Legal news

1. The conditions for the recognition in France of the effects of a trust validly constituted abroad

The French jurisprudence recognizes the validity of trusts constituted abroad according to the principle of the autonomy of the will which allows the parties to submit their act to a law knowing the mechanism of the trust.
Recognition of trusts validly constituted abroad must be constituted in accordance with the laws in force in the country in question It must not offend French public order and it may not in particular infringe:
• inalienability clauses where there are assets located in France and falling under French law,
• the hereditary reserve (public order). Thus, the trust can be recognized as valid under French law even if it comes up against the fundamental principle of our right (according to which all patrimony rests on the head of an owner).

In practice, the limitation of the effects of the trust in France often concerns the application of the rulesrelating to the reserve, the trust allowing the gratification of persons who are not heirs of the grantor and organizing a succession over several generations.

However, if there are reserve heirs, in case of application of the French Estate Law (e.g. when the settlor died while he was a resident of France or the estate of a non-resident relates to an immovable situated In France and subject to French law) the trust can only be executed on the available quota.

2. Illustrations

2.1. Trust subject to foreign law and recognized in France Betty Jackson (widow of Kevin Jackson), American citizen died in Chicago leaving two children Brenda and Tony Jackson also residing in Chicago. By a will, she had established a trust by instituting an American bank as a trustee and by designating her son Tony as beneficiary, having voluntarily excluded her daughter Brenda, with whom she had long been quarreled. The trust consists of 4 buildings located in California, a bank account of 500 000 € and a securities portfolio of 1 000 000 € in a French bank. On the one hand, the trust has been validly established as it relates to real estates located in the United States.

Betty Jackson, who died in California, is subject to California law, knowing that movable property in France may be transferred to the person qualified under the relevant foreign law to apprehend them. In this situation, the execution of the trust on movable property located in France devolved in accordance with the California law will not raise any difficulty: the notion of hereditary reserve does not exist in California, Brenda could be removed from the succession of its Mother Betty. The account and securities may be apprehended by the trustee appointed under the foreign law. The trustee may then transfer the property to the foreign country for administration, sale or distribution in accordance with the provisions of the deed of incorporation.

The French law intervenes here only as a real law of the place of situation of a movable asset. The fact that the furniture is situated in France does not prevent the trust admitted by the foreign estate law from developing in France.

2.2. The trust and succession subject to French law Gary Stone, a US citizen, established a testamentary trust over all his property. He designated as a trustee an American bank by transferring to him the whole of his property and by granting him a broad power of disposal to discharge certain debts, to issue important private legacies to charitable works (American and French) And to pay the income of her property to her two children and a portion of the capital at their respective majority.

The estate consists of four apartments located in Paris and important accounts in a French bank. Gary Stone died in Paris (where he was domiciled): the movable succession was then subject to French law. The latter also governs the devolution of buildings as long as they are located in France.

Being in the presence of reserving heirs (the two children of Gary Stone), the trust (even regularly established abroad) can not infringe the rules of public order of the French estate law relating to the reserve.

As French law is applicable to the transfer of property, the heirs who are the beneficiaries are automatically seized of all the property of the estate under article 1004 of the Civil Code. A testamentary trust of Anglo-American law cannot apply to an estate subject to French law and can only be executed at the level of the available quota. In this case, if the two children of Gary Stone (the heirs who are the reservees) require their inheritance in kind, their father's will can only be executed on the available quota.

3. Civilian impacts

3.1. French jurisprudence has attempted to give a qualification to the trust in the famous;
In this case, an American citizen die in Pans in 1965, leaving his sons (Sylvia and Diana Zieseniss) as their heirs, coming from their father (Christian Zieseniss) and a second son (Charles Zieseniss). The deceased had constituted an inter vivos trust of American law entrusting the trustee (a US bank) with the management of the shares that it gave him to pay the income to him during his lifetime and, after his death, to pay the capital to Her grandchildren. She had wanted this trust to be revocable and in 1962 it excluded from the trust its little girls (Sylvia and Diana Zieseniss).

