An interesting pre-Brexit point for those trustees holding
assets within the United Kingdom, as opposed to the Crown
Dependencies, under charitable trusts governed by a law other than
one of the jurisdictions within the United Kingdom.
I will leave the first part of the judgment to one side, as that
effectively debunks foreign trusts from having charitable status
insofar as s.23 Inheritance Tax Act 1984 is concerned:
" 23 Gifts to charities
(1) Transfers of value are exempt to the extent that
the values transferred by them are attributable to property which
is given to charities.
…
(6) For the purposes of this section property is given
to charities if it becomes the property of charities or is held on
trust for charitable purposes only, and "donor" shall be construed
accordingly."
The Court of Appeal effectively held that the phrase "...for
charitable purposes only .." limited the IHT charitable relief to
trusts governed by the laws of the United Kingdom, and therefore
that charitable trustees under a foreign law technically could not
benefit. I am not sure that that is correct from the EU
perspective, but I will leave that to my English friends to
debate.
I am concerned here with the issue as to whether the Crown
Dependencies, the Bailiwicks of Guernsey and Jersey; and the Isle
of Man have third country status for the purposes of the Freedom of
movement capital protection asserted by the Appellants under
article 63 TFEU.
I cite the relevant section from the partial judgment of the
Court of Appeal in Peter Routier & anor v. HMRC [2016] EWCA Civ
938.
"The second issue
Article 63 TFEU provides, so far as relevant:
"1. Within the framework of the provisions set
out in this Chapter, all restrictions on the movement of capital
between member States and between Member States and third countries
shall be prohibited."
In light of the decision of the Court of Justice in Case
C-171/96 Rui Alberto Pereira Roque v Lieutenant Governor of
Jersey [1998] 3 CMLR 143, the
appellants accept that relations between Jersey and the United
Kingdom cannot be regarded as similar to those between two Member
States. However, the appellants contend that, for the purposes of
Article 63, Jersey is (or is to be treated as) a "third country".
They also assert that s.23, as HMRC contend it should be construed,
would constitute an unlawful restriction on the movement of
capital.
HMRC dispute that Jersey is (or is to be treated as) a
"third country" within the meaning of Article 63 and they also
contend that any restriction on the movement of capital of the kind
in issue in this case can be justified.
Unfortunately neither the appellants nor HMRC were in a
position to develop these submissions at the hearing of the appeal
and accordingly we had no alternative but to direct that we would
deal with the appeal in two parts; that we would proceed to hear
argument upon and give judgment in relation to the first issue and
then, should it be necessary to do so, we would give directions for
the disposal of the second issue. In light of the conclusion I have
reached on the first issue it is indeed necessary to deal with the
second issue and accordingly I would invite the parties to consider
together and propose directions for that purpose."
I am not going to comment on the direction which the Appellant
might take here, but the situation is of considerable significance
for trustees in Jersey and elsewhere whilst the EU freedom of
movement of capital remains in force within the United Kingdom as a
Member State. I do not sense many EU tax administrations willing to
countenance a post Brexit extension of the Freedom of movement of
capital rules to London, but you never know....
It s therefore necessary to review not only Pereira Rocque, but
also the other rulings on the issue of the status of the CDs under
article 355 TFEU and the Third Protocol to the Act of Accession of
the United Kingdom as it now stands. I will also cite the recent
Gibraltar Ruling on the separate status of Gibraltar for the
purposes of EU law in relation to the freedom to provide services
under Article 56 (The Gibraltar Betting and Gaming Association
Limited v Commissioners for Her Majesty's Revenue and Customs and
Her Majesty's Treasury, Case C-591/15: http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1434369357781&uri=CELEX:62015CJ0591
I will start with the most relevant Ruling:
The decision in Jersey Produce Marketing Organisation (C 293/02,
EU:C:2005:664) only renders the CDs part of the United Kingdom by
reference to a given market, that of the Agricultural goods, and
commercial goods generally. What is more that applies only to the
limited extent that the EU Treaty dispositions apply in the
Islands. Those Treaty dispositions are limited to the free
circulation of goods and agricultural products between the CDs and
the EU including the UK. I leave Euratom out here.
