1. TRUSTS A French Approach
François L. Meynot
Avocat à la Cour
MB & Associés
35 avenue d’Eylau
75116 Paris
T : (33)
F : (33)
2017

2. 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

3. I. The Legal Framework 1. Definition
Definition provided by an agregation 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.

4. I. The Legal Framework
The only legal source is the French Tax Code (FTC).
Section 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.”

5. 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).

6. 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

7. 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

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

9. I. The Legal Framework 2. Ergonomics The settlor(s)
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.

10. I. The Legal Framework 2. Ergonomics The trustee(s)
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

11. I. The legal framework 2. Ergonomics The beneficiary(ies)
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.

12. I. The Legal Framework 2. Ergonomics The protector(s)
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.

13. 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
Discretionnary/ Simple ( Appendix 2)
Express/ Implied ( Appendix 2)
The Letter of Wishes

14. 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

15. 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 (Appendix 3)
Supreme Civil Court May 15th 2007 (Appendix 4)

16. I. The Legal Framework A- Trusts and other French notions
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.)

17. 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

18. 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

19. 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 bis, whatever be the substance of the assets or the rights contributed to the Trust. »

20. 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 ?

21. 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;

22. II. Trust and French Taxation
1. Income Tax
A- Income remitted
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.”

23. II. Trust and French Taxation
1. Income Tax
A- Income remitted
( French taxation/International taxation)
B- Income received
The theory of semblance: the Trustee
Movables: 2276 of the French Civil Code
Assets
Immovables: 244bis A of the FTC

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

25. 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 2014 Botswana, Brunei, Guatemala, BVI, Marshall Islands, Montserrat, Nauru, Niue.)” See Section A of the FTC.

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

27. 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.

28. 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 decujus is (or was) domiciled in France
- of the sole French assets of a donor or a decujus domiciled 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

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

30. II. Trust and French Taxation
B- Practicalities
qualification
Taxation
The assets owned in trust are transferred
Gift or inheritance tax
When the assets and the beneficiary are known
When the assets are globally transferred
other
Rate applicable in accordance with the relationship (parent, uncle, non family members,…)
45%
60%
Assets kept in trust after the
death of the settlor
Trustee domiciled in a NCST or
Settlor domiciled in France if the trust has been settled after 11th May 2011

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

32. 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.

33. II. Trust and French Taxation
Income Tax
Gift and inheritance taxes
Wealth tax
A. A favourable court case
B. An unfavourable legal provision
C. The exception of charitable Trusts
Originally, a court case recognised favourably the concept of trust:
Low Court of Nanterre 4th May 2004, Poillot versus French Tax Authorities (Appendix 8)

34. II. Trust and French Taxation
3. Wealth tax
Now, reference shall be made to section 885 G ter of the FTC:
“Properties or rights settled in a trust, as defined (above), as well as the capitalised proceeds, shall be included in the assets of the SETTLOR for their fair market value determined as of January 1st of each year.”

35. II. Trust and French Taxation
Reference: Section 885 G ter 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.

36. II. Trust and French Taxation
3. Wealth Tax
In short, the following items are liable to Wealth Tax:
Worldwide assets of a Trust, when the settlor is a French tax resident (with the 5 year exemption)
French assets settled in Trust, when the settlor is not a French tax resident (with the exception of financial assets under section 885 L of the FTC) (Appendix 9)

37. 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 assets settled in the Trust by the settlors, or beneficiaries, fiscally domiciled in France, and pay the correlative Wealth Tax (form 2181 Trust 2 filed on June 15th of each year).

38. II. Trust and French Taxation
4. The ‘sui generis’ Withholding Tax Otherwise, the trustee shall pay a ‘sui generis’ tax, at the rate of 1,5% of the fair market value of said assets and capitalized proceeds, at the latest on June 15th of each year.

39. II. Trust and French Taxation
4. The ‘sui generis’ Withholding Tax
When the trustee(s) is/are ‘liable’ to the laws of a cooperative state (i.e. which is linked to France with a treaty permitting the exchange of information) the sui generis tax is not due for:
Assets legally reported to the tax authority, when the correlative Wealth Tax has been paid
Assets devoted to Non Profit Organisations
Assets of trustee(s) in charge of employees’ retirement fund.

40. II. Trust and French Taxation
II. Trust and French Taxation 1. Income tax 2. Gift and inheritance taxes 3. Wealth tax 4.The sui generis Withholding Tax 5. Reporting obligations: Section1649 AB of the FTC

41. 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.
A public Trust register is created.

42. II. Trust and French Taxation
5. Reporting obligations – 2181-Trust1 (Appendix 11)
As a consequence, all assets or rights of a trust of which:
The settlor(s) or
One of the beneficiaries
Are fiscally domiciled or located in France, must be reported to the French Tax Authorities (including exempted assets).
The return 2181 Trust-1 must be filed on or before June 15th of each year, with the value of the assets on January 1st of the same year.
If not filed, a fine corresponding to 12,5% of the value of the assets (with a minimum of euros) must be paid by the trustee.
Settlors and beneficiaries are jointly liable for the payment of the fine with the trustee.

43. Thank You !