A Trust is a famous and ancestral legal arrangement in which a Trustee holds and manages assets on behalf of one or more beneficiaries.
Contrary to popular belief, the Trust is not a recent offshore engineering’s scheme. The very first one dates back to the Middle Ages. The Lord who went on a crusade knew that the adventure could be fatal, so he had to bequeath his fief and his property under conditions of use or duration to a man of “Trust”. The beneficiary was responsible for making the estate bear fruit while awaiting the return of the lord or his heirs.
Nowadays, Trusts can be used for a variety of purposes, such as estate planning, asset protection, and charitable giving. They offer a high degree of flexibility in how assets are managed, invested, and distributed, and can be customized to meet the specific needs and goals of the creator. Trusts can also provide privacy and confidentiality, as the details of the Trust and its beneficiaries can be kept private from the public record. In this context, the interest of a Trust refers to the benefits and advantages that a Trust can offer to its creators and beneficiaries.
In case of interests in France, the main interest of a Trust is that it could own assets and generate income which, without distribution, would not be taxed at the level of French resident settlor or beneficiaries.
This principle is however, attacked by several rules, and conditions, to allow anti abuse tax legislation to apply.
The recent 2022 financial law has enacted a new limitation to this principle which should be considered for all French tax resident involved with Trust and also for those who, may consider moving to France.
The article 123 bis of French tax code provides that "an individual holds 10% of the shares, units, financial rights or voting rights of a legal entity made up mainly of transferable securities, established outside France and subject to a privileged tax regime — which indeed refers to a Trust, the profits of this Trust — whether distributed or not — are deemed to constitute income from movable capital for this person, which is then taxed on income taxes or at the single flat-rate levy (PFU), whether this 10% holding threshold is actually reached or not".
When the Trust is located in a country which is considered to be tax opaque and non-corporative (list changed regularly and currently include BVI and Panama for example), the 10% condition is fulfilled. Thus, the tax payer has to demonstrate that the Trust has not been set up to structure artificially ownership of financial assets.
Since new 2022 financial law, there is a second case where the 10% ownership will be assumed to be fulfilled, returning the burden of proof to the tax payer again. This new legal provision is contrary to the recent appeal court decision of 24th June 2020 (“CAA de Paris, 2e ch, 24 juin 2020, n°19PA00458”). The court indeed rules at the time that beneficiaries without control over the assets of an irrevocable and discretionary Trust could not be taxed on the Trust income/profit.
The article 123 bis of the French tax code provides that:
“The 10% holding condition provided for in [1st paragraph] is presumed to be satisfied:
a) By the settlor or the beneficiary deemed to be settlor of a Trust, within the meaning of article 792-0 bis. Proof to the contrary cannot result solely from the irrevocable nature of the Trust and the discretionary management power of its administrator;
b) Or by the natural person who has transferred assets or rights to a legal entity located in a non-cooperative State or territory, within the meaning of Article 238-0 A.”
This new rule completes the legal frame work existing in France aimed at fighting against the abuse of use Trust for tax purposes.
Nowadays, the irrevocable nature of the Trust and the discretionary power of the Trustees, are no more sufficient conditions to prevent a French resident beneficiary to be taxed on the undistributed income of the Trust.
Paragraph B of the new text should also not be forgotten as it refers not only to Trust but to « all entity located in a so-called non-tax cooperative states » to which the tax payer transferred assets or rights. It means that potentially all interests in companies or entities located in these states, which list can be amended any time, could falls into the article 123 bis and implies taxation in France of undistributed income.
This new system gives high levels of freedom to the French administration to look through entities and disregard them for tax purposes, only based on their localization. Unless contrary proof is evidence by the tax payer, with all subjective elements that these interpretations contains.
