The European Union continues to be a structure under stress, facing significant change. Its development from the European Coal and Steel Community into a European Economic Community, then to a European Community, and now to a European Union, was one of incremental steps. Its competence, in relation to taxation, has in the past been limited to the European sales tax – value added tax. Although the recent problems with the single currency, the euro, may seem to have largely disappeared – with the exception of Greece’s place in it – its structural difficulties remain unchanged. The recent referenda in Denmark and the United Kingdom demonstrate a general unhappiness of EU citizens with the direction of travel. The trends in Austria and the Visegrad Group of Poland, Hungary, Slovakia and Czech Republic are seen to be away from the liberal social democratic model of the majority of Member States. The European Union is now facing an existential crisis, but much of the various EU institutions appear to be in denial, hoping that it may recede.
All Member States have focused on debt reduction and maximising tax collection, particularly from corporations, while dealing with their citizens’ concern over immigration. The EU institutions are conscious of the overwhelming priority to maintain the euro as a single currency and to attempt to produce economic growth. The eurozone perspective and priorities are likely to drive those Member States towards ever closer union. Uncertainties in Ukraine and with Russia have moved the Baltic States firmly into the euro, in contrast to the non-euro Member States such as the Czech Republic, Sweden and Poland, which remain firmly outside. The two-tier euro/non-euro EU has already created significant tensions. The stark divisions within the United Kingdom exacerbated by its referendum would objectively call for some form of compromise. The EU is very frightened of contagion and other dominoes falling. Brave political leadership may be in short supply, but other differences are, in any event, producing a more complex and multi-layered EU.
While strictly not a federation, at many levels the EU behaves as if it were one. Since the Lisbon Treaty of 2009, the Treaty on European Union and the Treaty on the Functioning of the European Union govern its constitution and legislative processes. The relationship between its civil service (the Commission), the Member States’ governments (the Council of Ministers) and the European Parliament (the EP) is still a work in progress. The results of the EP elections held in May 2014, although producing generally anti-EU results in the UK and France, were taken as a vote for business as usual by the EP, which is increasingly flexing its muscles – particularly in the area of tax. However, there is no evidence that the EP has taken on board the implications of the more complex EU forces at work.
The EU, with 28 Member States, was a place of significant wealth, with a combined population of 500 million or 7 per cent of the world’s population, but approximately 20 per cent of the world’s exports and imports.2 The European Economic Area (EEA) consists of the EU, Iceland, Liechtenstein and Norway (Switzerland being a member of the European Free Trade Association (EFTA) with Iceland, Norway and Liechtenstein, but not of the EEA).
The economic prosperity of the EEA made it an increasingly attractive destination for those fleeing conflict and poverty from countries to its south and east. If the UK exits the EU, even if it remains in the EEA, the strength and prosperity of both the UK and the EEA are likely to be diminished.
To the tensions of the multi-speed EU are added the problems of mass migration. The referendum in the UK held on 23 June 2016 as to whether it should remain within the EU should be considered in the wider context of the forthcoming elections in France and Germany in 2017. The migration of both EU and non-EU nationals to the wealthier parts of the EU bring its fundamentals into sharp focus. The free movement of labour and capital is designed to produce economic growth for both Member States and business. The demographics of most Member States require immigration to feed economic growth and counter falling birthrates. However, mass migration is an issue for all front-line Member States, such as Italy, Malta and Greece, and is also one for indigenous citizens who perceive their own wages and standard of living as being reduced by the competitive market.
It is unlikely that the EU, its Member States and the EEA will be able to square this circle easily.
II UNITED KINGDOM
The United Kingdom, which was in the middle of a constitutional muddle, is now in constitutional crisis. The Scottish independence referendum in September 2014 focused much thought as to the continuing nature of the strange ragbag of arrangements between the UK government in Westminster and those in Scotland, Wales and Northern Ireland. London, while having a larger population than each of those jurisdictions, has limited local government, while England as a whole has none.
