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.