In 1962 and 1964 she consented to her second son (Charles Zieseniss) several precipitary donations and then she institutes by will the latter as legatee of the available quota. The grandchildren, the heirs who are reserved, ask for the division of this succession (only movable) subject to French law because of the French domicile of the deceased and, consequently, the reduction of the Liberalities exceeding the available quota.

The parties disagreed with the order of the reductions: the plaintiffs argued that the trust had to be reduced as a gift between living beings, after the subsequent bequests and donations. The second son (Charles Zieseniss) and his children, beneficiaries of all the gifts, believe on the contrary that the trust could not be assimilated to a donation and had to be looked at and reduced as a legacy. The French Supreme court (i.e. “Cour de cassation”) breaks on the ground that the constitution of a trust by which the grantor deprives himself of a capital in order to receive income from it for the rest of his life while instructing the trustee to hand him over to the day of his death to the beneficiaries designated by him, is in fact an indirect donation at that date, which, having taken effect at the time of the death of the donor by the union of all its elements, took place to date.

3.2. This decision therefore entails consequences in terms of succession and more precisely in relation to the place of the trust in the order of reductions This order is based on the irrevocability of the donations (which explains that the oldest donees are preferred to the most recent) and on the date of divestment of the grantor (which justifies that those who have been granted due to death, legatees, are reduced before those who have been reciprocated, the donees).

Since the indirect donation made by the trust took effect on the day of death, the French Supreme court (i.e. “Cour de cassation”) considers that it should be reduced after the bequests but before the previous donations. (For the French Supreme court, we must reduce the legacies, then the trust and finally the donations inter vivos in their chronological order).

4. Income Tax Implications

4.1. Transfer duties free of charge: the tax consequences of the judgment in Zieseniss The French Supreme court (i.e. “Cour de cassation”), in its judgment of 15 May 20072, drew the lessons learned from the taxation point of the Zieseniss judgment concerning transfer duties free of charge. In this case, a French citizen had established in 1947 a trust under American law in which he had transferred securities.

Initially revocable according to the provisions of the deed of trust, which had been made irrevocable in 1950, the grantor could receive only the income generated by the assets put into trust during his lifetime, the capital to be transmitted by the trustee to the children of the grantor at the maturity of the trust fixed at the date of death of the latter.

The settlor died in France in 1995, leaving three French resident daughters to succeed him. Although it was collected, in accordance with the provisions of the trust deed, the capital of the trust was not
included in the estate taxable in France. The tax authorities paid this capital to the estate and claimed from the heirs an additional inheritance tax with penalties for late payment, considering that the trust in question made an indirect donation which received effect at the time of the donor's death. The heirs of the grantor claimed principally that the decision taken by the grantor to render the trust irrevocable in 1950 had the effect of definitively and irrevocably relieving the trust of the property put in trust and that the dismemberment of property resulting from the constitution of the trust (Which was supposed to constitute the chargeable event for the transfer duties) had been effected more than 10 years before the distribution, and that it was consequently no longer subject to a notice of assessment under the limitation rules.

The French Supreme court (i.e. “Cour de cassation”) dismissed the claim on the ground that the trustee had undone irrevocably the ownership of the property carried by the trustee on behalf of the named beneficiaries who had acquired the property of the trust caused by his death. Rightly deduced that a free transfer having taken effect on the expiry of the trust fixed on the day of the death of the grantor and not on the date of the formation of the trust. The taxation of the grant effected through a trust must therefore be deferred until the day of distribution of the capital to the beneficiaries.

In its decision of 15th May 2007, the French Supreme court (i.e. “Cour de cassation”) (which takes up the analysis of considering the trust as an indirect gift taking effect on the day of the death of the grantor by the union of all its elements) held that the trust had to be considered to have made a transfer free of charge. Consequently, as the judgment expressly states, transfer duties are payable not when the trust is constituted but when the assets of the trust are transferred to the beneficiaries.