The clear win by the Conservative Party in the 2015 UK general election came as a surprise to many, but the almost clean sweep by the Scottish Nationalist Party (SNP) should not have done. The tensions between a clearly mandated anti-austerity SNP and a clearly mandated austerity Conservative Party may be interesting for outsiders, but the tightrope for both will be difficult to walk. All the signs were that there was no desire on either side for complete independence, but finding a way to coexist will not be easy. The referendum on 23 June 2016 in the UK on its continued membership of the EU did not produce the expected result and the political structures reacted with disbelief, shock and dismay. The margin of 4 per cent on a 73 per cent turnout has left the UK divided. London and Scotland, by a 20 per cent majority, and Northern Ireland by a smaller one, voted to remain in the EU. The remainder of England and Wales, with the exception of some cities such as Bristol, Liverpool and Oxford, voted to leave by a significant majority. Much of the campaign was seen as a struggle within the Conservative Party, which has now resolved some of its differences with the election of its new leader. The SNP was probably the least damaged party, while the Labour Party is now facing an existential crisis. A third of its traditional base ignored its pro-EU stand and have turned to UK independence.
The EU institutions had mistakenly seen the referendum as an unnecessary distraction. The next French presidential election will be in April and May 2017 and the next German federal elections will be in the second half of 2017. Migration and nationalist feelings are very likely to play out there too, and calls for referenda in other Member States, such as the Netherlands and France, may become louder.
The UK’s government and institutions will now have to expend all of their energy in negotiating the UK’s position with the EEA and the effects of any exit from the EU on its laws and structures. Under the Treaty on European Union, a two-year timetable is started once the UK serves notice under Article 50. It is not yet clear when this may happen. While the absence of a written constitution has enabled flexible and incremental change in the UK, all of these tensions will create mounting pressure for some new relationships between the various existing UK structures. In the meantime, it is very likely that the UK and EEA economies will decline, while at the same time the proportion of UK government spending will inevitably increase.
Generally, the EU has no competence over personal taxation for individuals, such matters being for individual Member States and outside its competence. However, with increasing frequency the European Court of Justice has held3 that the right to free movement of persons, goods, services and capital within the EU applies to limit the taxation rights of Member States. Inheritance was found to be a movement of capital and many Member State governments have been forced to amend existing tax rules. In the case of Austria, this led directly to the abolition of gift and inheritance tax.
As a result, the EU Commission looked at two separate initiatives:
The limited competence of the EU in these areas has, however, meant that the recommendations were advisory only.
Over the years, the EU has developed various cross-border structures such as the European Company (SE) and the now lapsed proposal for a European Foundation (FE). However, the tax treatment of these structures is not uniform. There has as yet been no proposal for an EU-wide tax transparent vehicle such as an LLC, LLP or SCI.
By contrast, the EU has concentrated much firepower on corporate taxation. There is broad consensus on the part of EU institutions, Member States and the Organisation for Economic Co-operation and Development (OECD) on tackling aggressive tax planning by corporations. Tax justice and a level playing field are seen as a priority. The EU Commission has presented its Action Plans for Fair and Efficient Corporate Taxation in the EU and has relaunched the Common Consolidated Corporate Tax Base (CCTB).
At the same time both the US and EU are under increasing scrutiny on the question of the proposed Transatlantic Trade and Investment Partnership (TTIP) the main goal of which is to remove regulatory ‘barriers’ that restrict the potential profits to be made by transnational corporations on both sides of the Atlantic.
Further legislation continues to be made. The Regulation on Mutual Recognition of Protection Measures in Civil Matters came into force in January 2015 and binds the United Kingdom and Ireland but not Denmark. The proposed Regulation on the Acceptance of Public Documents is about to be finalised, and will not be subject to any opt out by Ireland. The Brussels I Regulation was reviewed and amended and Brussels I bis also came into force in January 2015.6 The Brussels II bis Regulation is now also under review. The EU (and Mexico and Singapore) has ratified Hague 37: Convention on Choice of Court Agreements that entered into force on 1 October 2015. It applies in Ireland (and the UK) but not Denmark.
How the UK is to extract itself from the EU acquis built up over 40 years will not be straightforward.
IV TAX COLLABORATION, ENFORCEMENT & REGULATION
Although the European Union is not a fully functioning federal state, its role in world organisations such as the OECD and the Financial Action Task Force (FATF) over money laundering and fraud or the Hague Conference over private international law, and in negotiating with world powers such as the United States in relation to matters such as the Foreign Account Tax Compliance Act (FATCA), should not be underestimated.
The European Union data protection laws appear to be what forced the United States into its FATCA Model 1 agreements with Member States.7 The European Commission played a significant role in those negotiations. However, while the Commission hoped to introduce a European FATCA, this was not politically acceptable in all Member States. The former Savings Tax Directive is now dead and is likely to be repealed.
