TRUSTS A French Approach

TRUSTSA French Approach François L. Meynot Avocat à la Cour MB & Associés 35 avenue d’Eylau 75116 Paris T : (33) 01.53.70.05.80 F : (33) 01.49. 54. 04 .55 fl.meynot@mb-avocats.com 2019

Table of Contents I. Legal framework • Definition • Ergonomics A. The different actors B. The different types of trusts C. The various uses • Validity of a trust in the French legal system A. Trusts and other French notions B. Recognition by the legal system and contract law II. Trust and French taxation • Income tax A. Income remitted B. Income received 2. Gift and inheritance taxes A. Scope of liability B. Practicalities C. Entry into force • Wealth tax A. A favourable court case B. An unfavourable legal provision C. The exception of charitable Trusts • The sui generis Withholding Tax • Reporting obligations

I. The Legal Framework 1. Definition Definition provided by an aggregation of Common law and Equity. A trust is an original institution enabling a division of the rights to ownership. An asset can be legally owned by a person for the benefit of another person. (Appendix 1) A trust is not a legal entity.

I. The Legal Framework The only legal source is the French Tax Code (FTC). • Section 792-0 bis, I-1 of the FTC created by section 14 of the First Finance Act for 2011. “A trust can be defined as the whole of the legal relationship, organised in accordance with the laws of a country other than France, enabling a person, the settlor, during his/her lifetime or because of his/her death, to transfer assets or rights, under the management of a trustee to the benefit of one or several beneficiaries or for the achievement of a specific goal.”

I. The Legal Framework • A trust is settled by the declaration of the settlor(s). • A trust is materialised by the trust deed, which organises the rights and obligations of the trustee(s).

I. The Legal Framework A trust is used for: • Providing securities and warranties • Protecting personal assets • Managing personal assets • Constituting a retirement fund • Proceeding with a non-profit purpose

I. The Legal Framework Some significant French court cases : • Paris Appeal Court, January 10th 1970 • Lower Court of Bayonne, April 28th 1975 • Supreme Civil Court, March 19th 1991 • Supreme Civil Court, February 20th 1996 • Lower Court of Nanterre, May 4th 2004 • Supreme Commercial Court, May 15th 2007 • Supreme Commercial Court, March 31st 2009 • Paris Criminal Court, 32nd Chamber, January 12th, 2017 • Supreme Administrative Court (C.E.), February 2nd, 2018

I. The Legal Framework 2. Ergonomics A- The different actors • The settlor(s) • The trustee(s) • The beneficiary(ies) • The protector(s)

I. The Legal Framework 2. Ergonomics A- The different actors The settlor(s) • May be an individual or an entity (be it a corporation, a partnership…) • May be a professional; in this hypothesis, according to French tax laws, the settlor(s) is/are the person(s) who transfers his/her assets and rights. • According to French tax laws, the beneficiary(ies) of the trust is/are deemed to be a “settlor” (or “settlors”) when the original settlor(s) passes away.

I. The Legal Framework 2. Ergonomics A- The different actors The trustee(s) • May be an individual or an entity • May be a professional or a non-professional • Must manage the trust, but cannot be one of the beneficiaries • May be compensated or not

I. The legal framework 2. Ergonomics A- The different actors The beneficiary(ies) • May be an individual or an entity (a company, an NGO, a partnership,…) • May be an individual already born, an entity already settled or incorporated, an unborn individual or an entity to be set up.

I. The Legal Framework 2. Ergonomics A- The different actors The protector(s) • May be an individual or an entity • Can control the trustee, oppose to certain of his decisions, terminate the trustee’s office or appoint a trustee, but cannot be one of the beneficiaries of the trust.

I. The Legal Framework 2. Ergonomics A- The different actors ( Settlor(s)/ Trustee(s)/ Beneficiary(ies)/ Protectors(s)) B- The different types of trusts • Intervivos/ testamentary • Revocable/ Irrevocable • Discretionary/ Simple ( Appendix 2) • Express/ Implied ( Appendix 2) The Letter of Wishes

I. The Legal Framework 2. Ergonomics A- The different actors B- The different types of trusts C- The various uses Management of private assets Investment Trusts Management of professional assets Security Trusts

I. The Legal Framework 1. Definition 2. Description 3. Validity of a Trust in the French legal system A- Trusts and other French notions • The trustee is not a will executor because he(it) owns the assets. • The trustee is not a sole heir because he(it) does not dispose of the usus and the fructus. • The trustee is not a proxy or an agent because he has the legal ownership of the trust assets. • Beneficiaries are not ‘usufruitier’. • The trustee can allow a gift Directly – NO Indirectly: Supreme Civil Court Feb 20th 1996 (Appendix 3) Supreme Civil Court May 15th 2007 (Appendix 4)

I. The Legal Framework 3. Validity of a Trust in the French legal system A- Trusts and other French notions B- Recognition in France Den Hague Convention (July1st 1985): signed, but not ratified by France. Case law: Courtois/ de Ganay January 10th 1970 Paris Appeal Court (Appendix 5) Bayonne Lower Court April 28th 1975 (Appendix 6) Caron Supreme Civil Court March 19th 1991 (Appendix 7) • In order to be valid under French law, a Trust must: • be legally settled under the laws of the country of settlement. • not infringe on French public order (for instance: forced heirship.)

