Edited by Krzysztof Kubala
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EU Treaty precludes taxation of unrealised gains on change of residence from one Member State to another.
The dispute ... concerns four trusts originally managed by trustees who were resident in the United Kingdom but some of whom were later replaced by new trustees, with the result that the majority of the trustees were then resident in Cyprus. The appellants are the current — Cyprus-resident — trustees of the four trusts.
The four trusts were created by Mr Panayi (born in Cyprus) in 1992 for the benefit of his three children and other members of his family (‘the beneficiaries’). Although he, like his wife, is not a beneficiary of the trusts while he is alive, he has retained the right, as ‘protector’, to appoint new or additional trustees to the trusts...
At the time when Mr Panayi created the trust[s] in 1992, he, his wife and his children were all resident in the United Kingdom.
Mr Panayi had previously established a successful business venture (‘Cambos’) in the United Kingdom. When setting up the trusts, he transferred to them 40% of the shares in the holding company for that business. The original trustees of the trusts were Mr Panayi and a UK-resident trust company by the name of KSL Trustees Ltd (‘KSL’). Mrs Panayi was added as a trustee in 2003.
Early in 2004, Mr and Mrs Panayi decided to leave the United Kingdom to return to Cyprus permanently. Although there was no legal requirement to do so, they both resigned as trustees of the trusts on 19 August 2004. On the same day, Mr Panayi appointed three new trustees who were all resident in Cyprus. As a result of those appointments, the administration of the trusts was moved to Cyprus. Since the majority of the trustees of the four trusts at issue ceased to be resident in the United Kingdom on 19 August 2004, the deemed disposal provided for in section 80 occurred on that date. This triggered a charge to capital gains tax on the increase in value of the assets contained in the trust fund which had accrued up to 19 August 2004. This constituted a capital gain chargeable for the 2004/2005 tax year. The due date for payment of that tax was 31 January 2006. As indicated, the trustees had no option to defer payment of the tax beyond that date or to pay the tax in instalments.
On 1 September 2004, Mrs Panayi left the United Kingdom and moved to Cyprus together with her youngest child. The two elder children, who were both beneficiaries of the trusts, initially remained in the United Kingdom in order to complete their university studies. It was only later that they moved to Cyprus. Mr Panayi followed them on 23 March 2005.
On 14 December 2005, KSL resigned as a trustee of the four trusts. On 19 December 2005, the trustees sold the Cambos shares held by the trusts. Their combined share of the net sale proceeds was approximately GBP 30 million.
On 11 May 2006, Mr and Mrs Panayi were reappointed as trustees of the trusts. From that point, all of the current trustees were resident in Cyprus.
... the provisions of the FEU Treaty relating to freedom of establishment preclude, in circumstances, such as those in the main proceedings, where the trustees, under national law, are treated as a single and continuing body of persons, distinct from the persons who may from time to time be the trustees, legislation of a member state, such as that at issue in the main proceedings, which provides for the taxation of unrealised gains in value of assets held in trust when the majority of the trustees transfer their residence to another member state, but fails to permit payment of the tax payable to be deferred.