Legal news

The trusts continue to give a hard time to the tax payers, as well as to the practitioners, and, even though, now it really exists in a French Tax Law, there are a lot of uncertainties rest concerning number of issues.

This law concept is polymorph and it brings all the difficulties that we face to understand.

The question of the taxation of the trust incomes was not waiting for the corrected financial law from the 29th July 2011(L. n° 2011-900, 29 juill. 2011, art. 14 : Dr.fisc. 2011, n°30, comm. 461) to arise and the answers, brought by the French legislator, articulate around two texts the cooperation of which is not always evident.

TAXATION OF THE INCOMES OF THE TRUST: THE LEGAL BASIS

Article 120,9° of the French General Tax Code (CGI): taxation of the distributed products

Among two existing legal bases, the article 120,9° is the most ancient one. It specified in the first version, that « The production of «trusts», regardless the consistency of the assets composing the trusts is considered as the incomes under the present article (…)9°».

The aforementioned corrected financial law for the 2011 was intended to modify the text which since that moment is as follows: «The distributed products of trust, defined in the article 792-0 bis, regardless the consistency of the assets or the rights put in the trust, are considered as the revenus under the present article (…)9°».

This last modification is present in the report by the Financial Commission of the National Assembly as the will to «limit a taxation of the distributed products, thus to exempt the reinvested products».

Thus, this article issues the rule of taxation of only the distributed profits or provided to the natural person by the foreign entity.

Hence, it follows from the only fact that the production is made by the trust established abroad, that the complex of those products is liable to taxation without proving by the taxation authority that those incomes come, partly or in the whole, from the foreign chattel or from the foreign debt obligations (BOI-RPPM-RCM-10-30-10-10, 4 mars 2016, § 130).

Indeed, and according to this rule, the production acquired of the capital, but which stays placed and capitalized in the foreign entity is not liable to taxation in France.

At the time of the adoption of the financial law of the 1999 ( L. n° 98-1266, 30 déc. 1998, art. 101 : Dr. fisc. 1999, n° 1, comm. 1), having created the article 123 bis of the French General Tax Code (CGI), the target was clear: to prevent tax evasion by non-distribution of the incomes of the assets indirectly held in the entity located in the State or on the territory with the privileged taxation politics.

Article 123 bis of the French General Taxation Code (CGI): the taxation increased by transparency of the capitalized production

This article that tends to finish with a principle of liability of limitless taxation, constitutes the principle of the taxation in France of the incomes, acquired by a natural person, a French tax resident, who holds directly or indirectly, participation of minimum 10% in the entity, established in the country, where it benefits a privileged tax system for the incomes or not distributed results of activity.

Thus, the taxation is based on the rights, held by the tax payer on the benefits and positive results of the foreign entity, which, in conformity with an article 209B, is a «natural person».

The type of the aimed structure is very vast as along with the notions of the legal entity, of institution and trusts, we find also the notion of «comparable institutions», so as not to exclude anything of the scope of the text.

The trusts were, besides, specifically aimed by the report of the Financial Commission that justified the non-use of the word «trust» by the constitutional obligation that is «the language of the French Republic is French» and that which concluded, on this «francophonic» note, that it did not have intention not to comprehend the structure, specifically cited in 9° of the article 120 (that is trust).

Uncollected incomes, corresponding, thus, to the category of the incomes of the real estate and are liable to taxation on the increased tax base of the 25% (CGI, art. 158, 7,2°) of the tax rate from the scale without tax allowance of 40% (CGI, art. 158, 2,3°), applicable to the dividends as well as to the social security contributions of the current year in which they were acquired.

Combination of the legal bases

A combination of the texts without collision

Since the conditions of the application of the article 123 bis are fulfilled, it is suitable to put a tax on the incomes of the foreign entity on that basis.

The article 120,9° should not be applied except than residually and without putting tax second time on the same incomes, which were already subject to the taxation under the article 123 bis.

