A recent Court of Justice of the European Union (CJEU) case has considered the UK capital gains tax (CGT) export charge levied when a UK resident trust becomes non-UK resident. The CJEU has concluded that a trust carrying on economic activity is able to rely on the freedom of establishment. Consequently, applying case law previously applicable to companies, whilst the UK is entitled to charge capital gains tax on a trust ceasing to be UK tax resident, not allowing a deferral of payment of tax is a breach of EU freedoms.
The decision states that:
- “It follows 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.”
- “Consequently, it must be held that legislation of a Member State which provides, in a situation such as that at issue in the main proceedings, for the taxation of unrealised gains in the value of assets held in trust on the occasion of the transfer of the place of management of that trust to another Member State, notwithstanding the fact that the former Member State has the possibility of retaining some power to tax those capital gains, is a suitable means of ensuring the preservation of the allocation of powers of taxation between the Member States, since the former Member State loses its power to tax those capital gains following that transfer.”
- “As regards, last, the proportionality of the measure at issue, it follows from the Court’s case-law that the fact that the Member State of origin, for the purpose of safeguarding the exercise of its powers of taxation, determines the amount of tax due on the unrealised capital gains that have arisen in its territory at the time when its power of taxation in respect of those capital gains ceases to exist, in this case at the time when the place of management of the trust is transferred to another Member State, is compatible with the principle of proportionality (judgment of 29 November 2011, National Grid Indus, C 371/10, EU:C:2011:785, paragraph 52). Further, legislation of a Member State which provides that a trust which transfers its place of management to another Member State may choose between immediate payment of the tax due on those capital gains or deferred payment of that tax, together with, if appropriate, interest in accordance with the applicable national legislation, would constitute a measure less harmful to freedom of establishment than the immediate payment of the tax due (see, to that effect, judgment of 21 May 2015, Verder LabTec, C 657/13, EU:C:2015:331, paragraph 49 and the case-law cited).”
- “It is apparent from the documents submitted to the Court that the legislation at issue in the main proceedings provides only for the immediate payment of the tax concerned. It follows that such legislation goes beyond what is necessary to achieve the objective of preserving the allocation of powers of taxation between the Member States and constitutes, therefore, an unjustified restriction on freedom of establishment.”
The UK Government has already legislated for a deferral mechanism for migrating companies (Sch 3ZB TMA 1970), and in future we may see legislation introduced to allow for a deferral of payment of the exit charge for trusts.
It is noted that the ability to claim the benefit of freedom of establishment has potentially wider implications which we are considering. For further details, see KPMG’s Euro Tax Flash.
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