Analysis
In 1992 a Cypriot national, Panico Panayi, settled 40% of the shares of Cambos Enterprises Limited on the trusts of four Settlements for the benefit of his children and other family members. At the time the trusts were created, both the settlor and the trustees were resident in the United Kingdom. Subsequently, the settlor and his wife decided to return to Cyprus. On 19 August 2004 new trustees were appointed, all resident in Cyprus. As a result, a majority of the trustees ceased to be resident in the United Kingdom. When the trustees filed tax returns for the year 2004/2005, they failed to include self-assessments to a liability under s80 of the Taxation of Chargeable Gains Act 1992 (‘TCGA’). HMRC opened enquiries and, in September 2010, issued a decision to the trustees, reassessing tax on the basis that there had been a charge triggered by the appointment of new trustees, since a majority of them had ceased to be resident in the United Kingdom and, consequently, the administration of the trusts was to be deemed to have moved to Cyprus in the tax year 2004/2005. The trustees brought proceedings before the First-tier Tribunal (Tax Chamber), challenging the compatibility of the taxation, and its immediate payment, with the fundamental freedoms of movement provided for under the law of the European Union. HMRC considered that none of those freedoms of movement were applicable because of the status of a trust under the law of England and Wales and, if any of them were held to be applicable, whilst it accepted that immediate payment of the taxation would constitute a priori a restriction, it was one that would however be justified and proportionate. The First-tier Tribunal (Tax Chamber) referred questions for a preliminary ruling – whether the provisions of the FEU Treaty relating to freedom of establishment preclude, in circumstances where trustees, under national law, are treated as a single and continuing body of persons, legislation of a Member State providing for the taxation of unrealised gains in the 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 due.
Held (as a preliminary ruling):
Article 49 of the FEU Treaty requires the elimination of restrictions on the freedom of establishment of nationals of a member state in the territory of another member state. For this purpose companies or firms, including other legal persons (except those which were non-profit making), are treated in the same way as natural persons who were nationals of member states. Although trusts were not companies or firms, the activity of the trustees in relation to the trust property and its management were inextricably linked to the trust itself so as to constitute an indivisible whole. It followed that such a trust should be considered to be an entity which, under national law, possesses rights and obligations that enable it to act in its own right and, being created in order that the beneficiaries might enjoy profits generated from the trust property, such a trust could rely on freedom of establishment. It was just as much applicable to a situation where a member state taxes gains in the value of assets held in trust by reason of a transfer of the place of management of the trust to another member state as it was when gains are taxed on the value of assets of a company or firm on the occasion of a transfer of the place of effective management of that company or firm to another member state. Section 80 TCGA provides that, when trustees cease to be resident in the United Kingdom, they are deemed to have disposed of the trust assets and immediately to have reacquired them at their market value. In contrast, that consequence does not apply when there is a similar transfer within the national territory. The difference in treatment, being liable to deter a settlor from appointing non-resident trustees, constituted a restriction on freedom of establishment and was only permissible if it related to situations which were not objectively comparable or if it was justified by overriding reasons in the public interest and, additionally, it was necessary that the restriction was appropriate for ensuring the attainment of the objective in question. As regards the question of whether the situations were comparable, there was no doubt that a trust which transfers its place of management to another member state was comparable to that of a trust which retained its place of management in the former member state. Further, the preservation of a balanced allocation of powers of taxation between member states was a legitimate objective recognised by the Court and, in accordance with that principle, a member state was entitled to charge tax on accrued gains at the time when the taxpayer leaves the country – such a measure was designed to prevent situations capable of jeopardising the right of the member state of origin to exercise its powers of taxation in relation to activities carried on within its territory and was therefore justified on grounds connected with the preservation of the allocation of powers of taxation between member states. Obviously, the former member state loses its power to tax those gains following the transfer to another member state. As regards proportionality of the measure at issue, legislation of a member state which provides for a choice between immediate and deferred payment of the tax due would be less harmful to freedom of establishment than the immediate payment of the tax due. In this case, the legislation at issue provides only for the immediate payment of the tax and it followed that this goes beyond what was necessary to achieve the objective of preserving the allocation of powers of taxation between member states and constitutes, therefore, an unjustified restriction on freedom of establishment. Accordingly, the provisions of the FEU Treaty relating to freedom of establishment precludes legislation of the member state, such as that at issue in these proceedings, which provides for the taxation of unrealised gains in the 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 due to be deferred.
JUDGMENT [1] This request for a preliminary ruling concerns the interpretation of Articles 49, 54, 56 and 63 TFEU. [2] The request has been made in proceedings between the Trustees of the P Panayi Accumulation & Maintenance Settlements (‘the Panayi trustees’) and the Commissioners for Her Majesty’s Revenue and Customs (‘the tax authority’) on the …