The risk of cumulation of the taxation bound with a principle of the taxation of the non-distributed incomes was already pointed out by the parliamentary works of 1999.

The report of the Financial Commission specified that it was necessary «to be sure that the incomes are not levied for the second time at the time of their distribution, as the article 120 of the French General Tax Code (CGI) provides that the paid out and, therefore, collected abroad financial profits should be liable to the taxation in the France».

This risk was excluded by the 4° of the article 123 bis, providing that the distributed or payed to the natural person, liable to tax, incomes, constitute the taxable income only in the part exceeding the sum on which the tax was put as on the acquired incomes.

On the practice, the case of the exceeding distributed incomes to the acquired incomes stay rare, thus the articles 123 bis and 120,9° are combined in very seldom cases.

A possibility to go out of the scope of the article 123 bis of the French General Tax Code (CGI)

Till recently, since it was proved that conditions of application of the article 123 bis were fulfilled, the positive incomes of the entity, which are considered to constitute a chattel capital of the natural person in the proportion of the rights, which it holds directly or indirectly.

It is about irrefragable presumption and the tax payer could not go out of the scope of the article 123 bis from the moment it went in.

In the recurrent context of the censorship by the Constitutional Council of the irrefragable presumption, the Priority Question of Constitutionality (QPC), raised in the case Nabitz, came just at the right moment.

The Council have drawn a direct line of its previous decisions and, if it has validated the conformity of those derogatory rules to the Constitution it is under condition that the natural person will be able to prove, that the participation that it holds in the entity established in this State neither aims nor allows for the purpose of the fraud or tax avoidance, the localization of the incomes abroad (Cons. const., 6 oct. 2017, n° 2017-659 QPC, Nabitz : Dr. fisc. 2017, n°41, act. 552).

Such a demonstration, from now on, helps tax payer to avoid the application of an article 123 bis to benefice the common rights of an article 120,9°.

A difficult application of an article 123 bis of the General Tax Code (CGI) to the trusts

Since the mechanism of an article 123 bis implicate that the natural person holds at least 10% of an entity, the application of the article to the trusts seems delicate and difficult.

On this point, the report of the Financial Commission of National Assembly about the project of the corrected financial law for the 2011 was clear: «the article 123 bis, assuming that the natural person pays taxes transparently and holds 10% of the entity, the provision which is, in the reality, applied rarely (almost never) to the trusts».

On this point, we totally agree with Bruno Gouthière who estimates that the application of the article 123 bis to the trusts requires that the founders would decide beforehead that the trustees should actually distribute to the beneficiaries the sums representing at least 10% of the trust’s incomes (B. Gouthièr, Les impôts dans les affaires internationales: Ed. Francis Lefebvre, 11e éd., n° 50385). Even if this hypothesis is not unlikely, but it is not the one we face very often.

However, there are still the cases in which the trust’s incomes could be taxed under article 123 bis, it is the case of the entities established on the not-co-operative territory or in state (ETNC).

In this situation actually, the article 123 bis, 4 ter specifies that the condition of the holding of 10 % is supposed to be fulfilled and that the taxable incomes of a natural person, thus, cannot be inferior the fixed amount, which represents a taxable minimum: if the application of the EC law leads to the superior taxable incomes, it will be the latter that will be liable to tax – on the product of the fraction  of the net assets or the net values of the entity,  corresponding to the rights of the tax payer  on the profit, resulted of the average interest rates applied by the credit organizations (currently 1,67%, V. avis, 28 juin 2017).

This very same rule of taxation is applied to the States of the Territories, which have not entered into the convention of the administrative assistance, but the presumption of the holding is not applied.

Since the decision of the  Constitutional Council of the 1st March 2017 ( Cons. const., 1er mars 2017, n° 2016-614 – QPC : Dr. fisc. 2017, n° 10, act. 159. – V.C. Acard, Fiscalité financière : Dr. fisc. 2017, n° 21, étude 318, n° 20) it only a simple presumption.

