"Since unity of title is a fundamental principle of civil law, the general rule in civil law jurisdictions is that trusts are unknown"
As a student of philosophy, the fundamental difference between the Anglo-Saxon empiricist and the continental rationalist philosophical tempers was impressed upon me.
The Anglo-Saxon starts with the obvious facts and arrives at the truth through a process of analysis and trial and error. Philosophy is the finding of bad reasons for what we believe upon instinct. The continental approach is to start with clear ideas and to arrive at the truth through a process of synthesis. Philosophy is an incontrovertible system of certain truths.
Many years later as a student of trust taxation, I discovered that this difference was also reflected in the Anglo-Saxon and continental approaches to matters of law. The former is happy to live with the facts of a common law that has never been codified and a constitution that has never been written down. This approach would be intolerable for the continental, for whom something exists only if it is written down.
Civil law and trusts
The continental civil law systems therefore struggle with trusts, which arise quite naturally in Anglo-Saxon law systems as a result of the fundamental distinction between legal and beneficial ownership. Since unity of title is a fundamental principle of civil law, the general rule in civil law jurisdictions is that trusts are unknown. Furthermore, since it is a matter of public policy that decendents have absolute rights in their antecedent's estate, the potential defeat of those rights through the use of a trust is prima facie viewed as anathema.
Given all this, can trusts be used by an individual and their family if they are connected with a civil law jurisdiction? And, if they cannot, what is the effect if a trust has been set up either by or for the benefit of such an individual and/or their family?
There is no all-encompassing answer to these questions and continental countries must be examined on a case-by-case basis and so, by way of example, the rest of the article will look at the case of Italy.
Italian investors' first encounter with trusts came with the negotiation of the double tax treaty between the US and Italy in 1985. Since trusts are recognised in the US, it was necessary that the treaty accommodate their use by US citizens subject to Italian tax.
However, the problem of accommodation is highlighted in the Italian version of the treaty, associazione commercial (commercial association) the nearest, but ultimately inaccurate, translation in the Italian legal code for a trust.
The next encounter came in 1986 with the abolition of exchange control, which meant that Italians could transact with foreign residents for the first time in 40 years, including offshore trustees. When a civil law jurisdiction encounters trusts, its first reaction is to seek to identify the trust with an already recognised legal entity.
Possible candidates within the Italian code included the usufruct, the fiduciary agreement and various types of mutual fund and investment management agreement. However, none of these arrangements, which are essentially contractual, fitted the bill.
A trust must, the UK courts have decided, include 'an element of bounty' in the form of a free, non-reciprocated gift. A contractual arrangement by definition must include consideration, or be paid, on both sides.
The next encounter occurred in 1990 when Italy ratified the Hague Convention on Trusts of 1 July 1985. This meant that, while there continue to be no means of establishing a trust in the Italian legal system, nevertheless trusts are 'recognised' to the extent required to resolve conflicts of law and to provide recognition and uniform treatment of trusts created abroad.
However, the Italian Parliamentary Report on the Convention stated that Italian law does not intend to create obstacles to impede Italian citizens (citizenship being the prime connecting factor for civil law) who have emigrated to other nations (which appears to mean those who are habitually resident abroad) using trusts in managing assets that are located in Italy, as long as Italian tax and exchange control regulations are respected. The same consideration would apply to assets held offshore. The convention came into force on 1 January 1992.
As a result, the recognition of the legitimacy of the distinction between legal and beneficial ownership has been grafted onto the Italian legal system and the trust as legal owner of property, located both within Italy and abroad, can operate within Italy independently of the trust's settlor and beneficiaries, subject to Italian tax and exchange controls being respected. This means that the fundamental principle of the non-admissibility of forms of ownership different from the historic absolute, unitary Roman ownership has been put on an entirely new basis.
The ending of exchange control and the limited recognition of trusts will open opportunities for offshore tax planning for expatriate individuals moving to Italy and Italian citizens moving abroad.
Inevitably, however, pressures will arise for their domestic use for all the reasons discussed in previous articles. But if the UK's experience is followed it will take some time for trusts to be widely used for tax and estate planning within the Italian domestic context.
However, continued in inward and outward commercial and personal investment, the proliferation of cross-border commercial and personal relationships and the increased mobility of labour within the EU will bring pressure for the use of trust relationships.
Brendan Harper is technical services consultant at Friends Provident International
It is usually the case when an individual adopts a domicile of choice that the domicile of origin will automatically revive if they return to their domicile of origin. However, sometimes a domicile of origin will not revive quite so automatically.
This was the case recently in Allen and Hately (Johnson's Executors) v HMRC (21st April 2005 - SpC 481). The Commissioners held that the deceased, Mrs Johnson, retained a domicile of choice in Spain, even though, by the time of her death, she had been residing in the UK for six years.
Mrs Johnson was born in England in 1922 and her domicile of origin was English. She married in 1951, and two years later she left the UK with her husband, who was an engineer for Shell. They spent the next 30 years living abroad. During this time they never owned a property in the UK, and they always returned to the UK for holidays.
When Mr Johnson retired in 1982, the couple went to live in Spain, purchasing a house and taking out residency permits. The couple built up strong ties in the local community, and the Commissioners accepted that their domicile of choice was Spain.
Mrs Johnson had been diagnosed with Parkinson's Disease in 1975 and, although she did not need constant care, she did rely on her husband's support. Mr Johnson died in 1996, and Mrs Johnson came to England to stay with her half sister shortly afterwards. This was originally intended to be a temporary arrangement, but, due to deterioration in her health, she remained in England until her death in 2002.
In 2001 Mrs Johnson purchased the house next door to her half sister, and work commenced to renovate the house so that she could move into it and receive professional care while maintaining a degree of independence. Before the work was completed, however, Mrs Johnson's condition deteriorated and she died in August 2002. The Inland Revenue raised assessments to inheritance tax based on their contention that she was UK domiciled. The Commissioners ruled against the Revenue, agreeing that Mrs Johnson's domicile of origin had not revived.
So what were the main facts of this case that led to this decision? They can be summarised as follows:
Mr & Mrs Johnson, when they moved to Spain, built very significant ties with their new country, including buying a property, keeping all their personal possessions there and immersing themselves totally in the local social and cultural life. It was worthy of mention that they had deliberately chosen to live away from the 'expat' parts of Spain. There was no question that they had adopted a domicile of choice there (but note that they did not lose their UK domicile until they moved to Spain, in spite of being outside the UK for 30 years by this stage).
This fact did not change when Mrs Johnson came to the UK. She maintained her property in Spain, and visited it as much as was possible given her health situation. Her personal possessions remained in Spain and she never abandoned an intention to return there if her health improved.
A domicile of choice can only be lost if it can be shown that the individual has permanently abandoned that domicile - the Revenue failed to prove this was the case.
The Revenue maintained that the purchase of the property in the UK was an event that triggered abandonment of the domicile of choice. However, the Commissioners did not agree. Mrs Johnson purchased the house in order to avoid the alternative of going into care. The Commissioners accepted that she purchased the property on the understanding that if her health improved she could always sell the property and return to Spain. Finally the Commissioners agreed that there cannot be an intention to remain in a jurisdiction permanently if that residence is not freely chosen. Mrs Johnson resided in England for health reasons, and not because she considered it to be her permanent home.
It is usually the case when an individual adopts a domicile of choice that the domicile of origin will automatically revive if he or she returns to their domicile of origin.
Commissioners ruled against the Revenue recently, said even though individual had returned to UK from Spain and died there six years later.
Reasons include fact individual was remaining in UK for reasons of health only and had never abandoned intention to return to Spain.
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