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2 janvier 2018


New Decision of the French Conseil Constitutionnel on Trusts

Under French law (article 885 G of the French Tax Code), trust’s assets were deemed to form part of the Settlor’s taxable wealth for the purpose of the computation of the French Wealth Tax (knowing that when the original Settlor had passed away, the beneficiaries were deemed co-settlors for the application of the French Wealth Tax).

Such article created an irrebutable presumption for the purpose of the application of the French Wealth Tax. In other words, the “settlors” or “deemed settlors” were taxable on the trusts’ assets even if the trusts were fully irrevocable and discretionary.

The compliance of such provision to the French Constitution was challenged in court.

By a decision n°2017-679 QPC of December 15, 2017, the French Constitutional Council transformed the irrebutable presumption into a rebuttable one. Now, the settlors have the possibility to demonstrate that the trusts’ assets, rights and income do not provide them with any contributory capacity, deriving in particular from the direct or indirect benefits that the settlors could get from the such assets, rights or income. It is expressly mentioned that such proof cannot solely derive from the irrevocable and discretionary nature of a trust.

Future case law and guidelines should enlighten in which cases settlors or deemed settlors could benefit from such decision.

In practice:

  • First of all, as you know, the French Wealth Tax is currently being reformed by the French Finance Bill for 2018 (which is not definitive yet). The new Wealth Tax should target only real estate assets. As a consequences, many trusts’ assets should fall outside of the scope of the French Wealth Tax as from 2018. In particular, there should be no concern in the future for all the trusts involving a French tax resident but solely financial assets.
  • For the past situations and for all the trusts holding real estate assets, the decision from the Conseil Constitutionnel is an opportunity to look closely at each situation. Settlors or deemed settlors who paid French Wealth Tax but have no right over the trust’s assets should contact their tax advisors.
  • For trustees, this decision has no impact but in cases where the French Sui Generis Tax would be at stake. Indeed, the Sui Generis Tax is payable directly by the trustee out of the trust’s assets in cases where the French Wealth Tax was due but not spontaneously paid by the settlors or deemed settlors. In our view, if the reason why the Wealth Tax was not spontaneously paid by the settlors or deemed settlors is because they had no contributory capacity deriving from the trust’s assets, then there would be a strong argument to claim back the reimbursement of the Sui Generis Tax paid by the trustee.