The issue is a Treaty one. Fundamentally no European territory
for whose international relations a Member State is responsible is
part of that EU Member State. That is how the Treaty functions. The
relationship between that Member State and the Territory remains
defined by its internal constitutional characteristics. It is only
where there is an issue of the Single Market that that
constitutional relationship can be modified.
The Status of the Crown Dependencies in relation to article 63
could not be clearer, they are third territories, and are treated
by the EU as such. They are not within the scope of the Single
Market as an internal part of that market. They are within the
Single Market for the Freedom of movement of payments, which is a
separate Freedom, but that freedom is limited to payments for goods
and agricultural produce within that part of the Single Market.
The reasoning of the CJEU in the recent ruling on the status of
Gibraltar in Case C-591/15 makes it clear that the incorporation of
Jersey into the United Kingdom by its reasoning in Case N° C 293/02
relates only to a market function, and is not an overall
constitutional change in the Crown Dependencies' status as a third
territory.
The key lies in the phrase highlighted in italics
"37. In reaching that conclusion, the Court, after
observing that the United Kingdom is responsible for the Bailiwick
of Jersey's external relations, relied in particular on the fact
that, according to Article 1(1) of Protocol No 3 on the
Channel Islands and the Isle of Man annexed to the 1972 Act of
Accession, EU rules on customs matters and quantitative
restrictions are to apply to the Channel Islands and to the Isle of
Man 'under the same conditions as they apply to the United
Kingdom', and on the fact that no aspect of the status of those
islands suggests that relations between the islands and the United
Kingdom are akin to those between Member States (see, in that
regard, judgment of 8 November 2005, Jersey Produce Marketing
Organisation, C‑293/02, EU:C:2005:664,
paragraphs 43, 45 and 46).
…
54 That interpretation of Article 355(3) TFEU, in
conjunction with Article 56 TFEU, has no effect on the status of
the territory of Gibraltar under international law, as it merely
concludes that, since EU law is applicable to that territory as
European territory for whose external relations a Member State,
namely the United Kingdom, is responsible, the provision of
services by operators established in Gibraltar to persons
established in the United Kingdom constitutes, as a matter of EU
law, a situation confined in all respects within a single Member
State. That interpretation cannot be understood as undermining the
separate and distinct status of Gibraltar."
Gibraltar's relationship with the United Kingdom and the EU are
here governed by article 355.3 TFEU with a slight amendment
excluding agriculture issues and VAT. It is not determined by the
specific terms of article 355.5 TFEU and the Third Protocol which
are applicable to the CDs alone.
Otherwise, were Jersey to be part of the United Kingdom, it
could freely provide financial services into the EU as part of that
Member State as Gibraltar does.
In other words, it is the law stemming from article 355 5. (c)
and the arrangements in the Third Protocol that the CDs are only
treated as being "as one" with the United Kingdom specifically for
the technical purposes of certain articles of the EC now EU
Treaties. Those provisions are technical and are related only to a
specified part of the Single Market, that of goods and agricultural
goods. They therefore are not treated as part of the United Kingdom
where the Treaties are specifically expressed not to apply to them.
The EU Freedom of movement of capital provisions are interpreted as
treating the CDs as third states or territories, not as part of the
United Kingdom. Neither HMRC nor the Treasury have any privileged
position in that respect. The movement of capital and payments
between the United Kingdom and Jersey is done on an entirely
separate basis. Jersey issues its own currency by simply requiring
British clearing banks to purchase Jersey notes in exchange for
Sterling notes issued by the Bank of England and allows circulation
of sterling in return. Jersey currency is not legal tender in the
United Kingdom.
The same issues arise in relation other recent developments. For
example Regulation (EU) N° 650/2012 simply does not and cannot
apply to Jersey as part of the United Kingdom. Its provisions can
apply to it, but only as a separate jurisdiction and territory to
the United Kingdom.