The tax payers, thus, are justifiable to avoid this particularly strict rule of a taxation, providing an evidence that the incomes actually received by the intermediary of the entity, are inferior to the incomes defined as a fixed sum applying this provision.

The Grid of Reading and application of the texts

It seems possible to indicate different situations and to join there the basis, serving to tax the incomes.

We present this grid of the synthesis in the form of a hypothesis and sub-hypothesis.

Hypothesis 1: The trust is the structure about which we can affirm that the natural person holds at least 10% of the entity.

Hypothesis 1.1: The trust is situated in the country with a privileged tax politics.

Hypothesis 1.1.1: The natural person is capable to demonstrate that the participation, holding by it in the entity, do not aim and do not allow the localization of the incomes abroad for the purpose of fraud or tax avoidance: application of only the article 120,9°.

Hypothesis 1.1.2: The natural person cannot report such a prove: application of the article 123 bis and, if needed, of the article 120,9°, if the distributed incomes exceed the acquired incomes.

Hypothesis 1.2: The trust is not situated in the Country of Privileged Tax Politics: application of only the article 120,9°.

Hypothesis 2: The trust is not structured and it is not possible to relate any participation to the natural person: application of only the article 120,9°.

Hypothesis 3: The trust is located in the not-co-operative territory or state (ETNC): the incomes liable to tax cannot be lower than the product of the fraction of the net assets or net values of the entity corresponding to the rights of a tax payer on the profit resulting from the average interest rates habitual for the credit organization (CGI, art. 123 bis, 3°, al. 2).

Hypothesis 3.1: The tax payer is capable to report the prove that the incomes, actually received by the intermediary of a moral person are inferior to the incomes, defined in a fixed sum: application of an article 123 bis, 1°. It seems, thus, consistent to admit that in this situation, the natural person can also prove that the participation, held by it in the entity, established in the not-co-operative territory or state (ETNC), does not aim and does not allow localization of the incomes abroad for the purpose of fraud and tax avoidance, to be able to go out of the scope of the article 123 bis and to enter to the scope of the article 120,0°.

Hypothesis 3.2: The tax payer is not capable to demonstrate that the incomes, actually received by the tax payer of an entity are inferior to the minimal limit of the incomes, defined as a fixed sum: application of a derogatory rule of the article 123 bis, 3°, al.2.

In the sense of transparency imposed today to the trusts and assimilated entities by the law of 29 July 2011, the administrators should fulfill the restrictive declarative obligations (CGI, ann. III, art. 344 G sexies et septies).

These obligations have surely the function to show that the settlors and, moreover, the beneficiaries considered as settlors or the simple beneficiaries were not led by the willing to use the trust to localize their incomes abroad for the purpose of fraud or tax avoidance.

The traceability of the assets and the capitalized production was made possible by the subscription of the factual declarations.

Thus, it helps to know with all the transparency:

– the distributed incomes taxable by the application of the article 120,9°;

– the allocated capital, not representing the incomes and not characterizing a free transmission, because they are captured by the settlor himself after contribution to the trust, or by the beneficiary, considered as a settlor after a regularly declared transmission;

– the attribution of the incomes, coming from the capitalized production of the free transmission of the property including this production.

It is clear, the case of the taxation of the incomes of the trust under the rules of the article 123 bis should be relatively rare.

The majority of the taxation should be made in conformity with the article 120,9° and only the distributed incomes should be aimed.

In this regard, the solution imposed by the Tax Authority in the frame of the regularization the assets, held abroad that consisted the taxe base of the production of the trust and other similar entities under the article 123 bis, could be justified in the majority of the cases treated by the Corrected Declarations Treatment Service (STDR).

Actually, the regularization concerned the time when the contribution was held as a secret and when the incomes were subtracted of the tax.

Now it is not the case and it is a time to feel the consequences that arise while applicating the tax politics to the incomes, generated by the trust, which is in conformity with the constitutional principles, as well as with the international obligations of France.

