Overseas Chambers of Peter Harris

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

The French Trusts Levy of 1.5% and the 2181 Trusts2

June 10th 2018

The recent Impôt sur la Fortune immobilère or IFI and the necessary allowances and exemptions has had to be adapted to the main sanction for non-declaration of Trust assets which is the  prélèvement of 1.5%

Those trustees with mere portfolio investments which do not contain immovables will be relieved of that they are no longer affected by the IFI or the prélèvement. Those with a French connection and a mixture of assets  will not be entirely free.

That prélèvement has been carried over to the IFI by the unrepealed article 344 sepites of Annexe III CGI, which sets out the elements required in the prélèvement declaration 2181 Trusts2 and which has been amended to take account of the new tax.

The Trustee declaration's due date of 15t June was not changed, unlike the individual's IFI filing date being held over to the same date from 15th May, which is questionable, given that the trustees only had a week from the issuing of the BOFIP instruction on 8th June to digest the implications for their declaration, which remained due on 15th June.

Whilst it is understandable that the administration were under significant time pressure to implement the new IFI and its ramifications such as the prélèvement, this is clearly abusive from the perspective of the non-resident trustee.

These are mainly neither French speaking and by definition unused to the French approach to trusts. That French approach is based on what has become a statutory fiction, and a degree of deliberate misunderstanding of the trust concept so as to convert it into something that is more easily taxable, as a fiction.

The administrative commentary in the BOFIP on the relationships between article 344 septies Annexe III defining the 2181 Trusts2,   and article 964 et seq, 990J and 1649AB  of the CGI  were only published on 8th June.

The link to the BOFIP section on the prélèvement can be found here: http://bofip.impots.gouv.fr/bofip/11317-PGP.html?identifiant=BOI-PAT-IFI-20-20-30-20-20180608&ftsq=pr%C3%A9l%C3%A8vement

The article 344 septies definition the Trustees' declaration refers back to a declaration enacted in 6th paragraph of article 1649AB. That paragraph does not mention any declaration. The reference to a declaration in 1649AB CGI was replaced by the wording implementing the Trust Register in 2013.  That fundamental error notwithstanding, the administration will probably not consider that lapse in the drafting of the legislative implementation to be an obstacle preventing it from issuing penalties for any absence of a declaration, from foreign trustees.

Those trustees who have not been able to meet the deadline will need to take stock of whether any of the defined allowances the articles following article  964 CGI can be applied and how to declare these on a late filing basis.

Also, the declaration of shares in property holding companies used in professional activities, normally other than bare or residential lettings, will need to be carefully considered so as to extract the maximum advantage of loans and other finance methods for the individual(s) otherwise liable for the prélèvement, under the changed charging régime. Whilst the administration considers the trustee to still be responsible for the payment of the levy, under article 990J, that article has been amended to render payment of the levy to be the responsibility of the constituant or the bénéficiare réputé constituant so as to circumvent the recent Conseil Constitutionnel's decisions in 2017 in this area.

The changes in the legislation in France alone are going to give rise to significant subjectivity in individual's IFI declarations, as the majority of French property owners will endeavour to classify their ownership as professional, and valuation issues of property held directly or indirectly will inevitably occupy the litigators for some time ahead.

However, until the IFI is repealed, which, given that it is a political tax rather than an economic one, is possible, trustees indirectly holding French immovable property or immovable property interests should ensure that their declarations are in order to give their beneficiaries and settlors the maximum clearance.

The problem with the French administration's and Parliament's attitude towards trusts is that, rather than respecting the prior French legal understanding of a trust as a matter of property law and at best a "convention" over property, they are attempting to retreat it as if it were a personal contract, giving rise to personal rights (propriété virtuelle) against an administrateur which it is not. They have therefore constructed a tax treatment around a fallacy. That fallacy has not been sufficiently challenged by the French Bar or legal academia, which has shown a degree of complacency, or fear of social acrimony in this area. That now means that the administration is now considering its fiction to be a legal not a fiscal reality, and acting accordingly.

Contact Peter Harris if as a trustee,  or a Constituant of a bénéficiaire réputé constituant,  you are in difficulty.

French residents with British immovable property will need to take advice on any trust holding of realty to which they may be deemed entitled.