The ancient constitutional rules and precedents of the
Constitutional relationship between the UK Crown and the Crown
peculiars may not be at the forefront of most English advisors'
minds, understandably. However, to project abstract legal principle
by way of theory into that legal space is self defeating as that
legal space is not a void. The law simply does not admit it,
whether that be the correct interpretation of the scope of article
355 TFEU. or the Third Protocol which sets the bounds.
The CJEU stated that categorically in Department of Health and
Social Security v Christopher Stewart Barr and Montrose Holdings
Ltd. Case C-355/89. At paragraphs 7-9 it held that:
"....
In that regard, it must be borne in mind that according to
Article 227(5)(c) of the EEC Treaty, as amended by the Act of
Accession, the provisions of the EEC Treaty are applicable to the
Channel Islands and the Isle of Man only to the extent provided for
by Protocol No 3.
Next, it must be pointed out that according to Article
1(3) of the Treaty of Accession, the provisions concerning the
powers and jurisdiction of the institutions of the Communities are
to apply in respect of Protocol No 3 which, according to Article
158 of the Act of Accession, forms an integral part thereof.
Accordingly, the jurisdiction in preliminary ruling proceedings
conferred on the Court by Article 177 of the Treaty extends to
Protocol No 3.
Furthermore, it would be impossible to ensure the uniform
application of Protocol No 3 in the Isle of Man if its courts and
tribunals were unable to refer questions to the Court concerning
the interpretation of that protocol, the interpretation and
validity of the Community legislation to which that protocol
refers, and the interpretation and validity of measures adopted by
the Community institutions on the basis of Protocol No
3."
That clear limitation on the scope of article 4 and Protocol III
in general was confirmed in the deportation case Rui Alberto Roque
Pereira v His Excellency the Lieutenant Governor of Jersey Case
C-171/96 [1998] ECR I-4607. Pereira Roque was a Portuguese
national. However the distinction as to nationality was reviewed by
the CJEC in the following terms:
"35. As the Court held in paragraph 17 of that judgment
[Barr and Montrose], however, the principle of equal treatment laid
down by Article 4 of Protocol No 3 is not limited exclusively to
the matters governed by Community rules which are referred to in
Article 1 of that protocol; Article 4 must be regarded as an
independent provision so far as its scope is concerned. It must be
interpreted as precluding any discrimination between natural and
legal persons from the Member States in relation to situations
which, in territories where the Treaty is fully applicable, are
governed by Community law.
36. It follows that, in so far as Mr Pereira Roque's
situation falls under, inter alia, rules on the free movement of
workers in territories where the Treaty is fully applicable, the
rule set out in Article 4 of Protocol No 3 applies to him, even if
Community nationals cannot thereby obtain in the Channel Islands
the benefit of the rules on the free movement of workers (see, on
that point, Barr and Montrose Holdings, paragraph 18). That rule in
Article 4 of Protocol No 3 applies in particular in the case of a
deportation order made against him by the Jersey
authorities.
37. In order to assess the implications of the principle
of equal treatment laid down by Article 4 of Protocol No 3 in a
situation such as that in the main proceedings, it is important to
recall in the first place that the Court has held that the
reservation contained in Article 48(3) of the EC Treaty permits
Member States to adopt, with respect to the nationals of other
Member States and on the grounds specified in that provision, in
particular grounds justified by the requirements of public policy,
measures which they cannot apply to their own nationals, inasmuch
as they have no authority to expel the latter from the national
territory or deny them access thereto (see Case 41/74 Van Duyn v
Home Office [1974] ECR 1337, paragraph 22; Joined Cases 115/81 and
116/81 Adoui and Cornuaille v Belgium [1982] ECR 1665, paragraph 7;
Case C-370/90 R v Immigration Appeal Tribunal and Surinder Singh,
ex parte Secretary of State for the Home Department [1992] ECR
I-4265, paragraph 22; and Joined Cases C-65/95 and C-111/95
Shingara and Radiom [1997] ECR I-3343, paragraph 28).
