FRENCH SUPPLEMENTARY BUDGET 2011 A NEW FRENCH WORLDWIDE TAX REGIME FOR TRUSTS AND ESTATES Impact on French citizens living abroad and other non-French resident nationals with interests in France 23 October 2012 RICHARD FRIMSTON PATRICK DELAS RUSSELL-COOKE LLP

POSITION UNTIL JULY 2011 Essentially governed by case law in terms of ISF and IHT i)ISF: No ISF in case of a discretionary trust [TGI Nanterre May 2004] ii) IHT: IHT due on actual transfer to the beneficiary at a rate depending on the relationship with the settlor [Cass Zieseniss Feb 1996; Tardieu de Maleissye 2007]

Loi de Finances Rectificative n° of 29 July 2011 (LFR 2011) Purpose i) End with previous case law and “common law approach” ii) Create an autonomous tax regime applicable to trusts using a large scope leaving room for interpretation iii) Discourage the use of trust schemes by French tax residents (regarded as tax evasion schemes)

Introduction of a general definition of trusts for the purposes of the CGI CGI art. 792-O bis A trust is defined as: “l'ensemble des relations juridiques créées, dans le droit d'un Etat autre que la France, par une personne, qui a la qualité de constituant, par acte entre vifs ou à cause de mort, en vue d'y placer des biens ou droits, sous le contrôle d'un administrateur, dans l'intérêt d'un ou de plusieurs bénéficiaires ou pour la réalisation d'un objectif déterminé.” [the collection of legal relationships created under the law of a State other than France by a person, acting as constituant by inter vivos deed or taking effect on death, which places assets or legal rights under the control of an administrateur for the benefit of one or more bénéficiaires or for the purpose of a specific objective.]

Definition clearly based on Article 2 of The Hague Trusts Convention 1985, however (Deliberately?) ignoring i) the various possible forms of trusts (discretionary/fixed; express/implied; lifetime/Will) ii) the notions of legal / beneficial ownership (Deliberately?) using French terms, the translation of which covers broader notions in English law i) “Administrateur” which is broader than “trustee” and should also refer to the executor and obviously to the administrator of an estate ii) “Constituant” which is broader than “settlor” and should refer to the testator of a Will or intestator of an intestacy trust or to the subsequent beneficiaries after the death of the original constituant and initial beneficiaries (deemed constituant)

The creation of the notion of deemed constituant CGI art. 792-O bis Le bénéficiaire est réputé être un constituant du trust pour l'application du présent II, à raison des biens, droits et produits capitalisés placés dans un trust dont le constituant est décédé à la date de l'entrée en vigueur de la loi n° du 29 juillet 2011 de finances rectificative pour 2011 et à raison de ceux qui sont imposés dans les conditions prévues aux 1 et 2 du même II et de leurs produits capitalisés.” [The bénéficiaire is deemed to be the constituant of the trust for the purposes of this clause II, of the assets, legal rights and capitalised income of a trust, the constituant of which had died before the date of entry into force of LFR 2011 or by reason of the liabilities under clauses II.1 and II.2 and that capitalised income.]

LFR 2011 is an effort to establish a body of rules with strict obligations but without necessarily clearly establishing the persons to whom the obligations apply This is not without consequences on the administrateur subject to new reporting obligations with severe penalties

Droits de donation et de succession (Gift & Inheritance tax) CGI art. 792-O bis II Date: as from 11 July 2011 Territoriality rules: Gift & Inheritance tax applies to the assets held in the trust if: i) The constituant or the bénéficiaire is French resident ii) The trust assets are situated in France (constituant or bénéficiaire are resident abroad)

Then, taxation of the trust depends on whether the transfer can be regarded as a gift or a succession i) If the transfer can be regarded as a gift or a succession i.e. with effective assignment of the trust assets to a beneficiary: normal Gift/Inheritance tax applies payable by the bénéficiaire ii) If not: a specific sui generis charge applies on the constituant’s death, payable by the administrateur as follows:

