a settlement cease to be resident or ordinarily resident in the UK, the trustees shall be deemed to have immediately disposed of the defined assets of the settlement in question, followed by an immediate reacquisition of these assets at their market value at the relevant point in time. Again, we are dealing with a fiscal fiction which allows to determine a(n unrealised) capital gain which, in turn, can be taxed. In essence, we are dealing with an ‘exit tax’. UK tax law does not allow for any deferral of the payment of the tax, not does it allow to take into account any subsequent decrease in the valuation of the assets in question.
The questions referred
Therefore, the UK Tax Court referred some preliminary questions to the CJEU, which were subsequently reformulated by the CJEU as follows: “the referring court seeks to ascertain, in essence, whether the provisions of the TFEU Treaty relating to freedom of establishment preclude, in circumstances, such as those in the main proceedings, 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, such as that at issue in the main proceedings, 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, and fails to permit deferred payment of the tax thus payable.”
A first observation is that the question on which the CJEU eventually ruled is actually quite narrow and specifically tailored to suit the legal context of the case in question. Accordingly, the answer of the Court was of the same nature. In short, the CJEU indeed ruled that the freedom of establishment does preclude legislation such as those at hand, given the relevant circumstances. The CJEU ruled as follows: “The provisions of the FEU Treaty relating to freedom of establishment preclude, in circumstances, such as those in the main proceedings, 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, such as that at issue in the main proceedings, 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.“
Some observations: the trust as ‘another legal person’
Nevertheless, the CJEU’s ruling does provide interesting insights in the matter at hand. In the remainder of this blogpost, we will focus on the question whether trusts can be seen as ‘other legal persons’ within the meaning of the TFEU.
When answering the question whether trusts can fall under the scope of the provisions relating to the freedom of establishment, the CJEU noted that trusts can be, at least for the purposes of this case, be considered to be ‘other legal persons’ within the meaning of the second paragraph of Article 54 TFEU. The CJEU took a more definite stance on this matter than AG Kokott did in her Opinion delivered in December 2016. In the Opinion, the AG stated that it should be left up to the national court to decide whether the trust could be seen as ‘another legal person’ within the sense of Article 54 TFEU. Nevertheless, the AG took note of the EFTA Court’s ruling in the Olsen-case (also discussed in earlier blogpost) and seemed to have some sympathy for the position that trusts could indeed be seen as an autonomies entities, given the English tax law rules in question. The AG concluded:
“However, as regards the question of whether such market operators are different from the persons using them, regard must be had to the relevant national legal system. In so far as the national law confers or imposes independent rights and obligations on the individual entity (here, the trust), that entity engages in legal transactions in its own right. This — as the United Kingdom submitted at the hearing — is a preliminary matter which, as EU law now stands, can be resolved only by the applicable national law and not by the Court in each individual case.“
In contrast with the AG’s Opinion, the CJEU ruled that: “an entity such as a trust which, under national law, 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.”
Now, apart from the question what constitutes an ‘economic activity‘, the CJEU’s ruling makes it clear that the Court considers the trust to be an autonomous entity, which, under national law, possesses rights and obligations that enable it to act in its own right within the legal order concerned.
It is however, very interesting to note that the CJEU based its conclusion mainly on the English tax law treatment of the trust/trustees, rather than focusing on the underlying civil law and/or trust law-characteristics of the trust:
“Accordingly, it appears that the legislation at issue in the main proceedings, for the purposes of that legislation, holds the trustees as a body, as a unit and not individually, to be liable to pay the tax due on the unrealised gains in value of assets of the trust when that trust is deemed to have transferred its place of management to a Member State other than the United Kingdom. Such a transfer occurs when a majority of the trustees are no longer resident in the United Kingdom. The activity of the trustees in relation to the trust property and the management of its assets are therefore inextricably linked to the trust itself and, therefore, the trust and its trustees constitute an indivisible whole. That being the case, such a trust should be considered to be an entity which, under national law, possesses rights and obligations that enable it to act as such within the legal order concerned.“
This ties in with the observation we already made above, regarding the narrow manner in which the CJEU is approaching the matter at hand. A close reading of the Court’s judgment actually reveals that the CJEU is not ruling on the question whether trusts can be seen as ‘other legal persons’ within the sense of Article 54 TFEU at all, but only in the specific (UK) tax-related context which relies on a legal fiction.
To be fair, the CJEU did also note that the trust assets constitute ‘a separate fund’, which is distinct from the property of the trustees, and that 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. However, according to English law, the trustees hold the legal title of the trust assets as joint tenants, meaning that the trustees are the ‘titulars’ of the trust assets. In and of itself, the foregoing does not, in our view, suffice to conclude that the trust is indeed a separate ‘entity’. All in all, a reading of the judgment reveals that the underlying tax law-considerations seem to have had a much more decisive influence.
Therefore, on the basis of this judgment alone, it remains an open question whether trusts can, in the abstract, be regarded as ‘entities’, capable of relying the freedom of establishment, given the narrow approach taken by the CJEU. However, given the fact that (i) the EFTA Court reached the same conclusion without taking such a narrow approach, (ii) the concept of ‘other legal persons’ within the meaning of Article 54 TFEU should be given an autonomous interpretation and (iii) exceptions to the freedom of establishment should be interpreted restrictively, it can reasonably be expected that trusts can indeed be considered to be ‘entities’ which can come under the scope of the freedom of establishment.