Is the systematic inclusion of trust assets in the wealth tax base of the settlor unconstitutional?

Is compliant with the constitutional principle of equality of citizens before charges levied by the State  (i) the systematic inclusion of trust assets in the wealth tax base of the settlor (ii) regardless the terms of the trust deed and rights confered thereby on the settlor?

This is the question the French Conseil d’Etat elected to refer to the French Conseil constitutionnel on September, 25th 2017 (n°2017-679 QPC). Asked again a priority question on constitutionality (“Question Prioritaire de Constitutionnalité” or “QPC”, ) on the matter of trusts, the French Conseil constitutionnel is due to render its final decision within the next three months.

This relevant question highlights once more the issues and doubts encountered in the Law on Trusts Act 2011, and whose the purpose was to set up a specific tax regime for a vehicle which was not recognized by the French law.

The settlor of the trust is liable to wealth tax according to French law

The principle set by article 885 ter, paragraph 1, of the French Tax Code (« FTC ») seems clear as to its scope : “assets and rights settled in trust […] and capitalized income thereof are included [for wealth tax purposes], for their net FMV value on January 1st of each tax year, in the assets of the settlor, or as the case may be of the beneficiary-deemed-settlor“. The settlor is therefore liable to wealth tax (“Impôt de Solidarité sur la Fortune” or “ISF”) on assets settled in trust.

Adding to the law, the French Tax Administration official tax guidance infers from article 885 G ter of the FTC that assets settled in trust are included in the assets of the settlor for wealth tax purposes “notwithstanding the terms of the trust deed and therefore the nature of the trust (irrevocable or revocable, and discretionary or non-discretionary).”.

The referral of the priority question on constitutionality to the French Conseil constitutionnel

The case brought in front of the French Conseil d’Etat was related to a taxpayer, liable to French wealth tax and assets settled in trust among other kind of assets. As provided by the applicable law and official tax guidance, the taxpayer was mandatory to report the value on January 1st of the assets settled in trust for the assessement of the wealth tax. The taxpayer raised a question on the constitutionality of the systematic inclusion in the settlor’s wealth tax base all assets settled in trust notwithstanding (i) the terms of the trust deed and (ii) especially if, in accordance with the nature of the trust, the trust may not confere to the settlor any taxable income.

The French Conseil d’Etat deemed the question on the constitutionality of article 885 G ter of the FTC under the principle of equality of citizens before charges levied by the State serious enough to refer the question for constitutional review to the French Conseil constitutionnel.

Legal action might be available

As the French Conseil constitutionnel must rule within three months of referral, a decision should intervene by the end of December 2017. The decision could have important consequences if the justices were to (i) rule that article 885 G ter of the FTC is constitutional but only if interpreted in a certain way (“réserve d’interprétation”) or (ii) to declare the entire provision unconstitutional. The French Conseil constitutionnel may also elect to restrict to the past the effects of its decision.

Therefore, settlors liable to wealth tax might be able to avail themselves of legal remedies for the potential overpaid amount of wealth tax, for the last (potentially) ten years. Affected taxpayers should review their situation with regard to French wealth tax and take precautionary steps before a decision intervenes.

 

Christina Melady

Christina Melady, Partner, has over 23 years’ experience practicing tax law in France and advises both companies and managers on personal tax matters. Christina created the specialized practice in France […]

Nicolas Meurant

Nicolas Meurant, Partner, has over 15 years’ experience providing advice to corporations and individuals in individual tax and Global equity area, in the structuring of shareholding schemes, as well as […]

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Alexis Fillinger

Alexis Fillinger has more than 11 years of practicing. He advises both companies and individuals on personal tax matters, in international context He is specialized in the structuring of investment […]