Banking & Finance Blog
It is common knowledge that trusts haven’t exactly received a warm welcome in civil law (ius commune) jurisdictions. It seems to be a result of the incompatibility of traditional trusts with the doctrine of absolute ownership, the numerus clausus property law concept, and the conflict with traditional doctrines of inheritance and matrimonial property law. However, trust structures carry with them a concern that they will be used to circumvent the law, tax evasion or to pursue other goals which are in conflict with public interests or good morals. These concerns have deeper roots than mere adherence to the formal structures of a legal doctrine.
The civil law jurisdictions tend to ignore or even reject trusts. They are concerned with their own concepts that the courts usually apply to foreign trusts. Trusts are regarded as creating an agency or mandate. If the trust concerns local assets, it may be regarded by the lex situs as the transfer of ownership and simultaneous creation of an obligation of contractual nature (fiducia). The trustees of a testamentary trust may easily find themselves in the position of a Testamentsvollstrecker (testamentary executor?). To find a functionally corresponding legal instrument is not always possible. Moreover the decisions of the courts concerning the trust structure are scarce and hard to predict. This creates a barrier for the trusts to be active in civil law jurisdictions.
On the other hand the practitioners in the civil law jurisdictions feel the deficit of their jurisdictions not having or recognising the trust concepts, most particularly in the realm of commercial transactions. Over the past few years, the attempt may be observed in continental Europe to respond to the perceived problematic lack of existence of institutes comparable to trust, or trust-like institutes. Apart from Liechtenstein, which has its own Trust Code of 1926 (amended in 2008), the structures corresponding functionally to trusts were implemented in France, Malta, and recently Hungary and the Czech Republic. In Germany the concept of Treuhand is becoming increasingly recognised by the courts as a separate fund. It might be noted that also the foundation sector tends to be more liberal and provides the possibility to use private foundations for the purposes trusts are used in common law jurisdictions (e.g. Austria).
Italy, the Netherlands, Luxembourg, Switzerland and Monaco ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition (1985). Especially, the example of Italy using the opportunity offered by the Hague Convention to establish trusts governed by foreign law over assets located in Italy, for the benefit of Italian beneficiaries or for the advancement of purposes to be carried out in Italy (trust interno) shows us a different way of civil law jurisdiction to the trust without the need of creating its own domestic trust structure. It seems that Switzerland will also follow this path.
It seems that the circumstances are suitable for European law action. It can be noted that the provisions on trusts were included in the Draft Common Frame of Reference and the idea of an EU Directive on Protected Funds is discussed. In connection with the 4th Anti-Money Laundering Directive, it is proposed that public central registers should be set up in each EU country listing information on the ultimate beneficial ownership of companies, foundations, holdings and also trusts. The registers will be interconnected across Europe and access will be made public to those who complete a basic online registration.
The European Court of Justice was confronted with the trust recognition issue in the famous case of Webb v. Webb (C-294/92) (1994). However this decision focuses only on the implications of lex situs rules in connection with the specific features of the trust.
However, the European Free Trade Association (EFTA) Court decision in the case of Olsen v. Norway(1) from July of this year might open new horizons of the EU law. It says that a trust, which pursues a real economic activity within the EEA, can invoke the freedom of establishment and the right to free movement of capital pursuant to the Agreement on the European Economic Area. It means that the member states are prohibited from restricting those rights by their national law. If the European Court of Justice follows this decision, it will have significant implications not only for the tax policy (which was the primary concern of the decision), but also for the general civil law of all EU member states.
In my view, reflecting the developments in the European company law, it follows from the Olsen v. Norway case that all EU states shall recognise the EU trust operating on their territories even if settled by their citizens (Centros case). If this is right, then all EU states seem to be forced to recognise the internal trusts such as Italy. Further, the recognition of the trust must be recognised without further formality (Uberseering case). It would alter the landscape of the law in most of the EU civil law jurisdictions.
The main question seems to be the extent of such trust recognition. In what extent should the national jurisdictions accept the implications of trust structures in the areas such as the right of ownership and other rights in rem, inheritance or matrimonial property law? If these implications are accepted, should not be the trust law harmonised on an EU level?
All in all, I believe that the mentioned decision of the EFTA Court in the case of Olsen v. Norway reflects the current convergence of legal cultures that the latest development seems to confirm, and that is necessarily associated with the destruction of traditional approaches.