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171214 THE DELICATE QUESTION OF THE TAX TREATMENT OF TRUST’s INCOMES (la délicate question du traitement fiscal des revenus des trusts)

Generally moved aside by the International Convention Against Double Taxation – or reduced to 5% or 10% for the royalty tax, the withholding, provided by the article 182 B of the French General Tax Code (CGI) for the services remunerations, rendered by the non-residents is applied at the full rate in the absence of the convention.

The recent decisions and current numerous adjustments show that this in the case, when the convention is denounced or when the foreign tax payer cannot enjoy the advantages provided by the later, he should be liable to tax in his State of residence.

The withholding is, thus, payable on the gross sum at the tax rate of 33,1/3% – 33,1/3/66,2/3=50% in the event of the auditing, or the rate on the basis superior to the corporate tax, to which the entities-tax payers would be liable if it were established in France. The purpose of the present

article is to show, in the light of the recent decisions, that this disadvantageous treatment is not compatible with the equity principle and that the right of defence requires that tax payer should be invited to participate in the rectification process before the taxation is applied towards the established debtor, or who has an activity in France.

171212 WITHHOLDING TAX la retenue à la source de l article 182 B à l épreuve du principe d égalité et des droits de la défence

A Fixed Place of Business (établissement stable) and a Veiled Real Estate Activity (activité immobilière occulte): the interesting details by the Council of State in the Frame of the French-Luxembourg convention

By the two decisions of the 17 March 2017, the Council of State gave a ruling on the notion of a Fixed Place of business (établissement stable) in the frame of the operations of the real estate promotion, realized by the Luxembourg entity.

It results from this decision, that the organizational structure of the Real Estate Operators seem to be a determining factor on the characterization of the Fixed Place of Business (établissement stable) (allocation of roles between the Program Company and the Service Company and the link between them, drafting of the project ownership contracts (maîtrise d’ouvrage), a control of the carried out constructional operations by a foreign society).

Besides, the Council of State took an opportunity to remind its interpretation of a veiled activity (activité occulte).

According to the High Jurisdiction, the notification of an exercise of the activity by the means of tax declaration does not prevent the Administration from considering that the other activity carried out by the same entity is veiled.

CE, 8e et 3e ch., 31 mars 2017, n° 389573, SARL Estienne d’Orves (1re esp.), concl. R. Victor, note F. Lugand et P. Lucas

Inédit au recueil Lebon

20171212 Fixed Place of Business and Veiled Activity – the interesting details by the Council of State in the Frame of the french-Luxembourg convention

Facing an emergence of the rivals, the life insurance loses progressively its «Swiss knife » status of the investments world.

STRATEGY It is a continues love story. The French people adore life insurance. Frankly speaking, because the investment offers an unequal status in terms of the capital transmission and allows to make investments on funds in euro, a UFO in the investment world. Investing their savings to these fonds, consumers are certain indeed, thanks to the «ratchet effect», not to lose their acquired ownings. However, several changes spoil the game: first of all, yield erosion of the funds in euro (1,80% the last year on average according to the firm Facts & Figures and the new decrease is expected this year). Then, the creation the uniform standard deduction (prélèvement forfaitaire unique) beginning from the 2018, which reinforces likewise an attraction of the securities account.

The first question arising for the investors: should they give up hope on the funds in euro? Being disappointing these last years the product is not exhausted. «The insurance agents should encourage the investors once again to bring savings to their fonds in euro as soon as the rate will increase significantly, then they can appear to be more generous than today», – hopes Cyrille Chartier-Kastler, the president of the Facts & Figures. The clients of the privet banks ask questions about a new tax system.

Most of them want to know if the real estate part of their life insurance (real estate investment trust (SCPI), lands) will be subject to the real estate tax (IFI), which will replace the solidarity wealth tax (ISF). According to the current condition of the text, it is the case: it is necessary to reintegrate to the real estate tax the quota of the real estate kept in the life insurance contract. «But there is no need to make quick decisions or make urgent trade-offs, the text is still neither definitely voted for nor validated by the Constitutional Council ( Conseil constitutionnel)», highlights Xavier Richard, the director of the capital planning (l’ingénierie patrimoniale) department of the HSBC France. The other question: is it better to keep their stock portfolios (sicav) in the life insurance contract of in the securities accounts Equity Savings Plan (PEA)?