4.2. The wealth tax

4.2.1. The constituent Once the trust is irrevocable, the settlor is no longer a priori the owner of the property put in trust and it is no longer in possession of it. It does not therefore appear to be taxable in respect of the wealth tax in respect of the property in question. However, in the case of a revocable inter vivos trust, the grantor is considered to be still the owner and, in this case, he should declare assets for wealth tax if he is resident in France (Or in the case of non- residence if the goods are located in France).

4.2.2. The trustee

The trustee should not be taxable as long as the property placed in trust is not part of his assets, provided, however, for the tax authorities to try to maintain that the trustee is the apparent owner. Such a risk is avoided When the trustee is a company which is not in principle subject to the wealth tax. 4.2.3. The beneficiary The question of whether the beneficiaries are liable for the wealth tax was delicate since the answer to this question depended on the extent of their rights and hence on the nature of the trust. It can hardly be argued that the beneficiaries must be assimilated to usufructuaries whose situation is very different from that of the beneficiaries of a discretionary trust who have no rights over the assets of the trust.

It is, moreover, the meaning of the only decision rendered in this matter3 which held that a French resident beneficiary of an American trust leaving to the trustee, a power of appraisal on the income to be distributed did not possess any right of ownership or claim on the trust or property which was the subject of the trust and which could justify its liability to wealth tax.

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170612 Trust in France (translation)

1- In France, several provisions of the General Tax Code (« Code Général des Impôts », or « GTC ») and the Tax Procedures Book (« Livre des Procédures fiscales » or « TPB ») regulate the owning of offshore accounts, by measures such as the information of the Administration and the authorization of automatical taxation (« taxation d’office »). First, the taxpayer who holds such a bank account is required to declare and identify it in his statement of income (GTC, Art. 1649 A).

He must answer to an information and justification request of the Administration on the assets that are in his foreign account, within sixty days, then – after notice in case of inadequate response – within thirty days (TPB art. L. 23 C).

In the second place, a taxpayer who does not answer to the Administration or whose reply is deemed insufficient shall be automatically taxed at the rate of 60% on the highest value of the assets of the ten years preceding the submission of the application of information and justifications (TPB, art. L. 71 and GTC, art. 755).

Does this system instituted by the French legislature meet the requirements of Article 6 of the European Convention on Human Rights (hereinafter "the Convention"), which guarantees the right to a fair trial? The European Court of Human Rights (ECHR), which is of course the supreme interpreter of the Convention, has not yet had an opportunity to comment on this point.

Several explanations are possible: a request raising the matter has not yet been submitted to the ECHR, or it is being examined before a Chamber pending its communication to the French Government, or it has been the subject of a decision of inadmissibility issued by a single judge, a decision which is therefore not included in the HUDOC database.

In the absence of "direct" case-law by the Court, it is only possible to make assumptions based on the procedural principles established by the ECHR over the years in the matter of fair trial.

The first of these concerns the applicability of Article 6 of the Convention to disputes which arise or may arise under the tax provisions in question.

1. The applicability of Article 6 of the Convention

2 – The civil aspect of Article 6 is not involved because the ECHR declared that « the tax disputes fall outside the civil rights and obligations field, despite the pecuniary effects which they necessarily have about the situation of taxpayers »1.

This applies both to the establishment of taxation and to the tax surcharges.It is quite different from the criminal side, as shown in the decision of the Grand Chamber Jussila vs. Finland of November 23 th 20062.

The ECHR does not merely recapitulate and clarify its jurisprudence on tax sanctions. It deems it necessary to declare the following (§ 36): "(…) Furthermore, the Court is not persuaded that the nature of tax-surcharge proceedings is such that they fall, or should fall, outside the protection of Article 6. (…) While there is no doubt as to the importance of tax to the effective functioning of the State, the Court is not convinced that removing procedural safeguards in the imposition of punitive penalties in that sphere is necessary to maintain the efficacy of the fiscal system or indeed can be regarded as consonant with the spirit and purpose of the Convention ».

In the light of this statement, it is necessary to recall the criteria which emerge from the case-law of the ECHR and then to compare them with the legislation in question.

A. The criteria laid down by the ECHR

3 – According to the established case law of the ECHR, the applicability of Article 6 under its criminal aspect is assessed on the basis of three criteria, often called the "Engel criteria', named after the case of Engel and a. vs. Netherlands3.

