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The French 3% annual Tax on immovable property holding entities and its application to Trustees, or ...

June 24th 2019

The French 3% annual Tax on immovable property holding entities and its application to Trustees: one should never allow an internationally binding legal principle to get in the way of a civil-servant's "good" statutory fiction.

The Old Chestnut : does a trust have legal personality and a siège, or at least how do the French administration and therefore their civil servants detached to the  OECD  manage self-deception so effectively?

The decision which I am about to analyse was handed down by the French Conseil d'Etat on 6th May, 2019 in the case n° 426431 Amicorp Limited, as trustee of the " The Stigell Family Trust ". the details of the case are unavailable. The trustee could be from any one of the jurisdictions served by the Amicorp Group from a federated state within the USA to Mauritius.

The corporate trustee had the misfortune to have an indirect but unspecified ownership in French immovable property. The administration therefore alleged that it was subject to the well rubbed 3% tax on immovable property holding entities: currently defiling the French statute book at article 990D CGI.  Indeed, the Trustee argued an exemption under article 990E CGI attempting to relieve itself of the 3% tax.

How was this achieved? The answer is quite simple - by ignoring the law altogether. Never has a trust had either legal personality, saving in Louisiana, nor had any requirement of a public office by which its legal status can be defined.  This French technique of rendering legal and equitable issues corporate is now standard OECD policy. The disinterested settlor of a trust has now been cloaked with the equivalent of an unalienable founder's share designated as an "equitable interest", which the French are shortly to assert is therefore transferable by fiscal succession.

The point that I am making is that in a pre-Brexit scenario, an English trustee had a degree of politico-legal protection, as the trust as a property law right had a degree of conceptual protection under the EU Treaty and regulatory framework, being the property law of a Member State. The French private international law rules were also capable of giving a trust a certain degree of legal recognition as a concept of property law, not of contract. The recent mischief is due to an administrative misappropriation and rewording of what is certainly no more than a mere private international law classification definition included in the Hague Convention on the recognition of trusts, which France has signed, but left unratified.  The somewhat spineless inaction of the French Chancellerie to the misappropriation can be illustrated by the fact that the French Republic has ratified a convention upon the law of agency, including fiduciary contracts, in which the trust is excluded, as it is not a fiduciary contract at all. The English constitutional concept of the "Rule of Law" over civil servants is not a continental one. Its arguable that the French Conseil d'Etat has crossed a red line in the recent judgment.  However, one should never allow a legal principle to get in the way of a good civil-servants statutory fiction.

Those who doubt that should read, in French the somewhat miserable commentary upon the case by a certain Bruno Gouthière, previously a high ranking French inspecteur de finances now working at a Paris firm of avocats and propagating the French administration's fiscal Gospel of Saint Thomas outside the inner sanctum of Bercy.   Having spent his administrative time at Bercy attempting to concoct a notion that the trust was a legal entity, and the equivalent of a contract, he is now recognising that that administrative requalification is full of difficulty outside that inner sanctum of quasi-religious requalification of reality.   A fiscal sea of holes or simply a reassessment of the interior of an Emmental, by one now forced to digest it from the taxpayer's viewpoint?

The Amicorp trust did not have that EU protection, and it is therefore likely that English trustees will soon find themselves subject to a thorough lack of the previous legal protection that they previously enjoyed. Once the UK leaves the EU, they will in particular be removed from the relative fiscal security as to recognition as a property mechanism of an EU Member State. The trustees might  retain the benefit of a Treaty and Treaty exchanges with France, but the French have a tendency to attempt to subordinate statutory protections against  discrimination to residents of EEA states, rather than respecting the CJEU's fundamental principle that the EU freedom of movement of capital and its protection  extends to persons resident in third states as well.

What is more, as any student of Equity and Trusts will have had branded upon their brain, the distinction between a trust and a contract under English law principles is fundamental and fatal. There is no cause or consideration in a trust, it is not a company. Until recently the French accepted that the absence of an affectatio societatis meant that a trust could not be considered a corporate entity or even an association. The nearest, but missing link in the Code civil is to a legal convention over property as mentioned at article .

To give Gouthière credit, he does recognise that his prior fiscal badmouthing was incorrect.

It has been a principle of the recognition of foreign trusts under the French civil law,  that they were considered to be part of the law of property, not of the law of contract or assimilated personal rights. The distinction is important as the contractual French equivalent sponsored by a certain Pierre Marini, Senateur is defined as a contract involving personal, not real rights.  Gouthière appears to accept that fundamental distinction. He cannot do otherwise as the CGI itself draws that distinction by giving each a separate status under article 969 which refers to a patrimoine fiduciaire for IFI purposes and then to a trust under article 970.

Those already slightly on edge, should realise that the scission between administrative law and the Rule of Law as defined for the English by Dicey and then rule of overriding precedent over administrative law which that implies have no equivalent status or value in France.

The French text of the decision n° 426431 can be found at either :

https://www.conseil-etat.fr/arianeweb/#/view-document/?storage=true

or

https://www.legifrance.gouv.fr/affichJuriAdmin.do?idTexte=CETATEXT000038458570

To summarise:

1. The Conseil d'Etat decided that for the purposes of the 3% annual tax, a trust having an indirect interest in French immovable property is to be considered as on a par with a French contractual fiducie. That is a typical French fiscal expedient of excluding legal principle by asserting an administrative exception.

