Overseas Chambers of Peter Harris

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

Is article 792-0 bis CGI - the French Trusts régime - unconstitutional? I believe so...

April 11th 2017

As a French trained tax lawyer, and national, I have been trained to be sceptical about whether a tax provision is constitutionally valid or not. I am known for being sceptical as to whether the régime defined in article 14 of the French loi de finances rectificative n° 2011-900 of 29th June, 2011 is constitutional given the excessive use of force over foreign property rights, and foreigners outside France.  I am also known for having tipped off HMRC in 2004, following a discusion with a French colleague that the French Tax Treaty negotiating team had not been entirely transparent to their HMRC colleagues about their proposed modification of the interpretation clause in the draft Income Tax Treaty with a view to and I translate  "knobbling those English with their trusts".  The Treaty was "pulled" as a result of that and certain other factors.

The "lutte"  of  the French administration against tax evasion, is put forward as an elevated constitutional value. Let us see to what extent that is no more than  a smokescreen for a far worse form of discrimination which goes beyond that laudable aim.  The French administration are attempting  to take out their own political and economic failings on the laws of the remainder of the planet simply because their "constitution" has been reduced to writing. They simply do not respect its principles, and leave the taxpayer to challenge their abuses.

This process of constututional analysis will be alien to the common law practitioner, as such issues are dealt with in other ways under the British constitution. For example, the case of Ingenious started from the basic common law rights which both the Crown and Parliament are required to respect where these are not directly and specifically amended by statute. It requires a very alert awareness of the issues of principle and exception at various levels of a social contract constitutional system. Hence the need to instruct an aware French speaking trust lawyer and a French constitutional practitioner, in this area.

It is becoming clear that the French Conseil Constitutionnel's record in ruling on the issue of constitutionality in appeals in tax issues is a strong and principled one. It applies the law.

For example, in 2004, on a procedural request from the Sénat on a Finance Bill proposal, the Conseil Constitutionel held that it was unconstitutional to charge an individual, a nu-propriétaire, to ISF who, by definition had no income from the asset. The usufruitier has the responsibility for annual taxation to Wealth Tax given that they had the income rights. To attempt to lay the tax on the shoulders of an individual who did not have the income was therefore unconstitutional. in that it breached two fundamentakl constitutional rights. That was on the basis of the constitutional value or principle that tax liability has to be allocated to those able to contribute. Whence the principle that works of art are exempt from ISF, or Wealth Tax, as they do not inherently produce income.

In a related issue, the Conseil Constitutionnel has also declared unconstitutional public access to the Register of Trusts. It has not been asked yet to rule on the constitutionality of the law itself. There is a point where declaring the régime essential for anti évasion purposes, both as to tax and capital movements becomes unconstitutional when there is no possibility of a review of the issue as to whether there was any evasion or avoidance. This is an inherent theme in most French anti-avoidance provisions, as was seen in the 3% tax ruling by the CJEU in its Elisa and Rimbaud decisions and subsequent cases, where absolute presumptions were reversed where there were information exchange provision in force.

The Conseil Constitutionnel has also recently dealt a fatal blow to the French administration's attempt to enforce irrebuttable presumptions in tax matters.  Article 792-0 bis CGI formulates at least two of these irrebuitable presumptions as to entitlement and as to transfer in its II and III. I stress here that the tax administration has declared that it considers the proprietary allocations of fiscal assets in a trust to be such a presumption irrefrageable in the preliminary work on the projet de loi (Bill). In Decision n°2016-614 QPC of 1st March, 2017 the Conseil Constitutionnel upheld a preliminary appeal from an individual taxpayer as to the présomption irréfrageable in article 123 CGI on deeming the amount of income that was to be subject to taxation under the article, without the taxpayer being given the opportunity to evidence that there was no intention to evade taxation.

One of the main principles argued for the somewhat ludicrous régime under article 792-0 bis CGI is just that: a trust is considered to be a tax evasion entity, without any leeway, so justifying the deemed succession rules laid down in article 792-0 bis II CGI.

The article in fact creates a form of fiscal forced heirship over an imagined and fictional entitlement, without the person so yoked in, or their heirs,  having the property right or income to pay it. In particular as to deciding who is the deemed constituant of the trust when the settlor has died prior to the coming into force of the law in 2011. It matters not to the French whether the Settlor is interested in the trust assets or not, although article 784 CGI does make a gesture in that direction, in that there is no presumption of property where the deceased individual concerned has not actually intermeddled with or received income from the trust in the  year prior to their decease.

There are other reasons why the constitutionality of the Trust regime can be challenged.

It is already difficult for a foreign trustee to accept that they have been converted into a contractual administrator. There is no condescension to a definition of the term "adminsitrateur" given in the defining French article nor in the executive orders setting out the declaratory requirements nor even in the administrative instructions.  The actual definition of a bénéficiare provided in the adminsitratuve instructions is to say the least far removed frorm the equitable definition of that term under the law governing the trust to which the article is subject.  It is becoming less difficult to accept that the regime is unconstitutional in the event of penalties for declarative omissions.

May I suggest that any trustee, or beneficiary take advice on whether the French régime when applied to their situation is constitutional? Merely going under the yoke of foreign requalification of a property régime into a mere fiduciary contract, is to accept that a foreign administration has the right to treat your law as non-existent. That in itself is a flagrant disobedience of the Hague Convention on Agency, which states that a trust is not a fiduciary contract and is excluded from the definition of agency. France has ratified that Convention. Underthat Conventon the trustee is not a mandataire, which n effect is exactly what article 792-0 bis I CGI defines them as.

The Conseil Constitutionnel has also held Commissioner' Moscovici's attempts to short circuit his country's own constitution by the insertion of the Country by Country reporting requirements argued through the European Parliament, as unconstitutional. The Conseil held these to be contrary to the basic freedom of entrepreneurship guaranteed under the 1879 Déclaration as a fundamental constitutional value. The current French influence at the OECD, which is another thorn in the side of honest taxpayers could also be counteracted by a declaration of non-constitutionality. The OECD is also attempting to requalify trusts as contracts without even having the objects clause in place in its constitutional treaty enabling it to do so.

Whilst the number of questions prioritaires de constitutionnalité ("QPCs") is rising, none has yet addressed the actual constitutionality of the definition in article 792-0 bisCGI and the other articles which hang off it. It would be unfortunate were the mounting number of QPCs to allow the Conseil might to consider that it has already decided the issue, simply because no one has raised it directly!

Overseas Chambers can provide advice to onshore and offshore trustees on how to approach this issue with a French constitutional lawyer to invoke the procedure known as a QPC in a situation where the French tax administration takes the matter "to the edge".

It would be very naive to assume that any tax administration or politician in the current scenario of mandatory information exchange is going to defend the property laws of its own country or their operation. HMRC has done nothing except vilify the trust in international organisations such as the OECD, and the French administration has done nothing to justify the usufruit dismemberment as a mere carve out in the United Kingdom. It falls to the irrebutably "deemed" taxpayer to defend themselves against these admitted fiscal fictions before they become an alternative economic reality.  It is not the taxpayer's place to be treated as a Don Quixote by the very administrations that are tilting at foreign imaginary windmills.