In parallel, however, the OECD developed its Common Reporting Standard (CRS), which seems to have been accepted by the EU as the model for automatic tax information exchange and brought to an end further changes to the Savings Tax Directive. There seems, however, to be no realistic prospect of the US abandoning FATCA in favour of the CRS at the moment.
Now, the EU has revised its Directive on Administrative Co-operation (DAC). Council Directive 2011/16/EU established procedures for better cooperation between tax administrations in the EU – such as exchanges of information on request. This Directive was amended in 2014 by Council Directive 2014/107/EU, which extended the cooperation between tax authorities to automatic exchange of financial account information and in effect incorporates CRS in the EU.
Money Laundering Directives were originally introduced to counter terrorist activity. Tax evasion and ‘abusive’ tax avoidance are now increasingly in the sights. The proposals for registers of beneficial interests in companies inevitably led to strong calls from the EP for registers for trusts and beneficial interests. However, the fourth Money Laundering Directive EU 2015/849, came into force on 26 June 2015 and must be implemented in each Member State by 26 June 2017. Article 30 imposes different obligations on the trustees of express trusts to the obligations imposed in relation to beneficial ownership information required for legal entities under Article 29.
The Panama Papers and calls from NGOs have resulted in the Commission and the EP revisiting the effectiveness of the Fourth Money Laundering Directive EU 2015/849. There is ever-increasing demand for public registers of beneficial ownership in relation to all structures in all jurisdictions. It is unclear where these demands will lead. Since the UK is unlikely to take any meaningful part in EU negotiations, further widening of the effects of EU 2015/849 are almost inevitable.
Since Henry VIII’s attempt to tax the use, equity has been successful in adapting and evolving to meet the demands modern society placed on it. Equity’s success is perhaps now under attack, particularly from the civil law world and civil society that sees it as a hindrance against corruption and tax fairness. It will be interesting to see how equity develops in response. Whether the UK will pull back from some EU developments if it leaves the EU is yet to be seen.
Practitioners, therefore, face continuing change and public pressure for transparency. Compliance will become ever more costly.
V SUCCESSION & MATRIMONIAL PROPERTY
It is in the area of succession law that the EU demonstrates its particular complexities. The substantive laws in Member States vary considerably in all areas. Individual forms of wills and succession agreements vary, as do the rules on forced heirship and reserved portions. Clawback or obligations to restore in states such as Italy last for the full lifetime of a donor and are enforceable rights in rem, while in Germany they are monetary claims and diminish by 10 per cent per annum and disappear after 10 years. Sweden and Austria have models of administration, while in France and Spain assets vest directly in the family heirs who can then be personally liable for the deceased’s debts even if greater than the value of the deceased’s assets. In addition, the private international law or conflicts of law rules (PIL) also varied considerably. Some Member States used connecting factors of habitual residence, while others used those of domicile. The majority used that of nationality.
While the EU has not sought to affect Member States’ internal substantive law, it has for many years been seeking to harmonise Member States’ PIL in this area. The Succession Regulation (EU) No. 650/2012 has finally entered into force.8 It became effective in all Member States (other than Denmark, Ireland and the United Kingdom) (the SR Zone) on 17 August 2015. In the SR Zone, the universal connecting factor is now that of habitual residence and the SR Zone Member State of habitual residence has universal jurisdiction. Renvoi has been abolished unless it is sending back into the SR Zone. A choice of national law (with no renvoi) is also permitted and a choice made prior to 2015 is still effective. Wills and succession agreements are now accepted throughout the SR Zone. The Succession Regulation also created the European certificate of succession (ECS) for use throughout the SR Zone. Recognition of the ECS, decisions of the Member State with jurisdiction and of clawback or obligations to restore throughout the SR Zone has changed the landscape for estate planning worldwide not only in relation to SR Zone nationals and residents, but also in relation to SR Zone situated assets for all individuals. There continues to be uncertainty as to whether Denmark, Ireland and the UK are included within the definition of a Member State for the purposes of the Succession Regulation. Winkler v. Shamoon  EWHC 217 (Ch) is an example of the effect that the Succession Regulation has had on other areas of law. For the purposes of Brussels I, ‘Succession’ has been interpreted extremely widely and includes oral proprietary estoppel as a matter for the Succession Regulation and is, therefore, outside the scope of other Regulations.
