FRANCE Law and Practice Contributed by: Elodie Mulon, Jennifer Tervil, Romane Lemaitre and Emmanuelle Bonboire-Barthélémy, Chauveau Mulon & Associés
in France. However, foundations may allow a testator to allocate part of their estate to designated legatees under a more favourable tax regime by naming the foundation as universal legatee ‒ subject to the dis - posable portion if there are forced heirs ‒ with the obli - gation for the foundation to subsequently pass on part of the estate to a specified third party. Foundations can thus be used for estate transmission purposes. 3.2 Recognition of Trusts France has never ratified the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition, and consequently, trusts are not formally recognised under French civil law. However, due to the growing prevalence of trusts and increasingly porous borders, France eventually acknowledged their exist - ence for tax purposes, to avoid their use in tax evasion schemes. A definition of a trust was incorporated into the French Tax Code by the Amended Finance Law for 2011 (Article 792-0 bis of the CGI). This legislation established a specific regime for foreign trusts that generates taxable events. This regime does not apply to French fiducies , which are subject to a separate legal framework. On the civil law side, French courts, invoking the principle of party autonomy, now recog - nise foreign trusts under strict conditions: • the trust must be validly constituted under the laws of the jurisdiction concerned; • it must not contravene French public policy; and • it must not infringe: (a) rules of inalienability, where assets located in France are subject to French law. French legal resistance to the trust stems not only from concerns about tax avoidance but also from con - ceptual differences. For example, the trust relies on notions foreign to French civil law, such as legal and equitable ownership, which conflict with the founda - tional principle in French law that all property belongs to a single legal owner. In a trust, the trustee is merely the nominal owner, while the beneficiary holds benefi - cial interest. This distinction between apparent own - ership and equitable ownership has no equivalent in French law. Although comparisons are often drawn between the trust and the fiducie , they remain dis- (b) the forced heirship regime; or (c) rules on gifts to unborn people.
tinct mechanisms. For example, a testamentary trust cannot be equated with a fiducie-libéralité , as such arrangements are currently prohibited under French internal law (French Civil Code, Article 2013). 3.3 Tax Considerations: Fiduciary or Beneficiary Designation Law No 2011-900 of 29 July 2011 (Amended Finance Law for 2011) introduced a specific tax framework applicable to foreign trusts. • The trustee is subject to a dual reporting obligation to the French tax authorities when the trust has any link with France (even a tenuous one): an annual asset declaration, and an event-driven declaration at the time of the trust’s creation, modification, or termination. Additionally, fees paid to French- resident trustees managing movable or immovable assets are taxed under the business profits (BIC) category. • The settlor is either the natural person who created the trust or, if created by a professional or legal entity, the individual who contributed the assets (French Tax Code, Article 792-0 bis, I-2). If the settlor is a French resident, they are subject to gift or inheritance tax and to the real estate wealth tax, since the French tax authorities consider the trust assets to remain part of the settlor’s estate. They may also be liable for the 3% annual tax, except in cases specifically excluded by Article 990 E of the French Tax Code. • A French-resident beneficiary must report income derived from foreign trusts as foreign investment income for income tax purposes, regardless of the nature of the trust assets. Thus, any connection between a trust and France sig - nificantly reduces the benefits otherwise offered by trusts in jurisdictions where they are fully recognised. The French authorities are generally suspicious of trusts and apply a transparency principle. The fiducie does not escape this scrutiny either, as it is also sub - ject to transparency rules and cannot be used for gratuitous transfers. Nonetheless, these mechanisms can offer some planning opportunities, provided all tax obligations are scrupulously observed.
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