Orthodoxy
The starting point for the Jersey courts will be that foreign taxes are unenforceable both directly and indirectly (the so-called “revenue rule”). This is a well-established principle of private international law founded on the idea that the courts should not extend the reach of foreign sovereign authorities beyond their own jurisdiction, and that revenue collection is essentially a domestic matter between a government and its subject.1
Most modern trust instruments will contain an express power for the trustee to make payments of foreign taxes even though they would be irrecoverable against the trustee or a beneficiary.
However, trustees may find themselves open to criticism for making such payments, and will usually need to consider whether a payment is in the best interests of the beneficiaries as a whole. Where such payments are substantial and would be opposed by a number of the beneficiaries, a trustee may be welladvised to seek approval from the courts as part of a directions application.
What then is the position if a trustee is treated as liable to pay tax by a foreign tax authority, but on questionable grounds that the trustee would need to challenge at the expense of the trust assets or at the risk of submitting to a foreign jurisdiction?
This issue arose in the case of Representation of Equiom Trust (CI) Limited [2022] JRC 288, where a Jersey trustee wanted to challenge a tax liability in the French courts. The Royal Court authorised the tax challenge on the basis that reducing the tax liability would be in the best interests of all the beneficiaries. However, the trustee was not permitted to substitute trust capital for the security paid by a French resident income beneficiary, as that might be contrary to the interests of the capital beneficiaries.
The Court considered that moving trust assets onshore to France in order to provide security for the challenge would prevent the capital beneficiaries from arguing in the Jersey courts that any liability was unenforceable offshore.
Inroads
While the Equiom case demonstrates that the orthodox approach is alive and well, there are a number of significant qualifications to this principle. Domestic tax legislation in Jersey introduced over the past 20 years gives effect to international obligations for the exchange of tax information, mutual administrative assistance in tax matters, and the collection of information under the OECD Common Reporting Standard, BEPS and FATCA regimes.
The Jersey courts have been required to consider the legality of the legislation itself in judicial review proceedings, as well as to consider individual administrative decisions.2
In upholding the transparent and cooperative approach under the statutory regime, the courts have inevitably made significant inroads into the principle of declining to enforce foreign taxes, at least indirectly.
The Jersey courts are also frequently called upon to reverse transactions which have given rise to unexpected tax liabilities. Most commonly, this will take the form of a statutory application to set aside a mistaken transfer of property into a trust, or to set aside the trust in its entirety.
A disposition to a Jersey law foundation may also be set aside, although the foundation has legal personality and must remain in existence. It is standard procedural practice for the application to be notified to the onshore tax authority, or for the authority to be convened, so that they have an opportunity to make representations.3
Underlying this practice is the assumption that the interest of a tax authority in the collection of foreign tax is or at least may be a consideration relevant to the exercise of a court’s judicial discretion.
In Representation of NBK Trustees (Jersey) Limited re C Trust [2024] JRC 133, the Jersey court granted an application for rectification by the Jersey-resident trustee of a Guernsey law trust, applying Guernsey law. In this case, an omission in the drafting of the trust instrument meant that the late settlor was not excluded as a beneficiary of the trust as had been intended.
As a result, adverse UK tax consequences arose: the settlement of property on to the trust was considered to be a gift with a reservation of benefit for the settlor and therefore the property, valued at approximately GBP3.5 million would attract inheritance tax (IHT) at 40%. The IHT liability would be eliminated if the application were
to be granted, so the court directed that HMRC should be notified of the application and given an opportunity to respond.
Although HMRC did not respond,4 the case demonstrates that the interests of HMRC were expressly acknowledged by the Jersey court.
A proactive approach to notifying HMRC was demonstrated by the court’s decision in Representation of IQEQ (Jersey) Limited re the B Trust [2024] JRC 210. The case concerned an application to vary the trust based on anticipated changes to UK tax laws which could have resulted in a significant tax liability. The application
sought the court’s consent to a statutory variation of a Deed of Exclusion in order to change it from being irrevocable to revocable, as well as a blessing of the trustee’s decision to revoke the exclusion of the settlor and appoint the entirety of the trust fund to him. No tax liability was currently due but would arise in the future, and debate arose as to whether HMRC ought to be notified.
The court considered whether there was any customary procedure in the specific context of variation applications and reviewed a number of previous cases.5
While the court noted that “practice has not been uniform” with regards to notifying onshore tax authorities, in this particular case, it decided that HMRC should be given notice given that the prospective tax liability would crystallise in 2032 and that, by granting the application, the liability would be removed. The application was subsequently adjourned so that the notification requirements could be fulfilled. HMRC chose not to intervene and, accordingly, the Court noted “there is nothing further in that respect which we need to consider”.6
The Court ultimately consented to and authorised the variation and blessing applications, determining that the proposed course of action was a proper one and in the
beneficiaries’ best interests.
Conclusion
Although the Jersey courts remain willing to reverse transactions which have given rise to unexpected tax liabilities, it is evident from recent case law that they are increasingly mindful of how such applications may adversely affect foreign tax authorities’ interests.
Whether foreign tax authorities will choose to participate in such cases remains to be seen, but the likelihood may have increased now that the UK Government is investing in the enforcement arm of HMRC. Should they do so, the Jersey courts will need to consider the impact of the orthodox approach and, in light of that, whether
it is permissible to attach any weight to what an authority has to say in seeking to uphold foreign taxes. 7
This article was first published in Private Client Magazine.
1 See Dicey, Morris & Collins, Conflict of Laws, 16th Edn., Rule 20 and related commentary.
2 See, for example, Larsen v Comptroller of Taxes (No.2) 2016 (2) JLR 198
3 See, for an example of a case involving a foundation and a trust, Representation of B and C re the N Foundation and the M Trust [2023] JRC 166 (at paragraphs 31-33)
4 Representation of NBK Trustees (Jersey) Limited re C Trust [2024] JRC 133, para. 30-32
5 See Representation of IQEQ (Jersey) Limited re the B Trust [2024] JRC 210, para. 9 citing In the Matter of the DDD Settlement [2011] JRC 243, In the Matter of the Paicolex Trust Management AG Representation [2023] JRC 127 and In the Matter of the Representation of Accuro Trust (Switzerland) SA [2023] JRC 215
6 Ibid. paras. 10-12
7 It is suggested that this is or may be a different issue to the one determined by the Guernsey Court of Appeal in HMRC v Gresh 2009–10 GLR 239, where it was held that it did not amount to indirect enforcement of a foreign tax liability to allow HMRC to intervene in order to advance an argument on a point of Guernsey trust law.