The first criterion is the one of the characterisation under internal law, of the text defining the offense charged.

The second criterion, which is the most important, is the one of the nature of the offense. Sanctions must be based on general standards, applicable to all citizens as taxpayers, and which do not tend to pay compensation for damage but serve a purpose both preventive and repressive.

The third criterion is the degree of severity of the penalty that may suffer the person concerned. It has virtually been abandoned, at least in tax matters. The ECHR now estimates that the lightness of a sanction – for example, a tax surcharge of 10% – has not the effect of exclude it from the application of Article 6. Moreover, the second and third criteria are alternative and not necessarily cumulative, which does not prevent the adoption of a cumulative approach if the separate analysis of each criterion does not allow to reach a clear conclusion as to the existence of a criminal charge4.

1 ECHR, Grand Chamber, July 12 th 2001, No. 44759/98, Ferrazzini vs. Italy.

2 ECHR, Grand Chamber, November 23 th 2006, No. 73053/01, Jussila vs. Finland.

3 ECHR, Grand Chamber, June 8 th 1976, n° 5100/71, Engel and a. vs. Netherlands.

4 ECHR, October 9 th 2003, Ezeh and Connors vs. United Kingdom, § 86.

These criteria apply ordinarily to a single procedure. However, several instances may be conducted in parallel and in a coordinated manner in order to

constitute a single procedural set. That is why the ECHR laid down the following principle in the decision Chambaz vs. Switzerland April 5 th 2002 (§ 43): "The Court may (…) be brought in certain circumstances, to examine broadly, from the standpoint of

Article 6 of the Convention, a set of procedures if they are sufficiently interconnected for reasons either concerning the facts on which they relate to, or for the manner in which they are carried out by the national authorities. Article 6 of the Convention is thus applicable when one of the procedures at issue concerns a criminal charge and the others are sufficiently related to it”.

B. The application of these criteria to the tax legislation in question

4 – It is a question of whether the taxpayer taxed automatically to any tax for free transfer of assets (“droits de mutation à titre gratuit”) is the subject of a "criminal charge" within the meaning of Article 6 § I. Under French law, the tax for free transfer of assets is considered as a tax and not has a penalty. However, those provided for in Articles L. 71 of the TPB and 755 of the GTC have particular features to a sanction. Indeed, the rate and the base of the rights in question are the highest. The procedure of automatic taxation stems from a presumption of donation. The rights are to apply only to the taxpayer that refused to provide information on the origin and manner of acquisition of funds to an offshore account, not on a French account.

There is therefore very similar to the tax surcharges under Article 1729 of the GTC, which were considered by the ECHR as falling within the scope of application of Article 6 § 15. The absence or inadequate reply to the requests of the Tax Administration definitely entails the automatic taxation of the taxpayer, under provisions which do not fall within criminal law, but falls under tax law, as this tax is provided by Articles L. 71 of the TPB and 755 of the GTC. However, this circumstance is not decisive.

Then the relevant transfer duties are based on general legal provisions applicable to all taxpayers. They do not tend mainly to pay compensation of a prejudice, but they tend essentially to punish taxpayers and to prevent the repetition of the offending behavior by deter them not to declare their account abroad, but also to punish those who refuse to cooperate with the Administration by providing sufficiently information on foreign assets.

Moreover, the above provisions do not apply to taxpayers who reported their account abroad at least once in the last ten years.

Lastly, transfer duties have a considerable scale: first, they are calculated on the highest value of assets appearing on the foreign account over the last ten years preceding the submission of the application of information and justifications, while rights are basically sitting on the value at the day of the operative event.

They are also calculated at the highest rate mentioned in Table III of Article 777 of the General Tax Code, whereas the rate is in principle determined in relation to the degree of kinship. This leads to the question whether the procedure for the automatic taxation of tax for free transfer of assets at the highest rate complies with the requirements of Article 6.

