The Trustees of the Panayi Accumulation and Maintenance Trusts v HMRC (Case C-646/15) Li Bin

Case Note: The Trustees of the Panayi Accumulation and Maintenance Trusts v HMRC (Case C-646/15) 

LiBin-EU tax law 

In this case the freedom of establishment is involved. The dispute in the mainproceedings concerns four trusts originally managed by trustees who were resident inthe United Kingdom but some of whom were later replaced by new trustees, withtheresult that the majority of the trustees were then resident in Cyprus. The Court affirmed that a trust can rely on this freedom, and the UK's exit tax on unrealised gainsupon a trust's cross-border movement is a restriction against this freedom, however this freedom dose not influence the fare allocation of tax right between member states, it was disproportionate due to the lack of a deferred payment option. All the disputes, other than whether the fundamental freedom is applicable to trusts, had been settledin previous Case C-9/02. 

1.Case fact 

The applicants were the trustees of the Panayi Accumulation and MaintenanceTrusts, established under the UK law. With the changes of the majority of trustees, theplace of management was transferred from the United Kingdom to Cyprus in August 2004, according to the domestic law the trust shall not be treated as being resident and ordinarily resident in the UK. This triggered the application of Section 80 of theUK's Taxation of Chargeable Gains Act (TCGA) 1992. This act stipulated that whenthe majority of trustees become non-UK resident, the trust is deemed to have disposed of its assets at their market value. So the UK deemed that the unrealisedcapital gains accrued during the trust's residency in the UK is subject to tax in UK, andthe tax dued should be paid immediately on 31 January 2005. The trustees appealedagainst the tax assessment, arguing that Section 80 TCGA 1992 constituted a restriction on the freedom of establishment. 

2.Case analysis

2.1 The fundamental freedom of establishment involved 

The key question was whether the freedom of establishment, under Articles 49and 54 TFEU, applied to a trust which was an English law entity lacking separatelegal personality, the CJEU affirmed that. The Court reasoned that for the purposes of EUlaw, the definition of a "company or firm" in Article 54 TFEU extends to any organisational unit that enables its members to engage in legal transactions, andtheunit must enjoy a degree of independence allowing it to operate in its own right. Under UK law, trustees constitute a "single and continuing body," which can hold assets, incur obligations, and engage in economic activities independently of the individual trustees. The CJEU held 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". Thiswas crucial, it brought the trust within the protective scope of EU fundamental freedoms. 

2.2 Discrimination or Restriction to Cross-Border Activities 

The comparability analysis focused on the differential treatment between a trust transferring its place of management to another Member State and a trust with apurely domestic transfer. The UK domestic law treated the two scenarios differently: across-border transfer triggered an immediate tax charge on unrealised gains, whileadomestic transfer did not. The Court stated that "it is solely in the event of a transfer... to a Member State other than the United Kingdom that the legislation... provides for the immediate payment of the tax... In contrast, that does not apply when there is asimilar transfer within the national territory". The different treatments were deemed"liable to discourage the trustees... from transferring the place of management of thetrust to another Member State" and therefore constituted a restriction on freedomof establishment. 

2.3 Justification

The CJEU accepted the preservation of the balanced allocation of taxation powers between Member States. The Court reasoned that a Member State must beable to tax capital gains generated within its territory before a taxpayer ceases toberesident. When a trust became a non-resident of the UK, the UK loses its power totaxand its ability to enforce its tax claim against the value the trust accrued when it wasthe resident of the UK. The Court held that a measure designed to prevent the erosionof the tax base at the point of exit "can therefore be justified on grounds connectedwith the preservation of the allocation of powers of taxation between the Member States". As for the UK's right to tax distributions to UK-resident beneficiaries, theCourt deemed that right was uncertain and dependent on future trustee decisions. 

2.4 Proportionality 

The core of the disproportionality lay in the mandatory immediate tax payment, the UK law provided "only for the immediate payment of the tax concerned". TheCourt deemed that according to its previous case law the option of "between immediate payment of the tax or deferred payment of that tax, together with, if appropriate, interest" should be provided. Without this option, the UK law "goes beyond what is necessary" and constituted an disproportional restriction. 

The Court also found that the principle of proportionality did not require the UKtoaccount for potential decreases in the asset's value thereafter, as the tax was legitimately levied on gains accrued during UK residency. Even the trustees had soldthe assets and realised the gains before the tax payment date, the court still deemedthat the disproportionality exist in this specific case, "the disproportionality of thelegislation is due to the fact that that legislation makes no provision for the taxpayer being able to defer the time when the tax is paid", and this disproportionality hadnothing to do with the taxpayer's follow actions. 

3.Conclusion

The case extended the scope of Article 54 TFEU, granting trusts the freedomof establishment. The other disputes in this case were clearly elaborated in previous case law, the court’s decision only reiterate those rules.