«Life insurance will stay an important device of the capital managing, but probably with a little bit less wide spectre than today», estimates Xavier Richards.

The «Swiss knife» of the investor, the life insurance witnesses an emergence of the new rivals. Keeping their stock portfolios (sicav) on the securities accounts or Equity Savings Plan (PEA), the private persons avoid paying the fee to the insurance agent (about 0,9%). As the fees are charged year after a year, in the last analysis they are quite heavy», highlights Cyrille Chartier-Kastler. The rate level, the assets valuation and tax reform will make the investors think first about their capital strategy. «There is no more evident choice. And the capital planning has become preponderant: for the given assets, depending on the investment conditions, the yield can vary from 1 to 3!», explains Meyer Azogui, the president of Cyrus.

The life insurance stays, however, unbeatable in the succession domain. In particular, for the big heritage. «Let’s take an example of the couple who has three children and who transmitted to each more than 700 000 euro. In the frame on life insurance, the 31,25% will be imposed on them, whereas it will be 35% outside this contract», counts Xavier Richard. It also allows not to be imposed on a gain (after the cession of the stock portfolio (sicav) or of the shares) as long as the assets rest in the contract. Finally, for the consumers who has set up a ceiling strategy (the income taxes, solidarity wealth tax (ISF) and supplementary social security contribution (CSG can’t represent more than 75% of the incomes et certain consumers try to limit the incomes to be imposed less), the life insurance is a good device. The incomes which are coming from the life insurance actually include a part of the capital, which limits the income taxation.

INVESTMENT An adoption of a uniform standard deduction on the life insurance will be profitable for one and disadvantageous for the others. But there is no reason to call into question its place in the estate managing. After twenty years of stability the taxation of the life insurance is facing the big changes with the introduction of the uniform standard deduction of 30% (prélèvement forfaitaire unique). The evolution which incites to revise the place of the life insurance but certainly not to wipe it off the map.

Which of the changes for the investments are already introduced?

First statement: the reform doesn’t imply any changes for the already invested sums before the 27 September 2017. It saves the previous tax regime, and therefore there is no reason to go backwards. For the sums withdrawn from the contracts after 8 years, the insured persons continue to benefit an annual tax allowance on the gains of 4 600 euro and 9 200 euro for the couple being subject to the common taxation, then the rate of the exempting standard deduction of the reduced rate of 7,5% is applied. «To the extent where each redemption contains at the same time a part of the initial capital, which is not taxable, and a part of the gains, which is taxable, the possibilities of a withdrawal are much broader than those sums let believe», specifies Gerard Bekerman, the president of the Afer. A life insurance containing for example a half of the premiums payed and half of the accrued gains authorizes, thus, to a yearly withdrawal of 9 200 euro in the investor is single and 18 400 euro for the couple. It will satisfy a good number of needs of the complementary incomes, as this tax allowance is valid every year.

And what about the new remittance?

The same statement for the sums invested after 27 September since they do not exceed 150 000 euro. Still, since the withdraw is effected after 8 years, the investors will have the right for the tax allowance and a reduced tax rate of 7,5% on the fraction of the withdrawn gains.

Thus, the principal change concerns the new installments but only for the part exceeding 150 000 euro. In the reality, this threshold is applied not only to the new installments, but to the totality of the sums placed to the life insurance. So, the person who invested 150 000 euro before the 27 September, then 100 000 euros after this date will be subject to the two different taxation regimes for its withdrawals. The tax authorities will apply the previous rules to the first 150 000 euros and new rules to the newly invested 100 000 euros. It is an insurance agency liability to communicate the data to determine the part of gains withdrawn corresponding to those two compartments.

