The case

2 September 2024, the Court of Justice of the European Union (CJEU) listed a request for a preliminary ruling from an Italian court as to whether the assets of a sanctioned person that have been transferred into a trust are out of scope for sanction freezes after this transfer.

Source: Court of Justice of the European Union (CJEU)

The commentary

Given the scope of the sanctions imposed against Russia by the EU following the invasion of Ukraine, some EU companies directly or indirectly owned by sanctioned entities have considered transferring their company’s shares to a trust.

This divestment mechanism allows for a temporary transfer of ownership, with the trust assets isolated in an autonomous entity, separated from the settlor’s assets. The overall objective is that the company’s shares are no longer under the control of, or related to, a sanctioned shareholder.

The case, FZ AR SpA C-428/24, concerns the interpretation of Article 2(1) of Regulation (EU) No 269/2014, which addresses restrictive measures against certain individuals, entities, and bodies in light of actions undermining or threatening the Ukraine’s territorial integrity, sovereignty and independence.

The central issue revolves around the legal status of assets held in discretionary trusts, where the beneficiary of such a trust is listed in Annex I to Regulation (EU) No 269/2014.

The trust in question claimed that there was no ownership or control upon the discretionary beneficiary of the trust, as, according to the deeds, the beneficiary did not have the right to demand and obtain distributions or payment, nor could the beneficiary give instructions to the trustee for the management of the assets or terminate the trust before its expiration or, until that time, appropriate the trust assets.

In response, the Italian government contends that the trust is a legal transaction based on the will of the parties and subject to changes. This includes a waiver to the contractual bans imposed on the beneficiary, for example by dissolution of the trust.

The Italian court that originally heard the dispute took the view that the beneficiary, although not directly owning or controlling the assets, was objectively able to exercise substantial influence over the assets. Ultimately, it said, the beneficiary’s will was decisive in the arrangement of the conferred assets. Vesting the assets in the trust would, therefore, not sever the link of substantial ownership.

As a consequence of this, the Tribunale Amministrativo Regionale per il Lazio has requested the CJEU to rule on two questions:

Does Article 2(1) of Regulation (EU) No 269/2014 (1) preclude an interpretation, according to which – in the case of assets or resources held in a discretionary trust (the beneficiary of which is listed in Annex I to that regulation) – those assets and/or resources are to be regarded as ‘belonging’ to the beneficiary of the trust, even if the national law applicable to the trust (or a contractual safeguard clause contained in the trust deed) expressly prohibits the beneficiary from performing any act of enjoyment or disposal of the trust assets or resources for as long as the beneficiary is listed in Annex I to Regulation (EU) No 269/2014, or, in any event, for as long as the use or disposal of such assets or resources would constitute an infringement of [EU] law.

Further, they wanted to know if the answer to the first question is in the affirmative, does Article 2(1) of Regulation (EU) No 269/2014 preclude an interpretation according to which those assets and/or resources are to be regarded as subject to the ‘control’ of the beneficiary of the trust, even if the national law applicable to the trust (or a contractual safeguard clause contained in the trust deed) expressly prohibits the beneficiary from performing any act of enjoyment or disposal of the trust assets or resources for as long as the beneficiary is listed in Annex I to Regulation (EU) No 269/2014 or, in any event, for as long as the use or disposal of such assets or resources would constitute an infringement of [EU] law.

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