There is probably no field of law that is more heavily dominated by the couleur locale as estate law and estate taxes. Who will be inheriting what, why, and under which restrictions and how will it be taxed ? There has been no harmonization at all in this area. Within the European Union, the common law (United Kingdom, Ireland, Scotland) and the continental 'civil' law systems different roots still have their pertinent influence on estates and the devolution thereof.
Where people tend to become global citizens, families are spreading over the world with several places of residence and assets in various jurisdictions, law systems interact and increasingly 'conflict' with each other. International private law systems have since long adopted 'rules of conflict' to provide for a solution in these cases. Although in practice, those solutions may look complex, however bottom line the principle of Näherberechtigung is dominant; where e.g. real properties are situated, the local rules do apply. The result may be a patchwork of different law systems applying to several assets of the same estate, however in practice this may work out fine since in each country the local rules are practiced by local practitioners and courts.
As of 17 October 2015 this will dramatically change within the European Union when the European Succession Regulation will be enforced with direct effect in the EU member states, with the exception of Denmark, the United Kingdom and Ireland. The European Succession Regulation will therefore start with an important and inherent dissension within the Member States.
Albeit the intentions behind the European Succession Regulation are certainly good, i.e. to create the universal application of one applicable law to an international estate and its devolution within the EU, substantial problems are anticipated as a consequence of the enforcement thereof. The intention of the Regulation is to provide exclusive rules that overarch the local applicable rules and that exclusively appoint one applicable law to any international estate whilst the Courts of that jurisdiction should also exclusively be competent to deal with all legal issues surrounding that international estate.
In order to effectuate this, a European Certificate of Succession is introduced according to the Dutch practiced model. In this certificate, each 'competent authority' may declare the applicable law and corresponding jurisdiction according to the rules of Brussels IV, with effect towards all banks, authorities and other relevant parties. In an ideal world this instrument would be the perfect solution to all the issues surrounding international estates.
The threats to this ideal world however come from different angles. The reality is pluriform and the hurdles that will be caused by Brussels IV are more diverse than our imagination now is permitting us to describe.
A few hurdles caused by the Succession Regulation however catch my eyes already:
Default: 'habitual place of residence'?
The jurisdiction where the deceased has its 'habitual residence', does universally apply to his or her estate. The concept 'habitual residence' has not been defined and is therefore subject to local interpretation, ultimately backed up by jurisprudence of the European Court of Justice. From the recitals of the European Succession Regulation, it follows that in order to determine the habitual residence, the authority should make
´an overall assessment of the circumstances of the life of the deceased during the years preceding his death and at the time of his death, taking account of all relevant factual elements, in particular the duration and regularity of the deceased's presence in the State concerned and the conditions and reasons for that presence. The habitual residence thus determined should reveal a close and stable connection with the State concerned taking into account the specific aims of this Regulation´ .
It is easy to imagine cases, where testators have a said 'close connection' with more than one state at the time of decease.
The Regulation underpins the same by stating that determining the habitual residence may prove complex especially where persons have been migrating during their life.
But the Regulation loses track when it provides that in exceptional cases – where, for instance, the deceased had moved to the State of his habitual residence fairly recently before his death and all the circumstances of the case indicate that he was manifestly more closely connected with another State – arrive at the conclusion that the law applicable to the succession should not be the law of the State of the habitual residence of the deceased but rather the law of the State with which the deceased was manifestly more closely connected. The Regulator does not seem to acknowledge that in such a case the ´habitual residence´ is not in the country where the testator has died. That provides ample opportunity for arguing about what a habitual residence indeed is.
The term ´habitual residence´ is very much resembling the concept of ´residence´ for individuals under Dutch tax law as it was until a few years back and overlooking Dutch case law, this does result in a far from clear picture. It is a grab bag for arguments and real conflicts. What happens if several heirs have an interest to address ´competent authorities´ in distinct jurisdictions ? The most vigorous heir will win, since the Regulation clearly determines the exclusive competence of the Court in the jurisdiction that firstly has been seised; any court other than the court first seised shall of its own motion stay its proceedings until such time as the jurisdiction of the court first seised is established.
In order to avoid that a case will turn into a wrong direction from the first place, it is of high importance to overlook the playing field in order to be able to act quickly. This is likely to result in 'defensive litigation', since the stakes are higher than ever before: the exclusive and universal applicable law to the entire estate.