II. Trust and French Taxation • Assets or proceeds ? Gift tax or inheritance duties: assets or capitalized income Distribution by the Trust Personal income tax: proceeds

II. Trust and French Taxation 1. Income tax A- Income remitted Section 120.9° of the FTC Domestic taxation Section 123 bis of the FTC Canada: Tax Treaty International taxation USA: Administrative Comments

II. Trust and French Taxation 1. Income tax A- Income remitted • French taxation: Section 120.9° of the French Tax Code « Is deemed to be an income, according to the present section: … 9° Proceeds, distributed by a Trust defined in accordance with section 792-0 bis, whatever be the substance of the assets or the rights contributed to the Trust. »

II. Trust and French Taxation 1. Income tax A- Income remitted French taxation Section 123 bis of the French Tax Code “1. When an individual, domiciled in France, OWNS, directly or indirectly, at least 10% of the shares, the financial rights or voting rights of a legal entity- organisation, fiducie or similar institution- established outside of France and benefiting from a favorable tax regime, income received by such entity is deemed to be an income by said individual in accordance with the participation this person disposes in such entity when, but only when, the assets of this entity are composed of shares, bonds, deposits or current account.” I.e. this text only applies to beneficiaries, but can we say that a beneficiary is the owner of a Trust of which he owns a 10% participation ?

II. Trust and French Taxation 1. Income tax A- Income remitted International taxation: Convention between Canada and France for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. Article 3 « General definitions • In this Convention … b) The term "person" includes an individual, a company or any other body of persons, and, in the case of Canada, a partnership, an estate and a TRUST;

II. Trust and French Taxation 1. Income Tax A- Incomeremitted International taxation: Article 21 • « 1. Subject to the provisions of paragraph 2 of this Article, items of income of a resident of a Contracting State which are not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State. • 2. However, if such income is derived by a resident of a Contracting State from sources in the other Contracting State, it may also be taxed in the State in which it arises, and according to the law of that State. However, in the case of income from an estate or trust, the tax charged shall, provided that the income is taxable in the Contracting State in which the recipient resides, not exceed 15 per cent of the gross amount of the income. • 3. For the purposes of this Article, a trust does not include an arrangement whereby the contributions made to the trust are deductible for the purposes of taxation in a Contracting State.”

II. Trust and French Taxation 1. IncomeTax A- Incomeremitted ( French taxation/International taxation) B- Incomereceived The theory of semblance: the Trustee Movables: 2276 of the French Civil Code Assets Immovables: 244bis A of the FTC

II. Trust and French Taxation 1. Income tax • B- Income received Section 2276 of the French Civil Code: « For movable properties, possession is title »

II. Trust and French Taxation 1. Income tax B- Income received Section 244 bis A of the FTC: (A summary) “I.-1. Save as what is provided in a tax treaty, capital gains, realized by a company or another type of organization, the headquarters of which are located outside of France, because of the transfer of real estate, are liable to a 33 1/3 % tax withheld at source. The same applies to the transfer of shares of a company the assets of which are predominantly composed of real estate. This rate is stepped up to 75% when the transferor is a resident or is incorporated in a non cooperative state, and territory (NCSTs, i.e. as of January 1st, 2019 Botswana, Brunei, Guatemala, Marshall Islands, Nauru, Niue, Panama, Guam, American Virgin Islands, Namibia, Samoa Islands, American Samoa, Trinity-and-Tobago)” See Section 238-0 A of the FTC.

II. Trust and French Taxation 1. Income Tax 2. Gift and inheritance taxes A- Scope of liability B- Practicalities C-Entry into force

II. Trust and French Taxation 2.Gift and inheritance taxes A- Scope of liability 1- Taxable successions Is deemed to be liable to inheritance or gift tax any transfer of rights or assets which can be qualified as a gift or an inheritance, i.e. when those rights or assets are transferred to the beneficiary(ies). Otherwise, inheritance duties are due when the settlor passes away.