CGI art. 792-O bis sui generis taxation 1) If at the date of the constituant’s death, a determined share of the trust assets is due to a determined beneficiary: normal Gift & Inheritance tax applies according to the beneficiary’s relationship with the deceased [This seems to refer to e.g. “life interest to my children - then to charity”] 2) If NOT, then: i) If a global share is due to beneficiaries who are descendents of the constituant, Gift & Inheritance tax applies at a rate of 45% (maximum rate applicable between parents and issue) [Not clear but could refer to e.g. “my estate to such of my children as attain 21”] ii) The non distributed residue is subject to Gift & Inheritance tax at the rate of 60% (maximum rate applicable between non related individuals) [This apparently also applies to family beneficiaries who would normally be taxed at a lower rate of exempt e.g. surviving spouse] Note the 60% rate applies in any case if the administrateur is located in a non-cooperative state or if the trust has been created by a French resident after 11 May 2011

Impact of France / UK Double Tax Treaty of 21 June 1963 (estate duties)  Only applies with respect to duties arising on death and NOT to lifetime gifts  The domicile of the deceased (i.e. of the constituant) determines which state will have the right to tax the succession  Domicile is determined under each country’s own domestic rules  If the deceased is UK domicile under a UK law and French domiciled under French law: tie break clause (art. 2) Art. 5 of the DTT Where a person at the time of his death is domiciled in some part of the UK, duty shall not be imposed in France on any property not situated in France (i.e. only French immoveable property is subject to tax) Therefore, if the domicile of the constituant at the time of his death is in the UK, France may only tax the French immovable assets even though a bénéficiaire is resident of France

Wealth tax – ISF (art 14 LFR 2011) Art. 885 G ter CGI Irrefutable presumption: assets held in the trust are part of the constituant’s estate for ISF purposes (they are not part of the beneficiary’s estate before the constituant’s death) ISF is due on the net value of the French estate if the constituant is non- resident (on the worldwide estate if the constituant is French resident) Rate:  0.25% if estate is between 1.3 MEUR and 3 MEUR  0.50% if estate is above 3 MEUR

Sui generis 0.50% charge (art. 990 J) A sui generis 0.50% charge is payable if ISF is not declared payable by the constituant or the bénéficiaires jointly:  on the French estate if the constituant or the bénéficiaires are non-residents  on the worldwide estate if the constituant or the bénéficiaires are French residents  Exemptions: charitable and pension trusts Reporting obligations (art AB) The net value of the trust assets on 1 st January must be declared by the administrateur (As well as the creation of the trust, any change in its terms and its termination) This applies if:  either the constituant or the bénéficiares are French residents  the trust has French assets Severe penalties: 5% of the trust assets with a minimum of 10,000 EUR

Problems  The beneficiaries are not necessarily indicated in the trust deed (discretionary trust)  The beneficiaries may ignore the existence of the trust or its value  If one of the beneficiaries is French resident, the 0.50% charge applies to the worldwide assets The above has been applicable since 1 st January 2012 A decree is expected (presumably before end of June corresponding to the deadline for ISF declaration?)

Taxation of accumulated income and capital gains (120 9° CGI)  Only distributed income and capital gains (produits distribués) are subject to French income tax  Art. 123 bis on anti-avoidance remains unchanged and submits income and capital gains (even not distributed) to income tax when situated in an entity located in a privileged tax regime on a 125% basis. How this combines with 120 9° is not clear

ConstituantAdministrateurBénéficiaire Resident Non resident ISF: worldwide assets ISF: French assets Constituant or bénéficiaire French resident Trust assets in France Reporting obligations Income taxGift/Inheritance tax If distributed: Income tax If not:If capitalised: No tax except 123 bis If can be regarded as a gift/succession: normal Gift/IHT 0.5% charge Penalty 5% of the trust assets Determined share: normal Gift/IHT Global share due to descendants: 45% Other case: 60%