Thus, there is a principal change: the part of the gains included to the withdrawal of the contract fed by the sum exceeding 150 000 euro will be subject to a new uniform standard deduction of 30%, that is 12,8% of the tax against 7,5% which existed till the present moment. The increase of the tax for 5,3%, but which will be applied only to the fractions of the withdrawals higher than tax allowance (4 600 and 9 200 euro), as this tax «deduction» (franchise) remains.

Hence, the wealthiest possessors of the contracts of the life insurance will become the main victims of this tax hardening, but only if they process the withdrawals exceeding the tax allowance. In reality, they will be affected a bit: «In general, our clients ask us to settle the sum of their withdrawal on the sum of the tax allowance in order to not pay the taxes», explains Jean Malhomme, a responsible of the individual deposits in Axa. Besides, the persons which can become more probably a subject to taxation generally keep their money as the investment to the life insurance during all their life, so their relatives could benefit the important tax exonerations on the succession rights which are still effective.

Who are the winners?

There will be persons who will benefit from the reform: from now on, it will be applied a rate or 30% of the uniform standard deduction to all the new contracts, even for the withdrawal made during 8 first years. The profit will be very significant for the withdrawal effected before 4 years, to which the rate of 35% was applied, and now it will decrease to 12,8%. And for the withdrawal of the contracts lasting between 4 and 8 years, it will decline from 15% 12,8%. A modest gain, but still good to have it!

Thus, the reform will introduce an unexpected element; it will imply a taxation more beneficial for the life insurance for the short and average term, smaller tax rate than before. It sounds like an invitation to use a life insurance for the short-term deposits, for example in the guaranteed fonds in euro, which, despite of the erosion of the performance, stay the most profitable security solution.
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171128 HOW TO RESTRUCTURE OWN CAPITAL (Comment remodeler son patrimoine)

Bare ownership (nue-propriété) donation of the shares under condition of reinvestment and postponement of the unsecured usufruct

By the court decision of the 31 march 2017 the Council of the State it was admitted the validity of the bare ownership (nue-propriété) donation of the shares under condition of reinvestment and postponement of the unsecured usufruct. By this the supreme judges confirm their position of the 10 February (CE, 9e et 10e ch., 10 févr. 2017, no 387960 : JurisData no 2017-002348; RFP 2017, comm. 8, note S. Torricelli-Chrifi ; JCP N 2017, no 18, 1172, note J.-J. Lubin ; Dr. Fisc. 2017, no 14, comm. 239, note R. Mortier). Little by little, at will of the court decision appears the supervision of the donation cession of the shares in the vis-à-vis abuse of rights process.

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Bare ownership donation (Donation de la nue-propriété) 20171002.docx

Deductibility of the loan and acquisition interests on the bare ownership (nue-propriété) on the part of the property society (SCI): a missed appointment for equalizing harmonization.

On the combined legal basis of the articles 8, 13, 1o и 31,I, 1o, d of the General Taxation Code of France (CGI) the loan interests are acquired personally by the holder of the bare ownership(nue-propriété) to finance the acquisition of the bare ownership (nue-propriété) from its part, within SCI as a holder of the rented real estate, the property interests are not deductible if the interested person would receive them for other property or property rights since those interests cannot be considered as the exposed obligation for the acquisition or the conservation of the estate income in conformity if the administrative doctrine prescriptions.

On the other hand, on this very same legal basis the loan interests supported by the usufruct holder from the part of society to finance this acquisition since it the only subject to the income tax for the quota corresponding to the right in the social Income that he receives.

Finally, the loan interests actually paid by the bare ownership holder of the rented property (not a part of the SCI) and intended to finance either acquisition of the bare ownership either expenses of repairing, maintenance or improvement of such property are deductible from the property income coming from their other property if necessary.

CE, 8e et 3e ch., 24 févr . 2017, no 395983, Frank, concl. B. Bohnert, note P.-Y. Di Malta: JurisData no 2017 -004184.
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Deductibility of the loan and acquisition interests (déductibilité des intérêts d’emprunts et acquisition) 20171002.docx