38. That difference of treatment between a State's own
nationals and those of other States derives from a principle of
international law which precludes a State from denying its own
nationals the right to enter its territory and reside there, and
which the EC Treaty cannot be assumed to disregard in the context
of relations between Member States (Van Duyn v Home Office,
paragraph 22).
39. That principle must also be complied with in applying
Article 4 of Protocol No 3.
40. Turning next to Mr Pereira Roque's argument that the
requirement of equal treatment should nevertheless be applied
between citizens of the United Kingdom who are not Channel
Islanders and nationals of other Member States, it is true that
Protocol No 3 distinguishes citizens of the United Kingdom having
certain links with the Channel Islands from other citizens of the
United Kingdom.
41. However, since Channel Islanders are British
nationals, the distinction between them and other citizens of the
United Kingdom cannot be likened to the difference in nationality
between the nationals of two Member States.
42. Nor can relations between the Channel Islands and the
United Kingdom be regarded as similar to those between two Member
States because of other aspects of the status of those
Islands. "
The wording of the relevant part of the ruling is
instructive:
"2. Article 4 of Protocol No 3 is not to be interpreted as
limiting the reasons for which a national of a Member State other
than the United Kingdom may be deported from Jersey to those
justified on grounds of public policy, public security or public
health, laid down by Article 48(3) of the EC Treaty and set out in
detail by Council Directive 64/221/EEC of 25 February 1964 on the
co-ordination of special measures concerning the movement and
residence of foreign nationals which are justified on grounds of
public policy, public security or public health.
Article 4 of Protocol No 3 does, however,
prohibit the Jersey authorities from making a deportation order
against a national of another Member State by reason of conduct
which, when attributable to citizens of the United Kingdom, does
not give rise on the part of the Jersey authorities to repressive
measures or other genuine and effective measures intended to combat
such conduct."
In other words the freedom of movement of persons
restrictions per se under article 48(3) of the EC
Treaty simply do not apply to the CDs. They do however to the
UK.
Taken in context, the Court of Appeal's partially correct
statement that the "relations between Jersey and the United Kingdom
cannot be regarded as similar to those between two Member States"
is not the end of the matter at all. It is only a partial
truth.
The cases of Barr and Montrose and Pereira Rocque are directed
at the point that the general non-discrimination provision of
article 4 of Protocol III should not be treated as a back door to
require the Islands to force feed any EU freedom of movement into
the laws of the Islands, a matter which the Treaty article
implementing the Protocol itself excludes.
The argument that the United Kingdom in some manner incorporates
the CDs for the purposes of article 63 TFEU is therefore without
any treaty or regulatory basis whatsoever.
The CDs, being the Bailiwicks of Guernsey, Jersey, and the Manx
crown (yes, the Manx purchased it back from the mainland holder)
are therefore separate territories to the UK for the purposes of
the Treaty saving the market in goods technical exception.
The freedom of movement of capital that does exist historically
between the United Kingdom and Jersey has nothing to do with the
European Union.
In sum, the Protocol arrangements have in fact incorporated a
further protection of capital movements by default under article
63, so long as the United Kingdom remains within the EU.
HMRC cannot have its brioche and eat it. However, it will
doubtless attempt to argue that IHT is not covered by the freedom
in article 63, and that it remains free to tax accordingly by
denial of relief..
That is another issue.
However, a Ruling from the CJEU to that effect might
actually encourage the Commission to perform its rôle with a little
more diligence in relation to the general EU population, rather
than preoccupying itself with delusions of multinational fiscal
delinquency.
It would be curious that a French association de 1901 with
utilité public be granted exemption form IHT under EU principles.
Whilst it might meet the charitable purpose test, it certainly is
not governed by English law. However, a Charity governed by the
laws of a Crown Dependency in similar format and effect
to an English or United Kingdom charity should be denied it.