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France: What liability of the settlor of a trust to the French wealth tax?
K.Pratique | Chroniques juridiques du cabinet KGA Avocats - Sophie Borenstein, 20/12/2017
By a decision dated of 15 December 2017 (2017-679 QPC), the French Constitutional Council stated that the fact that the assets or rights in trust must be included in the settlor’s estate is constitutional, provided that the assets placed in trust confer on the taxpayer a contributive ability. The Constitutional Council has noted that there is a presumption of attachment to the settlor’s estate of the assets or rights placed in trust. The taxpayer can nevertheless prove the absence of contributory capacity conferred by the assets or rights in trust and exclude them from its wealth tax taxable basis.
Reminder of the provisions in force :
Article 885 G ter of the French tax code provides that the assets or rights placed in a trust and the products that are capitalized therein are included, for their net market value on January 1st of each tax year, in the estate of the settlor or the deemed tax settlor.
The French tax administration doctrine outlines that the inclusion of the asset’s and right’s trust in the settlor’s estate is independent of the content of the trust deed and therefore of the nature of the trust deed (in particular, revocable or irrevocable, discretionary or not). It is the reason why there is an irrefutable presumption of inclusion of the assets and rights of the trust in the settlor’s estate.
The French tax administration doctrine outlines that the inclusion of the asset’s and right’s trust in the settlor’s estate is independent of the content of the trust deed and therefore of the nature of the trust deed (in particular, revocable or irrevocable, discretionary or not). It is the reason why there is an irrefutable presumption of inclusion of the assets and rights of the trust in the settlor’s estate.
Referral to the French Constitutional Council :
In this specific case, the administrative courts had been seized for an annulment of this administrative doctrine on grounds of ultra vires since that would be illegal as it adds a clarification not provided for by law.
In this context, the French administrative Supreme Court has submitted to the French Constitutional Council on September 25, 2017 the question of the conformity of article 885 G ter of the French tax code with regard to the principle of equality before charges levied by the state.
The French Constitutional Council has ruled a conformity decision subject to the following proof. The assets or rights in trust do not fall within the scope of the French wealth tax insofar as the taxpayer proves that the assets or rights placed in trust do not confer on him/her any contributory capacity.
The decision specifies that a contributory capacity is conferred on the taxpayer when the assets or rights in trusts provide him with direct benefits (such as the collection of income from the assets or rights in trust) or indirect benefits (such as the use of the assets or rights as security for example) and that the proof of the absence of contributory power cannot result solely from the irrevocable nature of the trust or the discretionary management of the trustee.
In this context, the French administrative Supreme Court has submitted to the French Constitutional Council on September 25, 2017 the question of the conformity of article 885 G ter of the French tax code with regard to the principle of equality before charges levied by the state.
The French Constitutional Council has ruled a conformity decision subject to the following proof. The assets or rights in trust do not fall within the scope of the French wealth tax insofar as the taxpayer proves that the assets or rights placed in trust do not confer on him/her any contributory capacity.
The decision specifies that a contributory capacity is conferred on the taxpayer when the assets or rights in trusts provide him with direct benefits (such as the collection of income from the assets or rights in trust) or indirect benefits (such as the use of the assets or rights as security for example) and that the proof of the absence of contributory power cannot result solely from the irrevocable nature of the trust or the discretionary management of the trustee.
Consequences of this decision :
Any taxpayer who has established a trust whose assets and rights don’t confer him/her any contributory ability may consider to submit claims on the basis of the assets declared on his/her wealth tax declaration.
In addition, it is interesting to note that a system similar to that of article 885 G ter of the French Tax Code is contemplated as part of the implementation of the Taxation on Real Estate Property (IFI), which would apply from 1 January 2018. Indeed, the new draft of the article 970 of the French Tax Code provides that the assets placed in a trust are included, for their net market value on January 1 of the tax year, in the settlor’s or deemed tax settlor’s estate as the case may be. However, the interpretation reserve of the French Constitutional Council should apply for the future to this new article
In addition, it is interesting to note that a system similar to that of article 885 G ter of the French Tax Code is contemplated as part of the implementation of the Taxation on Real Estate Property (IFI), which would apply from 1 January 2018. Indeed, the new draft of the article 970 of the French Tax Code provides that the assets placed in a trust are included, for their net market value on January 1 of the tax year, in the settlor’s or deemed tax settlor’s estate as the case may be. However, the interpretation reserve of the French Constitutional Council should apply for the future to this new article