The aim of the European Court of Justice (ECJ) is to safeguard European fundamental freedoms. As the largest European court, it is up to the ECJ to uphold the interpretation of the EU treaties. Cases brought before the ECJ are often cases in which European fundamental freedoms are disregarded by prohibitions, discrimination or undue restrictions. The ECJ judgment of 14.07.2017 – Az. C-646/15 and the analysis of the judgment are particularly related to tax law. The tax law of the individual Member States is not entirely uniform, as each Member State still has its own tax rules and laws. Here, in particular when persons or companies move and/or leave, there may be violations of European fundamental freedoms (in particular freedom of movement of capital and freedom of establishment). In such cases, the ECJ must be appealed to as a judicial authority.

Mr. Panico Panayi founded four English trusts in 1992, the beneficiaries of which were his children and other family members. In common law countries, trusts are treated as trusts in which a trustee manages the assets in escrow according to the specifications of the trust deed. Beneficiaries (here the UK resident children) do not have to tax the proceeds until the capital is paid out to them. This applies regardless of where the administrative seat of the trusts is located.

In 2006, when the majority of the trustees of Panayi Trusts were no longer tax resident in the UK but in Cyprus, the administrative headquarters of Panayi Trust was automatically transferred from the UK to Cyprus. According to Section 80 TCGA, this triggered an immediate final taxation of the hidden reserves in the trusts.

The ECJ saw in this regulation of British tax law a restriction of the freedom of establishment. This can be justified by the objective of a balanced distribution of taxation powers; However, insofar as the tax is imposed immediately, the measure is disproportionate.

The judgment is not surprising, it continues the previous case law of the ECJ stringently. The special feature, however, is that the transfer of the seat of administration will continue to subject the disbursements of future capital to taxation by the beneficiaries resident in the United Kingdom, thus not (initially) limiting or excluding the British taxation law. Therefore, both Advocate General Kokott and the ECJ[802] were right to consider at the level of justification whether immediate taxation can be justified by the objective of a balanced distribution of taxation powers. Finally, this justification presupposes “that the departure actually endangers the taxation power of the departure state”, which requires an end to the taxation power.[803] In other words, both the ECJ and the Advocate General confirmed that the objective of a balanced distribution of taxation powers can justify only those measures in which the State of origin loses its right to tax on the hidden reserves created. If the right of taxation of the State of origin is preserved, the measure does not already withstand the justification test.

In the present case, both the Advocate General and the ECJ nevertheless considered the measure at issue justified by the objective of a balanced distribution of taxation powers. After a close examination, Great Britain is no longer entitled to tax the hidden reserves after the transfer of its headquarters. Only in favourable circumstances can the UK tax only the part of the income that is paid at the discretion of the parties concerned – and only to the extent that it is attributable to beneficiaries resident in the UK. Since the parties involved can control the taxation in the United Kingdom by restitution or departure at their own discretion, there can be no question of a “taxation right”. It is right that the restrictive deregulation tax can thus be justified but, in the absence of a deferral option, cannot withstand the proportionality test.