News and Insights

What is the revenue rule?
The revenue rule is a universal doctrine that states that the courts of one country will not enforce the tax laws of another country.

What is the underlying reason for the rule?
In its simplest form, the rule can be seen as an expression of a reluctance to allow foreign state A to exercise its sovereign power to gather tax within the jurisdiction of the courts in state B.

Lord Denning summarised the sentiment of the rule best in Att-Gen of New Zealand v Ortiz [1984] when he stated:

“No one has ever doubted that our courts will not entertain a suit brought by a foreign sovereign, directly or indirectly, to enforce the penal or revenue laws of that foreign state. We do not sit to collect taxes for another country or to inflict punishments for it.”

Never mind “take back control”. The courts prefer not to have given it away in the first place.

How can the rule contribute to political tension?
All governments want to collect as much tax revenue as possible. If a tax obligation arises in one country that is payable by individuals in another country, the country where the tax is due will want the amount paid.

A fiduciary holding assets on which foreign tax arises will rightly hesitate to pay that tax. After all, if the fiduciary pays a tax that they are not obliged to pay, they could be breaching their fiduciary duty.
Even if a trust instrument contains a power to pay foreign taxes, that will address what a trustee can do, not necessarily what it should do. The fiduciary is therefore likely to ask their local court for guidance on whether to pay the tax. The court will in most instances be bound by the revenue rule and instruct the fiduciary to not pay the tax. This puts the country where the tax is due and the fiduciary’s local court at odds with each other.

Example
What would happen if the IRS wanted to collect death duties on the estate of a US citizen who died domiciled in Jersey which their Jersey executor refused to pay?

Happily there is no risk of US commandos flying over to Jersey and compelling the executor to pay the tax. However, the executor who refused to pay the tax could be held personally liable for this default by the IRS.

The IRS could exercise its authority if the executor ever made so bold as to set foot on American soil. The next family trip to Disneyland will be ruined if the executor is handcuffed and detained at Orlando airport over taxes they had refused to pay on an estate years earlier.

How have the Jersey courts tackled the revenue rule?

The Marc Bolan Charitable Trust Case
In this instance, the court allowed Jersey trustees to make a payment to HMRC for an English tax liability. Note that, since Jersey is a separate and distinct jurisdiction, the UK revenue authorities will be treated by the Jersey Court as effectively “foreign”. This case was decided on the basis that to make the payment was in the beneficiaries’ best interest.

The Case of Walmesley
The court laid out 4 factors for Jersey fiduciaries to consider when they are asked to make a payment of an unenforceable foreign tax. The factors are as follows:

1. The first point is to remember the revenue rule.
2. The second point is that the fiduciary should not meet claims for the payment of foreign tax.
3. The third point is that the first and second points can be subject to qualification, but only up to a point, if not paying the foreign tax would result in the fiduciary being penalised upon entering the taxing country for breaching their laws.
4. The fourth point is that a fiduciary may be indemnified out of assets used to pay foreign tax payments if it is clear that the taxing country can enforce the payment.

The Case of the X and the Y Settlement
The tax payable in this instance was to be paid by the trustees of a Jersey trust. The beneficiaries of the trust made clear to the court that they were happy for the tax to be paid as that was what the settlor of the trust would have wanted. The beneficiaries could also not benefit from the trust until the tax was paid. The court considered the four points from Walmesley and decided paying the tax was for the benefit of all concerned.

Representation of Viberts Executors Limited and Anor 07-Mar-2024

Background

• This case revolves around a married couple who claimed to be domiciled in Jersey, referred to as A and B.
• A died in the summer of 2021.
• A was a US citizen, and she left a US Will directing her US estate into a US trust.
• Brown Brothers Harriman Trust Company NA (BBHTC) were appointed the executor and trustees of A’s US estate.
• A also owned considerable assets outside of the US. These assets included the shares of a Jersey holding company which owned a portfolio of US securities.
• A did not leave a will dealing with her non-US estate. Under Jersey’s intestacy rules, B inherited them.
• B died a few weeks after A.
• B was a UK citizen and did not hold assets in the US. B’s will left his assets among a group of 19 beneficiaries.
• Viberts Executors Limited was appointed as administrator of A’s intestate non-US assets and the attorney for the executor of B’s Will.
• A’s worldwide estate was subject to US death duties at 40%. BBHTC paid these so as to ensure no late payment charges or interest would be incurred.
• Under US law, BBHTC had a statutory right to seek a portion of the US tax from the beneficiaries of A’s estate wherever they might be.
• As the 19 beneficiaries of B’s will inherited A’s non-US assets, BBHTC requested payment of their pro rata share of the US death duties.
• B’s executor is faced with a choice of paying the tax and possibly breaching his fiduciary duty to the 19 beneficiaries or not paying the tax in line with the principle of the revenue rule.
• The matter was presented to the Jersey Royal Court for its consideration.

Outcome

• The court considered the benefit of the 19 beneficiaries to be paramount in making their decision.
• Crucially, affidavits from 2 US lawyers stated that BBHTC could freeze the US situs assets held by the Jersey holding company if the sum BBHTC had already spent on meeting the Jersey estates’ share of the US tax was not repaid to it.
• The court held that it was in the best interests of the 19 beneficiaries for B’s executor to make this payment because the alternative would be for the executor to fight a costly and futile battle in the US courts, whose decision was bound to allow BBHTC to recover from the non-US estate assets physically located in the USA.
• The new refinement to the revenue rule is therefore “a fiduciary may expect to receive permission to pay foreign taxes where there are assets physically located in the country where the tax is due”. 

What does this change mean for fiduciaries?
Whenever they are asked to pay a foreign tax a fiduciary should conduct a 360° review of all the circumstances.

Remembering that a fiduciary can be an executor, a trustee or anyone who is holding assets on behalf of another, that is a large range of persons who must be mindful of the rule. Where things will get difficult is if their beneficiaries don’t want the tax paid and the court agrees, leaving the fiduciary to fear personal difficulties if ever visiting the jurisdiction raising the tax in question.