2. The main argument was directed as to whether the administrative doctrine published specifically at §50 BOI-PAT-TPC-20-20 was correct and should be annulled.  Whilst not an infrequent pleading, that is an uphill battle.

As the trustee was seeking to use an exemption under article 990E CGI, the Conseil d'Etat felt able to comfort the redefinition of the law by stating that article 792-0 bis I which uses the somewhat quaint expression "l'ensemble des relations juridiques" entitled it to totally redraft the effects of the trust and insist that the trust  "doit être présumé, au sens et pour l'application du 3° de l'article 990 E du CGI, avoir son siège dans l'État ou le territoire selon le droit duquel ont été créées les relations juridiques qui l'ont institué."

The whole concept of a siège in these circumstances is entirely pretentious, as any English tax lawyer accustomed to the issue of the residence of the body of trustees under English law as modified by the legislation is aware.

What is more, in the whole context of the Common Reporting Standard, nothing could be further from the current position adopted by HMRC which requires a UK tax connection for a trust to become subject to the IGA.  This heralds potential issues post-Brexit for any UK trustee holding a portfolio which  contains an asset considered to be an indirectly held immovable under article 990D CGI.

In other words, if you are a trustee seeking to benefit from the legal treatment which the mainstream French civil law otherwise provides, you may find yourself excluded from using the exemption under article 990E. What is more, if the trustees in the initial jurisdiction have retired in favour of a trustee in a different jurisdiction, that succeeding trustee might find itself excluded from the exemption on that basis alone as there will be no deemed siège left in the jurisdiction where the trust was,  in French terminology, constituted.

Whilst the Conseil d'Etat mentions "présumée" in other words deemed,  and then proceeds to state that nothing prevents the trustee from proving that it is established in the state of constitution of the trust, it is clear hat any trustee of a trust which has changed its proper law either in combination with a change of forum or not will find itself in some difficulty:

7. Le paragraphe n° 50 des commentaires administratifs publiés le 5 octobre 2016 au bulletin officiel des finances publiques - impôts (BOFiP) sous la référence BOI-PAT-TPC-20-20 énonce que, pour l'application des dispositions du 3° de l'article 990 E du CGI, qui prévoit que la taxe instituée par l'article 990 D du même code ne s'applique pas aux entités juridiques qui ont leur siège en France, dans un État membre de l'Union européenne ou dans un pays ou territoire ayant conclu avec la France une convention d'assistance administrative en vue de lutter contre la fraude et l'évasion fiscales ou dans un État ayant conclu avec la France un traité leur permettant de bénéficier du même traitement que les entités qui ont leur siège en France, "les entités juridiques de type fiducie, trust et fonds d'investissement sont réputées être établies dans l'État ou le territoire de la loi à laquelle elles sont soumises". La société requérante doit être regardée, eu égard aux moyens qu'elle soulève, comme contestant cette énonciation en tant uniquement qu'elle concerne les trusts.
8. Il résulte des dispositions combinées des articles 990 D, 990 E et 792-0 bis précitées du CGI qu'un trust, défini comme un ensemble de relations juridiques créées dans le droit d'un État autre que la France, doit être présumé, au sens et pour l'application du 3° de l'article 990 E du CGI, avoir son siège dans l'État ou le territoire selon le droit duquel ont été créées les relations juridiques qui l'ont institué.
9. Ainsi, en se fondant sur l'État ou le territoire de la loi à laquelle sont soumis les trusts pour déterminer le lieu où ils sont établis, les commentaires administratifs attaqués n'ont pas donné de l'article 990 E du CGI une interprétation erronée de la loi fiscale, ni ajouté à cette dernière. Contrairement aux affirmations de la société requérante, la doctrine attaquée, qui se borne à faire état d'une présomption d'établissement dans l'État ou le territoire de la loi à laquelle ces entités juridiques sont soumises, ne saurait faire, par principe, obstacle à ce qu'une entité qui revendiquerait le bénéfice de l'exonération prévue par le 3° de l'article 990 E du CGI à raison des immeubles situés en France ou des droits réels portant sur ces immeubles qu'elle détiendrait, en estimant relever, dans le cadre de ses relations avec l'administration fiscale française, du droit d'un État ou territoire visé par ces dispositions, puisse en apporter la preuve et renverser ainsi la présomption de rattachement à l'État ou au territoire correspondant à la loi à laquelle elle est soumise.
10. Dans ces conditions, la société Amicorp Limited n'est pas fondée à demander l'annulation des énonciations du paragraphe n° 50 des commentaires administratifs publiés le 5 octobre 2016, en tant qu'elles concernent les trusts. Par suite, sa requête doit être rejetée.

There is now an entrenched and declared hiatus between French administrative law, and the categorisations previously adopted by Law professors and dare I presume to say, the judicial court system.

The author has had more than 30 years continuous experience in the different stages of development of this tax, having started as the only English tax lawyer working at a siège tax department of a French multinational in Paris between 1981 and 1986.

Peter Harris

24th June, 2019

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