II. Trust and French Taxation 2.Gift and inheritance taxes A- Scope of liability 1- Taxable transmissions 2- Taxable assets: The properties or the rights settled in trust as well as the capitalized income: - of French or foreign assets when the donor or the decujusis (or was) domiciled in France - of the sole French assets of a donor or a decujusdomiciled outside of France - of French and foreign assets received by a recipient or an heir, domiciled in France for at least six (6) years during the last ten (10) years

II. Trust and French Taxation 2.Gift and inheritance taxes A- Scope of liability B- Practicalities

II. Trust and French Taxation B- Practicalities

II. Trust and French Taxation • Assets and beneficiary(ies) qualified : according to the relationship Transfer duties • Assets transferred • Assets globally transferred: 45% • Other situation: 60% Common taxation • Assets kept in trust after death of the settlor: 60% • Trustee domiciled in an NCST: 60% • Exception • Settlor domiciled in France when the trust has been settled after 11th May 2011: 60%

II. Trust and French Taxation 2.Gift and inheritance taxes A- Scope of liability B- Practicalities C- Entry into force All those legal dispositions are applicable to: - gift granted and - death occurred as from 31st July 2011. An extremely favorable Court case : The Wildenstein Case, Paris, First level of jurisdiction (TGI), January 12th, 2017 (Appendix 8)

II. Trust and French Taxation • Income Tax • Gift and inheritance taxes • Wealth tax on real estate assets (hereinafter designated as “IFI”) A. A favourable court case B. An unfavourable legal provision C. The exception of charitable Trusts Originally, a court case recognisedfavourably the concept of trust: Low Court of Nanterre 4th May 2004, Poillot versus French Tax Authorities (Appendix 9)

II. Trust and French Taxation 3. IFI Now, reference shall be made to section 970 of the FTC: “Assets, mentioned here above in section 965, settled in a trust, as defined in section 792-O-bis bis, shall be included in the assets of the SETTLOR or in the assets of the deemed settlor for their fair market value determined as of January 1st of each year.” However, these provisions are only covered by a relative presumption (presumption réfragable) and not by a definite presumption (présomption irrefragable) (CE, 16.02.2018)

II. Trust and French Taxation Reference: Section 970 of the FTC With the exception of charitable Trusts if: • The Trust is irrevocable • The beneficiaries are non profit organisations • The Trust is « subject » to the laws of a state or territory which is linked to France by a tax treaty permitting an administrative assistance for the prevention of fiscal evasion and tax fraud.

II. Trust and French Taxation 3. IFI In short, the following items are liable to IFI: • Worldwide real estate assets of a Trust, when the settlor is a French tax resident (with the 5 year exemption) • French real estate assets settled in Trust, when the settlor is not a French Tax Resident.

II. Trust and French Taxation 4. The ‘sui generis’ Withholding Tax Each year, the trustee must report to the French tax authorities the fair market value of the real estate assets settled in the Trust by the settlors, or beneficiaries, fiscally domiciled in France, and pay the correlative IFI (form 2181 Trust 2 filed on June 15th of each year) (Appendix 10)

II. Trust and French Taxation 4. The ‘sui generis’ WithholdingTax Otherwise, the trustee shallpay a ‘sui generis’ tax, at the rate of 1,5% of the fairmarket value of saidassets and capitalizedproceeds, at the latest on June 15th of eachyear.

II. Trust and French Taxation 4. The ‘sui generis’ WithholdingTax When the trustee(s) is/are ‘liable’ to the laws of a cooperative state (i.e. whichislinked to France with a treaty permitting the exchange of information) the sui generis taxis not due for: • Assets legallyreported to the taxauthority, when the correlative IFI has been paid • Assetsdevoted to Non Profit Organisations • Assets of trustee(s) in charge of employees’ retirement fund.

II. Trust and French Taxation II. Trust and French Taxation 1. Income tax 2. Gift and inheritance taxes 3. IFI 4.The sui generis Withholding Tax 5. Reporting obligations: Section 1649 AB of the FTC (Appendix 11)

II. Trust and French Taxation 5. Reporting obligations Regulated by section 1649 AB of the FTC On a yearly basis, the trustee of a Trust: • Of which the settlor, or one of the beneficiaries, is fiscally domiciled in France, • Of which any of the assets is located in France, • If the trustee is himself domiciled in France (2013 law), must declare to the French tax authorities the settlement of the trust, the identity of the settlor and of the beneficiaries, any modification of the trust deed, the terms of said trust as well as the termination of the trust. By the provisions of the Law enacted on December 6th, 2013, a public Trust register has been proposed. By a decision applicable as from October 23rd, 2016, the Supreme French Court (Conseil Constitutionnel) has ruled this provision as unconstitutional.

II. Trust and French Taxation 5. Reporting obligations – 2181 – Trust 1 (Appendix 12) As a consequence, all assets or rights of a trust of which: • The settlor(s) or • One of the beneficiaries … are fiscallydomiciled or located in France, must bereported by the Trustee to the French TaxAuthorities (includingexempted assets). The return 2181 Trust-1 must befiled on or before June 15th of eachyear, with the value of the assets on January 1st of the sameyear. If not filed, a 20,000 euros fine must bepaid by the trustee. In addition, any taxes the source of which are undisclosed assets shallbegrossed up with a 80% penalty. Settlors and beneficiaries are jointly liable for the payment of the fine with the trustee.

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TRUSTS A French Approach