It has always been a mystery how the French tax administration
were able to believe that they could treat a trust which is not a
company as if it was one. It is a common failing, paralleled on the
English side of the Channel in other areas
One of the distinguishing features of a trust is that it is a
property arrangement; not a contractual "organisme".
That means that in reality and existentially, a trust cannot
produce French corporation tax returns as the French legislator,
particularly in article 123 bis CGI assumed that it should, for
example. Whilst Senator Marini was informed of that during his
visit to Jersey in 2017, the message still had yet to get through
to the central mind to the extent that that exists in Bercy.
This may have implications in other areas, for example, the 3%
annual tax on real property holding entities which the
administration has assumed includes trusts and is based upon
similar assumptions, namely that a trust can embody voting roghts
and rights akin to share capital. The Cour d'appel in the case
below clearly agreed wiith the taxpayer that that was not the
case.
Back to foreign trusts in France :
The French administration has consistently attempted to treat
trusts as corporates at all levels of its limited constitutional
competence and powers. That is obviously a fallacy and has led to
the most imperfect sets of deeming provisions and
administrative misconceptions.
The Cour d'appel administratif de Paris has just clamped down
and trashed that practice in an judgment handed down on 24th June,
2020, which needs to be widely advertised. Hence the recourse
to a STEP Forum.
The case involved the application of article 123 bis
CGI to certain Bermudan trusts. Those familiar with this
issue will recall that the idea of article 123 bis was to
treat corporate offshore entities as French tax avoidance vehicles
and tax them as if they were look through corporates. These were
required to file French impôts sur les sociétés
corporation tax returns, which as everyone with a flicker of
accounting imagination will realise is an impossibility. A trust
has neither a capital, nor voting rights nor for that matter
anything beyond a method of holding property under the law of
property. There is no affectatio societatis , no
contractual or corporate structure, no directors or general
meetings of shareholders.
In effect the Court held that :
The French taxpayers did not hold any voting rights in the
trust, let alone the 10% requited to trigger the article 123 bis
look through. It is quite incredible that the French administration
had the gall to assert that they did; and
The French taxpayers did not hold any « droit
financier » in the trusts, despite the fact that they could
receive payments from the trustees.
So, the attached judgment might interest those practitioners and
trustees offshore with French resident settlors or
beneficiaries.
The trusts in question were discretionary and irrevocable. They
had been constituted by the settlors prior to their moving to
France, had been constituted for perfectly valid reasons and were
not judged to have been avoidance vehicles under article 123 bis §4
bis. The French administration were simply told, politely, to
grow up.
Without wishing to labour the point, I and others have been
stating this unavoidable fact since article 123 bis CGI
came into force.
However, this judgment was taken in the context of discretionary
irrevocable trusts, and might not be immediately transposable to
affect interest in possession trusts to the same extent.
Advice still needs to be taken in relation to these. In particular
the impact of the Trusts Disclosure régime following on from
article793-0 bis CGI is not addressed in the judgment, as those are
IFI, gift and succession duty issues. The issue here was income
tax.
The judgment is particularly instructive in relation to the
future of British influenced trusts post-Brexit.
See
https://juricaf.org/arret/FRANCE-COURADMINISTRATIVEDAPPELDEPARIS-20200624-19PA00458