Similar issues also affect matrimonial property and matrimonial property regimes. The EU has an even more complex patchwork quilt of substantive laws and of PIL. Regimes vary from full community in the Netherlands, to limited community in other Member States and to marital gains in Germany. PIL is governed by the 1978 Hague Convention in France, Luxembourg and the Netherlands. In other Member States connecting factors can vary from that of nationality or residence and changes in these during a marriage sometimes do and sometimes do not produce a change, whether retroactive or not. France and Germany have agreed a new form of matrimonial regime that can be used in both countries. Again, the EU did not propose to amend Member States’ substantive law, but wished to legislate to harmonise Member States’ PIL. Rome IVa dealt with the property effects of marriage, and Rome IVb with the property regimes for registered partnerships. Because of the significant differences in the recognition of same-sex relationships throughout the EU, there was strong political opposition. The Visegrad Four of Hungary, Poland, Slovakia and the Czech Republic have become increasingly more vocal and some of its members vetoed (as a family matter, it required unanimous support) both Rome IVa and Rome IVb. In record time, the EU put in their place both the Regulations under the enhanced co-operation mechanism so that they have been adopted by all EU Member States (other than Croatia, Cyprus, Denmark, Estonia, Hungary, Ireland, Latvia, Lithuania, Poland, Slovakia and the UK) and will be fully effective from 2019. Rome IVa deals with the property rights of all married couples, whether mixed sex or same sex, and similarly Rome IVb deals with the property effects of all registered partnerships, whether mixed sex or same sex.
Although many practitioners consider that the issues involved in matrimonial property regimes do not concern them if the domestic law of their particular state does not use the concept, the England and Wales case of Slutsker v. Haron Investments Ltd 9 is an example of PIL bringing such matters into play. They will continue to be of vital importance for international couples.
While the International Commission on Civil Status10 (ICCS/CIEC) has made proposals for a convention dealing with the recognition of registered partnerships, this has met with little support in the EU. The diversity of arrangements for the registration of marriage for same-sex couples, and for registered partnerships for same-sex and mixed-sex couples and for the recognition of such marriages and registered partnerships, cause considerable conflict. In many Member States such as Sweden, the Netherlands, Belgium, France, Spain and Portugal, marriage is available to both mixed-sex and same-sex couples. The Marriage (Same Sex Couples) Act 2013 in England and Wales and the Marriage and Civil Partnership (Scotland) Act 2014 in Scotland recognised same-sex marriage from 2014. Ireland is also to introduce such legislation. The ability to convert a registered partnership to a marriage does create its own PIL problems. There appears to be no indication of any change in the law in Northern Ireland. In many states, one party must be a national or habitually resident in the particular Member State in order to register a marriage. In other Member States, such as Romania, Latvia and Lithuania, there are protection of marriage laws which make it unlawful for marriage to be other than between a man and a woman. In yet others such as Austria, the Czech Republic, Finland, Germany, Hungary, Ireland, Italy, Slovenia and Northern Ireland, registered partnerships are permitted. The Netherlands permits both marriages and registered partnerships for either same-sex or mixed-sex couples. The French PACS is a form of registered contract that is available to both same-sex and mixed-sex couples. The changes to the law in Scotland and in England and Wales do not permit mixed-sex registered partnerships. Thus, while the Northern Ireland will recognise a same-sex marriage from another jurisdiction as a registered partnership and Scotland and England and Wales as a marriage, the United Kingdom will not recognise a mixed-sex Dutch registered partnership or French PACS as either a marriage or a civil partnership. Whether a Scottish, English or Welsh same-sex marriage between a couple, one of whom is domiciled in a state that does not recognise same-sex marriage, would be valid in the United Kingdom is uncertain. Adoption and recognition of surrogacy for same-sex couples is not available or recognised in many Member States. It may be another generation before Member States’ substantive laws begin to converge sufficiently to permit some measure of harmonisation. However, Italy has now introduced the concept of a registered partnership. The impact of the United States Supreme Court decision in Obergefell v. Hodges11 of 26 June 2015 continues to reverberate in the US and around the world.
VI MENTAL IMPAIRMENT
As populations live longer, the problems for individuals with diminished mental capacity across borders are also growing. The Hague Convention 35 of 13 January 2000 on the International Protection of Adults (Hague 35) deals with the PIL issues of the recognition and enforcement and the applicable law of protective measures and the applicable law for private mandates. Hague 35 has already been ratified by Austria, the Czech Republic, Estonia, Finland, France, Germany, Monaco, Scotland and Switzerland. Cyprus, Greece, Ireland, Italy, Luxembourg, the Netherlands and Poland have all signed but not yet ratified. It is anticipated that Ireland and Portugal may ratify during 2016 and Northern Ireland in 2017. The changes to the internal law in Ireland and Northern Ireland will be significant.
