Overseas Chambers of Peter Harris

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Unconstitutionality of French trusts régime: The French administration backs off in pleadings before Conseil d'Etat

July 21st 2017

Cabinet Bornhauser, a firm of avocats in Paris has successfully managed to have the administration admit an error "of interpretation" by its services in pleadings in a case currently before the Conseil d'Etat.

However the issue was to be taken to the French Constitutional Court under a QPC procedure which will now not take place.

The administration accepted in pleadings that its interpretation of the Parliamentary travaux préliminaires was incorrect and that it lead to its attempt to add the levy of 1.5% to the ISF liability of a Settlor resident in France and then to charge that by way of joint imputed liability to a beneficiary also resident in France. Sensible, given that the whole artificial edifice could have been brought down had the Conseil d'Etat seized the Conseil Constitutionnel on the issue. However, as Bornhauser states, that may not be the end of the matter, when they deplore the manner in which the administration ducked a constitutional challenge.

The French administration has backed down and admitted that the levy is not cumulative with the ISF liability (Wealth Tax) of a constituant/settlor.

The position was that the constituant was resident in France and had made a nil value declaration of the trust assets for ISF: I assume that he did not possess them and could not recover them from the trustees.

The administration were attempting to levy the full rate prélèvement levy of 1.5%, as a result, as whilst the assets had been declared, they had been given no value for ISF purposes and no tax was proffered on them. The administration assessed the Trustees to the prélèvement, and claimed payment under article 990J CGI from a discretionary beneficiary who was also resident in France under the statutory joint and several liability . They have now effectively admitted that their interpretation of the French Parliamentary "travaux préparatoires" may have been incorrect and have withdrawn their pleadings on that point.

The French administration has elsewhere presented the Constituant or deemed constituant as being the taxpayer liable for ISF. The Constituant in question did not declare the full "valeur vénale" of the trust fund in his ISF declaration.

The administration had therefore assessed the levy on the trustees and then held a beneficiary resident in France liable for the levy, which is set at the maximum rate of ISF on a gross basis, not a net vasis of valuation.

It is difficult to see any justification for ratcheting up both the base, from net to gross, and then the infliction of the levy at the ISF maxiimum rate, 1.5% on the Trustee, and then changing target on the basis of a pure deeming provision and deemed joint and several liability to a levy or a penalty, from someone who was not even liable for the assets under the legislation. When placed in the light of other constitutional norms of equality before the tax charge, particularly in relation to the means to pay the tax concerned this fails to pass muster. A discretionary beneficiary subject to a deeming provision simply does not possess the rights upon which the régime seeks to place a levy upon him . He does not possess any income rights from the assets which he is deemed to possess, and is certainly not the taxpayer liable to ISF even under the deeming provisions of the legislation. To then inflict both the levy and a penalty upon him is intellectually indefensible. Even by the iniquitous and I argue unconstitutional "irrebuttable" deeming process in question. The legislation attempts to nail someone - the constituant to whom to attache the property. It is the constituant, and no one else, to whom the legislation purports to attach the trust assets. It is in the constituant's hands that the basis for assessment is placed, and upon which the administration should collect both the wealth taxation, and what is more the succession and gift duty assessments under the general trust régime. Non bis in idem?

Technically therefore the deeming provisions contained in the statutory fictions invented by the French have been challenged as to their constitutionality. However, the administration has ducked the bowling. There may be more to come in Autumn in this case, as Bornhauser have taken up the Constitutional cudgels over the deeming mechanisms and penalities inflicted in the discretionary trust arena.

I have consistently stated that the entire régime is open to constitutional attack, as the French Parliament has been missled on the notion of a trust and what is more there has been no adequate representation of what it actually is in the definitions deployed.

The Parliamentary debates, if they can be so described, were swamped by white noise in the form of such constitutional values as the fight against capital evasion, which of course is largely irrelevant given that most British immigrants have a trust before they arrive, coupled with the fight against tax avoidance with no reference at all as to whether the legislation proposed met the other equally fundamental constitutional principles and safeguards of a civilised society governed by the rule of law. The latter points were not even mentioned in the Carrez Report, which very deviously concentrated upon one aspect of a set of fixed interest trusts without any thought to the more prevalent discretionary elements. My thanks to EFL for the link to the text of the report.

This is only a skirmish in a fundamental attack on the Constitutional basis of the régime.

The question arose in relation to the ISF declaration by the Constituant that the value of the trust fund in their hands was nil.

As I have been stating, the French tax régime in relation to trust has all the hallmarks of being unconstitutional on basic principles. However, we are not yet in practical position where a case can be brought before the Conseil Constitutionnel on the actual validity of the legislation itself. Bornhauser seems to be getting there.

The full summary of the current position in the case is at http://blog.bornhauser-avocats.fr/index.php/2017/07/20/une-premiere-victoire-dans-la-contestation-du-nouveau-regime-fiscal-des-trusts/