Determined action: will a choice of law be sufficient?
The only thing that a testator is able to do (except, obviously, managing precisely his or her habitual residence) is making a choice of the law of its nationality. The Regulation does not provide for other options to make a choice of law.
That is substantially more restrictive if compared to actual Dutch law. Dutch citizens that are currently habitually resident in a country with more favorable applicable laws (from the perspective of the testator, e.g. without forced heirship rules) should determine a choice of law for the country where they currently are habitually residing, before 17 August 2015. This choice of law is valid under current Dutch laws but will be grandfathered if executed properly under the new Regulation if these persons do remigrate at a later moment back to the Netherlands.
In some situations, implicit choices of law will be recognized and grandfathered under the Regulation. All these situations are exceptions to the universal rules of the Regulation.
However, it is important to note that in all cases where a valid choice of law is made for another applicable law than the law of the habitual residence of the testator, the choice does not imply the jurisdiction of the Courts of the country whose law is chosen. The Regulation is making a sharp distinction between the material applicable law and the jurisdiction of the Courts and provides only for 'Gleichlauf' if all stakeholders agree with the exclusive jurisdiction of the Courts of the chosen law jurisdiction. If that is not realistic, the Courts of the jurisdiction of habitual residence do have exclusive jurisdiction but have to apply foreign law (the law of choice) entirely in relation to the estate, its devolution and separation. That is highly undesirable and a tricky situation for all stakeholders concerned and may prove a grab bag for opposing strategies.
Both the material differences in estate laws, the laws affecting the devolution and separation of the estate and the differences in trial laws are so important within the EU, that smart strategies to attain a desirable result (whether in litigation or in negotiation) will become a new estate planning area.
Exceptions to the rules: fraus legis in international private law and ordre public
It this all is not enough, a member state may refuse the application of the Regulation if the Courts are of the opinion that the application would be 'manifestly incompatible with the public policy (ordre public) of the forum.
Ultimately, the last word on the opinion is upon the European Court of Justice that may overrule the local Courts be it that this may take years of litigation.
Furthermore, the Regulation provides for the recital that 'nothing in this Regulation should prevent a court from applying mechanisms designed to tackle the evasion of the law, such as fraude à la loi (fraus legis) in the context of private international law'
A voluntary change of nationality of a jurisdiction outside the EU with which the testator has no connection, may be an example of fraus legis in private international law, being a mechanism designed to tackle the application of the Regulation in an artificial way. Where estate litigation structuring will become important, the doctrine of fraus legis in the context of private international law will be developed and that this does not sound favorable to me (fraus legis is well known in the tax practice).
Notary liable for the issuance of the European Certificate of Succession ?
In the Netherlands, the notaries are appointed as the 'competent authority' and on that basis notaries have the exclusive authority to issue the European Certificate of Succession, which is deemed to demonstrate the legal positions of heirs, legatees, executors and administrators, their entitlements and restrictions with immediate effect in all member states. Unnecessary to say, the notary will also declare the applicable law following the European Succession Regulation. In practice, the Certificate will be a very important document since it provides access to bank accounts, induces to transfer real property, and other properties of the estate. In the Netherlands, there is only a marginal procedure to involve a lower Court, without the possibility of an appeal.
Although notaries exist in many European member states, the notaries as a profession have not received the same position as 'competent authority' in all states; in e.g. Germany the Court is appointed the 'competent authority', not the notaries. Different from our Ministry of Finance, we do not consider the Dutch choice an understandable choice. In many cases, notaries will have an interest in the application of Dutch laws if they are being addressed from that perspective by their clients. Consequently, In dubious situations a notary may be held liable for the consequences of the issuance of a European Certificate of Succession.
The Regulation does not provide for an litis pendens rule in case of contradictory European Certificates of Succession in various countries.
These and many more disharmonious issues arise from the application of the European Succession Regulation. The tax consequences of international estates are not covered by the European Succession Regulation and are not harmonized at all whilst there are only few bilateral treaties in place to avoid double taxation. Obviously, the creators of the Regulation on European Successions have not taken into consideration the practical consequences of the interaction between the universal applicable estate law and the respective estate or inheritance tax legislation. In practice, this may be a new area of jigsaw planning with many uncertainties since it may require local tax authorities to take into account specific aspects of foreign estate law.