Overseas Chambers of Peter Harris

Maison de la Boucterie
Rue de la Boucterie
Saint Saviour
Jersey, JE2 7ZW

(Un) Constitutionality of French tax provisions, trusts and assimilated non-French vehicles

July 12th 2017

To cite the Tax lecturer at the Inns of Court School of Law in 1977 in relation to a British taxing statute:"there's a lot of that demn'd deeming going on here". No tax lawyer can or should tolerate fiscal abuse of fiction, let alone "irrebuttable" fiction upon a statutory fiction, simply on the basis that "that is the law". It is not that straightforward as it may not be either a law or for that matter a regulation.  It may not even be constitutionally valid.

A colleague in Paris kindly mentioned that a senior lawyer from the Conseil Constitutionnel - French Constitutional court - gave a seminar on the Constitutionality of fiscal deeming provisions in Paris.

The speaker outlined the position in a recent referral from the Conseil d'Etat registered as received on 10th July, 2017 under the Question Prioritaire de Constitutionalitéprocedure concerning the constitutionality of certain of the deeming provisions in article 123 Code général des impôts. That broad brush provision refers to fiducies and other comparable entities - i.e. trusts. The affair will be heard in the autumn.

Whilst granting the referral procedure on certain points, the Conseil d'Etat abstained from referring certain others one the basis that these had already been the subject of a decision by the Constitutional Court, which had admitted their colstitutionality, subject to a reservation that the taxpayer be allowed to produce evidence as to the actual taxable income concerned.

The point here is that article 123 CGI refers, now, to "fiducies" or other comparable structures (implying trusts) as one of the vehicles falling within its scope.

In past decisions, the Conseil Constitutionnel did not direct its attention to any executive decree, or instruction, as these fall outside the scope of its constitutional reference. Those issues fall mainly within the jurisdiction of the Conseil d'Etat. It is basically only statute which falls within its remit. What the Conseil Constitutionnelhas however started to do is to qualify the constitutionality of deeming provision of the types inserted into article 792-0 bis CGI at several points and render these subject to a requirement that the taxpayer be allowed to provide evidence rebutting the presumption as to the taxable forfeitary basis laid down in any anti-avoidance article. That t he chink in the administration's chain mail.

It is common knowledge that the French tax administration has deliberately gone beyond its powers in many areas to serve its political masters' need to sweep in any tax revenue possible by hook or by crook. In any jurisdiction with a constitution, there is always a backlash to such administrative and executive abuse of the lawmaking machinery.

That can be aligned with a successful prior DC reference by the Sénat challenging a draft Finance Bill's provision transferring Wealth Tax liability to a person who does not have the income rights in the capital asset concerned, and is therefore unable to pay the tax. That decision, on a purely internal French property law mechanism, means that the entire article 792-0 bis CGI régime can be queried as contrary to the constitution and in particular to the principles of equality before the law and of equality before "les charges publiques". In layman's terms, the conceptual status of these constitutional norms and values strikes down any attempt to attribute a tax liability on a fictional basis to a person who doe not have the means to pay it.

Whilst stressing that the terms and objectives of article 123 CGI are not the same as the presumptions upon fictions established by article 792-0 bis CGI and the taxation provisions which depend upon it, the outcome of this QPC will need to be followed closely by any lawyer advising trustees in this area.

The action of the administration in deliberately drafting a set of presumptions based upon the pre-millennium IRS Grantor Trust régime, and ignoring the complex trusts régime initiated in its own instructions on the US Tax Treaty issued in the 1970s needs to be challenged, as it is being given a fictional force of law, despite having no legal basis whatsoever.

A colleague, Mark Lindley TEP, CTAPS of Bootle Hatfield has kindly pointed out that a French cabinet d'avocats, Cabinet Bornhauser has filed a challenge with the Conseil d'Etat  to the administrative instruction commenting the trusts assorted with QPCs to the Conseil Constitutionnel, presumably as to the constitutionality of the legislation.

The Cabinet Bornhauser are merely indicating that this has been done, and there is insufficient detail to be able to analyse the full implications of their pleading for the overall industry, yet.

In that respect, please see:

http://blog.bornhauser-avocats.fr/index.php/2017/07/02/regime-fiscal-des-trusts-les-qpc-sont-deposees/ and


The main point that they are raising before the Conseil d'Etat, with added QPC references is the constitutionality of levying trust penalties on underlying structures which are not trusts. The French administration have been busily exploiting the constitutional differential between executive doctrine and statute.

However the issues raised in their defence of their clients are not the only challenges available against the legislation when taken as a whole.

So there is no point in simply awaiting the result of this laudable challenge, where your clients are being taxed in other ways, particularly in relation to the fiscal forced heirship provisions , as such they may be dubbed, in article 792-0 bis II CGI.  However, is that not contrary to French public policy to attempt to render foreign properfty subject to French internal rules of public order, particularly in relation to foreign movables? The answer is yes, it is contrary to prior statements of principle by the French courts as to the differential between  French ordre public national limied to French property and the loi d'autonome in matte rof foreign law guaranteed by the ordre public international.

Those do need to be challenged, as fiscal fiction upon legal fiction does not a law make.