For England and Wales there is considerable confusion since the Mental Capacity Act 2005 came fully into force on 1 October 2007 and gives full effect to the Convention notwithstanding the fact that England and Wales has not yet ratified.
This issue is likely to be on the EU programme during the next five years and Member States will be encouraged to ratify. Hague 35 is not without its own problems and further developments are likely. The inherent conflicts in the UN Convention on the Rights of Persons with Disabilities (UN CRPD) between the protection of rights under Article 12 and the protection from abuse under Article 16 are probably impossible to square. It is argued that Hague 35 and the legislation of many states bound by UN CRPD are not compatible with it. The debate is one that will continue.
VII WEALTH STRUCTURING & REGULATION
As a result of the lack of EU competence in the area of personal taxation, there are no vehicles to provide structures that are comprehended throughout the EU. Trusts, while recognised in Cyprus, Ireland, Italy (now increasingly less novel), Malta and the United Kingdom, are not recognised in many other Member States. The changes to French tax law in 2011 were a partial recognition of trusts, but have not been welcomed. Belgium and Spain have followed with similar moves. In many Member States, life insurance is given beneficial tax status, while structures such as usufructs or partnerships are also often used.
As mentioned above, Article 30 of the fourth Money Laundering Directive EU 2015/849, imposes obligations on trustees of express trusts. Pressure for public registers will continue. While seen as problematic, logically this should lead to further recognition of trusts in the long term.
VIII CONCLUSIONS & OUTLOOK
Harmonisation of PIL in the EU is likely to continue. Free movement of EU nationals, goods, services and capital is still seen as an engine for growth, even though the EU is under pressure to legislate less. The role of the European Court of Justice will also continue to increase although in response to political trends, it may tend towards protecting national sovereignty against EU encroachment.
All Member States were focused on debt reduction and maximising tax collection. The EU institutions are conscious of the overwhelming priority to maintain the euro as a single currency and to concentrate on economic growth. As a result, the EU institutions are likely to be proactive in encouraging any OECD and FATF initiatives that might be perceived to increase revenue share. The eurozone perspective and priorities are likely to drive those Member States in the eurozone towards ever closer union. Some Member States still consider Anglo-Saxon light-touch regulation as principally to blame for the economic and banking crises developing particularly since 2008. Pressure for increased regulation is likely to continue. The tensions between those Member States inside and outside the eurozone are likely to deepen.
Whether the process of the UK negotiating its exit from the EU will encourage other Member States to review the previous direction of travel for the EU, and whether some Member States may themselves be encouraged to hold referenda or attempt to become more detached, is not yet clear.
1 Richard Frimston is a partner at Russell-Cooke LLP.
3 In for example Case C-364/01 Barbier  ECR I–15013 (treatment of immoveable property), Case C-513/03 van Hilten-van der Heijden  ECR I–1957 (inheritance tax within 10 years of being resident was permissible), Case C-464/05 Geurts  ECR I–9325 (exemption for Belgian businesses only), Case C-256/06 Jäger  ECR I–123 (reduction for German agricultural property only), Case C-11/07 Eckelkamp  ECR I–6845 (reductions for Belgian residents only), Case C-43/07 Arens-Sikken  ECR I–6887 (provisions for Dutch residents only), Case C-67/08 Block  2 CMLR 39 (double taxation by Spain and Germany was permissible), Case C-510/08 Mattner  All ER (D) 167 (Apr) (exemptions for German residents only) and Case C-133/2013 re Q (restriction of exemption to Dutch land was permissible).
6 Regulation No 1215/2012 (recast) effective from 10 January 2015, replaced Reg. No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters of 22 December 2000.
7 The starting point for all US FATCA Model 1 Agreements.
9 Slutsker v. Haron Investments Ltd  EWCA Civ 430.
10 See: www.ciec1.org.
11 James Obergefell, et al, Petitioners v. Richard Hodges, Director, Ohio Department of Health, et al 576 US No.14-556 reinforcing the previous 2013 decision in United States v. Edith Schlain Windsor 570 US No.12-307.