New EU beneficial ownership rules for trusts: good news for offshore?
26 May 2017

Currently in the UK and most other Common Law jurisdictions where trusts exist, the identities of beneficial owners are anonymous to the public—although a UK anti-avoidance measure stipulates that “trusts which generate tax consequences [have] to demonstrate their ownership to HM Revenue & Customs”, as a British government official told the Financial Times. However, because trusts stem from the British Common Law system, they are alien to continental Civil Law systems. Amongst the other 27 EU countries, only Luxembourg and the Republic of Ireland also have sizeable trust industries, using similar laws to those in Britain.

The same British official quoted above also emphasised to the FT that trusts “are sometimes used to protect vulnerable people”. Their apparatus—with someone getting a competent financial mind to manage assets for someone they want to provide for—is seen as essential if the beneficiaries are incapable of managing their own financial affairs. That might be because they are at present too young to do so, because they are vulnerable due to a physical disability, or because they are in some way mentally incapacitated.  People who are vulnerable and who have, or will have, significant financial assets are at risk of exploitation. Many think this makes it necessary for the beneficial ownership of trusts to be anonymous.

In March, the European Parliament voted overwhelmingly for new legislation to force EU countries to keep public registers of all parties in trusts in their jurisdiction. Beneficial owners would only be able to maintain anonymity if they could prove to the authorities that making their beneficial ownership public would put their personal safety at risk. This proposed legislation stems from European concerns that the privacy of trusts is used to hide tax evasion.

If the European Commission backs up the Parliament’s legislation with a directive to implement it before Brexit, as looks likely, the UK will have to follow it at least until it leaves the EU in 2019. Of course, as entrenched members of the EU, the Republic of Ireland and Luxembourg will be subject to the new laws indefinitely. The trust industries in British overseas territories (OTs) and crown dependencies (CDs) such as Jersey and Guernsey could also have to abide by these new rules. There has been mounting pressure for the UK government to take stricter control of OTs and CDs to heighten financial transparency—meaning that Britain could forcibly align them with new EU legislation.

Even if that does not happen, the EU has already set its sights on dealing with British OTs and CDs for what it perceives as the safe haven they offer to people or companies avoiding or evading European taxes. A 2016 EU report singles out eight British OTs and CDs (including Jersey, Guernsey, the Cayman Islands and the British Virgin Islands) for yellow cards on this issue, before a definitive list of countries classed as havens for secrecy, tax avoidance and evasion is published at the end of this year. European officials are considering imposing additional taxes to specifically target such countries’ economies.

Meanwhile, Jersey and Guernsey, for example, already have ‘equivalence’ with the EU on financial legislation. This means that they have access to the EU single market in exchange for showing Brussels that their regulations are broadly aligned with European ones. Consequently, there is a fair chance that the two islands will have to defer to the new EU trust regulations in order to maintain access to the huge European market nearby. Under current equivalence arrangements, the Channel Islands have some latitude to make their regulations similar to – instead of completely corresponding to—EU regulations. But it is significant that a House of Lords EU Committee report describes Deputy Gavin St. Pier of the Guernsey government as conceding that, for Guernsey, Brexit “makes obtaining equivalence more difficult in connection to any future EU Directives.”

This suggests that the Channel Islands’ rules will have to be even more closely aligned with EU law, rendering unlikely an exception to allow continued anonymous beneficial ownership of trusts there. As Deputy St. Pier says, Guernsey places “huge value on […] our access to markets” with an “objective […] to try to preserve as much of that as we possibly can.” Of course, if the EU takes a strict line on equivalence, as seems probable, Jersey has the same strong incentive as Guernsey to kowtow to European trust regulations, in order to keep up the flow of capital to and from the continent.

For any country with a trusts industry, abiding by the new EU legislation will decrease privacy, as some would say, or increase transparency, as others would put it. In any case, that will make such jurisdictions less attractive for people to set up trusts, pushing customers to financial service companies in other jurisdictions.

It is too soon to tell whether Britain will benefit from the forthcoming European legislation. It depends on whether or not it pursues (and obtains) equivalence for its financial sector. Given the EU’s renewed push for transparency and its tough negotiating stance on Brexit, it looks unlikely that any equivalence deal with the UK would exclude trust regulations. Chancellor Philip Hammond and Brexit Secretary David Davis have discussed equivalence with leading City figures, and promised a “smooth and orderly transition” out of the EU for the UK’s financial services sector.

Britain has an obvious incentive to seek equivalence. Financial services make up 12% of British GDP. Between a third and a fifth of UK financial service trades involve EU clients. Most of these operations will not be legally possible if there is no equivalence deal. Given the importance of financial services to the British economy, and given the importance of trade with the EU to that industry, prima facie it seems reasonable to assume that the government will pursue equivalence to safeguard its future. On the other hand, Theresa May’s government is committed to a ‘hard Brexit’ that takes Britain out of EU law as much as possible. Thus far, May seems to prioritise political over economic goals in carving out a post-Brexit future for the UK—for example, allowing lucrative trade talks with India to stall because of her overriding concern with reducing immigration.

The Prime Minister could take a similar approach by deciding against going for equivalence in order to maximise British sovereignty. That would be highly damaging to the UK financial services sector overall, but lucrative for its trust industry, with anonymous beneficial ownership maintained. Alternatively, if the UK government takes what many see as the only rational option of seeking equivalence to protect its banking sector, the trusts industry would be harmed by the new EU regulations. In that case, the new European legislation would likely drive much business further afield, to the well-established trust industries in countries like Singapore and New Zealand.

Tom Wheeldon is a freelance journalist and political commentator at Radio France Internationale.

Advance your CPD minutes for this content, by signing up and using the CPD Wallet