Under French tax law, individuals who are resident in France for tax purposes are subject to an annual wealth tax (impôt de solidarité sur la fortune) on their worldwide assets, provided that the total market value of such assets is higher than a certain threshold (€ 780,000 in 2009). The tax rate itself varies between 0.55% to 1.80%. Non-resident individuals are only subject to the tax on their French assets.
The question of how assets held in trust must be treated for French wealth tax purposes is unclear because there is no comparable notion in France, even if the concept of fiducie recently implemented into French law allows companies or individuals to a certain extent and within certain limits to attain similar objectives. Further, the separation of legal and beneficial ownership under UK common law does not fit squarely within the classifications of French civil law.
In order to be subject to wealth tax in France, an individual must be the owner, or at least the usufruct holder, of assets that fall within the scope of the tax. This raises the issue of identification of the owner of assets passed under trust for French wealth tax purposes.
In a decision dated March 2009, the French Supreme Civil Court (Cour de cassation), addressed this issue in part by deciding that the value of a portfolio of securities held by an individual under a US based revocable and non discretionary trust should be included within her assets subject to wealth tax (Cass. Com., March 31, 2009, 07-20219, Anna X.).
The facts were as follows: the US citizen, resident in France for tax purposes, did not report in her wealth tax calculation various securities that she had previously passed under a US trust. After her death in 2001, the tax authorities disregarded the trust and took the position that before her death, she was liable to French wealth tax with respect to the securities held in trust.
The settlor’s heirs challenged the tax authorities’ view and brought the case to court.
The Court of Appeal confirmed the tax authorities’ position that the trust assets should be subject to French wealth tax in the hands of the settler because the trust was revocable and that the trust deed provided for the allocation of income for the benefit of the settlor. Indeed, the Court found that during the settlor’s lifetime, the trustees were required to hold the trust assets in her interest, to pay her any income derived from such assets and to dispose of them as she saw fit without any limitations. In addition, it appeared that the settlor could revoke the trust at any time and regain ownership of the trust assets or request that all or part of the securities portfolio be liquidated in her favour.
In an appeal against this decision, the settlor’s heirs claimed that regardless of the trust’s characteristics (revocable or irrevocable, discretionary or non discretionary), the passing of assets under trust triggers an immediate transfer of legal ownership of such assets to the trustee who is not a mere depository and is the sole person entitled to sell them.
In addition, they argued that the creation of a trust under US law triggers a division of legal ownership and beneficial ownership, which is not acknowledged by French law. Thus, the settlor is neither the owner or the usufruct holder within the meaning of the French Civil Code and the trust’s assets may not be included in his/her wealth tax calculations in the absence of an express provision in this respect.
The Cour de cassation nevertheless approved the position of the Court of Appeal and considered the fact the settlor had benefited from several rights of ownership, i.e., the right to use and dispose of the assets held in trust. It therefore concluded that such assets had to be included in her wealth tax calculation.
Whilst the position of the Cour de cassation is consistent with the dominant view, the case is still significant as it is the first time the Cour de cassation has ruled that the settlor of a revocable trust must be considered as the owner of the trust assets for wealth tax purposes.
The ruling however does not deal with all the questions raised by trusts with respect to French tax law.
Most notably, the Cour de cassation does not address the more complex situation where the trust is irrevocable or discretionary. In this case, does the settlor cease a contrario to be treated as the owner of the trust assets? Do both of these characteristics need to be present in order to deprive the settlor from ownership? Further, if the settlor is no longer the owner for wealth tax purposes, does someone else become liable for this tax in his or her place?
If the trustee were to be treated as the owner by the tax authorities, notably as a result of the theory of apparent ownership, this would mean that most of the time none of the parties involved would be covered by French wealth tax, as the tax does not apply to corporations. If the trustee is an individual, in any case, he or she may only be subject to French wealth tax on the French assets held in the trust.
In certain circumstances, the owners for wealth tax purposes might be the beneficiaries but this will depend on the provisions of the trust deed and cannot be an automatic solution. In this respect, in a recent case, the Civil Court of Nanterre ruled that a French beneficiary of US trusts could not be subject to French wealth tax with respect to beneficial ownership. Indeed, the Civil Court did not agree with the tax authorities, which tried to demonstrate that since the beneficiary was regularly receiving income from the US trusts, she was deemed to be the owner of a portion of the trusts for wealth tax purposes.
The Court stressed that the trust deed denied any property right or claim on the trusts or trust assets to the beneficiaries. In addition, the Court took into account the fact that the trustee had a discretionary power to decide whether or not income should be distributed each year (TGI Nanterre, May 2, 2004, n° 0303950, Evelyne Poillotc/ M. le Directeur des Services Fiscaux des Hauts de Seine).
In addition, the Court’s decision does not address the impact of the ruling on other taxes. However, it should be noted that the logical consequence of its position is that the passing of assets under a revocable trust does not trigger a transfer of ownership to the benefit of the beneficiaries, or even the trustee, and cannot be subject to French tax provisions in relation to gifts.