27 March 2020 – A new step on the path to trust normalization in French case law
On 20 March 2020, the Conseil d’Etat, France’s highest administrative Court, published a judgement which, while not massively impacting trust taxation law in France, may offer a welcome ray of hope to practitioners in France in relation to the approach that tax authorities and courts may now take in their attitude to trusts.
As you will be aware, France, having executed but not ratified the 1985 Hague Trust Convention, never introduced the trust mechanism in its legal system. A similar tool, the fiducie, was created in 2007 for the purpose of managing assets or creating securities or guarantees, but its use was expressly prohibited for gifts or succession planning.
As a result, and until recently, trusts have remained mostly ignored by the French tax code. Their characteristics, however, and notably the basic distinction between legal and equitable ownership, often prevent the straightforward application or consistent transposition of traditional French tax concepts and rules to them. A few anti-abuse provisions have been progressively introduced and, on 31 July 2011, a new law provided for a comprehensive, if not yet perfect, set of wealth tax and inheritance / gift tax rules for foreign trusts.
As a result of inconsistent case law and isolated, ad hoc, statutory measures French tax practitioners are often handicapped when addressing the numerous French taxation issues for foreign trusts, particularly, currently, in relation to direct capital gains and income taxation.
This is all the more the case as, in practice, the decades-long ignorance and misunderstanding of trust mechanisms, coupled with a few spicy tax evasion scandals, can often result in difficult and frustrating discussions with the French tax authorities and disappointing outcomes in the courts where a general suspicion of trusts seems to replace the application of objective reasoning, the careful reading of the law or simply common sense – even in situations where there is no evidence of any intention to avoid, much less evade, taxation.
This was the unpleasant experience of a client of ours, a French company whose share capital was, in part, held in trust.
By way of background, French companies in which individuals hold at least 75% of the share capital are (subject to a few other conditions) exempt from a 3.3% corporate income tax surcharge. In this case, one of the shareholders, a US resident, had placed his shareholding in trust for bona fide, family protection, reasons. The trust did not have a separate legal personality. The settlor, all the beneficiaries and all the trustees were, and continuously remained, individuals. Despite this, the French tax authorities, the first instance court and the court of appeal all took the view that “the trust” held these shares and, because “the trust” was not an individual, the company was not entitled to benefit from the exemption.
Thankfully, the Conseil d’Etat allowed the taxpayer’s appeal.
While this decision is very case-specific, we consider that it should provide some comfort to taxpayers and their advisers (particularly those from outside of France) that, in spite of any surviving prejudices against trusts, the reasoning of the Conseil d’Etat can be anticipated to have a strong influence on the manner in which tax authorities and the courts analyse the nature and role of trusts and will hopefully result in more favorable outcomes even when French tax law does not specifically address their position.