French Wealth Tax and Trusts

French Wealth Tax and Trusts

The settlor of a trust may prove that he has no right of disposal over the assets and income of the trust and therefore no corresponding tax liability

Article 885 G ter of the French General Tax Code (CGI), as amended by the 2011 Finance Act, No. 2011-900 dated 29 July 2011, provides that the property or rights placed in trust as well as the products capitalized in the trust must enter into the taxable assets for the Solidarity Tax on Wealth (so-called “ISF”) as if they had never been transferred. Alternatively, the assets and income must be enter into the patrimony of the beneficiary, when he is legally deemed to be a settlor (in particular in the event of the death of the settlor prior to the date of entry into force of the aforementioned law no 2011-900).

A priority preliminary ruling on constitutionality concerning Article 885 G ter CGI, has been referred to the French Constitutional Court. The questions to solve was to know (i) whether the assumption of attribution of assets and income of the trust negates the principle of equality of the taxpayers vis-a-vis government encumbrances, (ii) whether this assumption is proportionate in the view of the objective of combating tax fraud and tax evasion, (iv) whether this legal assumption is irrefutable, in other words if the taxpayer can prove the contrary or not and (v) whether this provision contravenes article 13 of the Declaration of the 1789 Rights of Man and of the Citizen[1].

In its decision dated December 15th 2017  (n° 2017-679 QPC), the Constitutional Court declared that the assumption complies with the French constitution as it pursue the objective of combating tax fraud and tax evasion and helps to establish the facts. According to the Constitutional Court, the French Parliament took into account  the difficulty inherent in trusts in designating the person who as a tax capacity in relation with the assets and income of the trust.

However, the Constitutional Court held that this assumption must be rebuttable. The application of this irrefutable presumption could lead to a breach of the equality between the taxpayers. Two citizens with equal contributory capacity must pay the same taxes. The ability to pay is the estimated ability of a taxpayer to finance a portion of public expenditures through taxes. The trust deed, especially when it establishes an irrevocable and discretionary trust, forbids the settlor from disposing of the transferred assets or forbids the beneficiary of the trust to freely dispose of the transferred assets (see our contribution dated February 14, 2017, about the Wildenstein case). In this event, the settlor shall not be liable of the taxes in relation of the assets and income transferred into the trust. For this reason, the settlor must be able to prove that he bears no tax capacity in relation of the trust equity and income. The Constitutional Court underlines that this proof of the contrary may only result from the existence of a discretionary and irrevocable trust.

The 2018 Finance Law No. 2017-1837 of 30 December 2017 replaced the “ISF” wealth tax with a property tax (“impôt sur la fortune immobilière”). In our opinion the above mentioned Court decision should however apply to the property tax as well as the transfer duties.

Daniel Ohl, docteur en droit, avocat aux barreaux de Paris et de Genève, section des avocats UE




[1] “For the maintenance of the public force and for the expenditures of administration, a common contribution is indispensable; it must be equally distributed to all the citizens, according to their ability to pay”

6 March 2018