2. Compliance with Article 6 of the Convention

5. The device provided by Articles L. 23 C and L. 71 of the TPB 755 and the GTC and its implementation by the tax authorities raise the field of Article 6 of the Convention three major and interrelated issues: the burden of proof, the right not to contribute to its own incrimination, and the respect for a contradictory debate and equality of arms.

A. The burden of proof

6 – According to the established case law of the ECHR, "the burden of proof is on the prosecution and any doubt should benefit the accused. Moreover, it is incumbent on the prosecution to inform the accused the charges against him – in order to provide him an opportunity to prepare and present his defense accordingly – and to provide sufficient evidence”.

7 – Articles L. 23 C and L. 71 of the TPB and 755 of the GTC are based on the idea that the Administration does not have sufficient evidence about the origin and the modalities of acquisition of the funds to punish taxpayers suspected of hold an offshore account and must therefore oblige the person concerned to remedy the deficiency by providing incriminating evidence. In so doing, they introduce a reversal of the burden of proof and run up against the principle of the presumption of innocence guaranteed by Article 6 § 2 of the Convention.

B. The right not to contribute to incriminating himself

8 – The question of sanctions for refusal to produce the documents requested by the Administration was raised for the first time to the ECHR in the case Funke vs. France6. Customs had provoked the criminal conviction of a German resident in France to obtain bank accounts abroad which they supposed to exist without being certain. As they were unable or unwilling to obtain them by any other means, they attempted to compel him to prove himself that he had committed offenses.

The ECHR found that the applicant did not have a fair trial and therefore concluded that there had been a violation of Article 6 § 1. In so doing, it had inferred from that provision a right not to be obliged to provide evidence under duress. This principle was confirmed by the ECHR in two judgments delivered by the Grand Chamber in 1996, which established its case-law on the matter. This is the John Murray vs. UK7 and Saunders vs UK8 decisions. “68. The Court recalls that, although not specifically mentioned in Article 6 of the Convention, the right to silence and the right not to incriminate oneself, are generally recognised international standards which lie at the heart of the notion of a fair procedure under Article 6. Their rationale lies, inter alia, in the protection of the accused against improper compulsion by the authorities thereby contributing to the avoidance of miscarriages of justice and to the fulfilment of the aims of Article6 (see the above-mentioned JohnMurray judgment and the above-mentioned Funke judgment). The right not to incriminate oneself, in particular, presupposes that the prosecution in a criminal case seek to prove their case against the accused without resort to evidence obtained through methods of coercion or oppression in defiance of the will of the accused. In this sense the right is closely linked to the presumption of innocence contained in Article 6 §2 of the Convention. 69. The right not to incriminate oneself is primarily concerned, however, with respecting the will of an accused person to remain silent. As commonly understood in the legal systems of the Contracting Parties to the Convention and elsewhere, it does not extend to the use in criminal proceedings of material which may be obtained from the accused through the use of compulsory powers but which has an existence independent of the will of the suspect such as, inter alia, documents acquired pursuant to a warrant, breath, blood and urine samples and bodily tissue for the purpose of DNA testing." Since then, this approach has consistently been followed by the ECHR, as evidenced by the Grand Chamber’s decision O'Halloran and Francis vs. UK of June 29 th 2007, which summarizes it9.

9 – Articles L. 23 C and L 71 of the TPB and Article 755 of the GTC aim to make the taxpayer admit by requiring him to indicate the origin and manner of acquisition of the alleged assets.

However, the application of the 60% tax for free transfer of assets severely penalizes the refusal of the taxpayer to recognize that he is the holder of the assets in question. Such a system based on duress is a clear example of "improper compulsion by the authorities," in the words of Saunclers stop, and therefore ignores one of the fundamental requirements of Article 6. Moreover, this system opens the way to a "classic" criminal procedure for tax evasion, the author of which incurs penalties of € 2,000,000 in fines and seven years of imprisonment under Article 1741 of the GCT. Taking account of Article 40 of the French Penal Procedure Code, the taxpayer is virtually certain that the justifications provided in a purely tax procedure will be used during the investigation for tax evasion and may therefore serve as a basis for his criminal conviction by the judicial courts.

7 ECHR, Grand Chamber, February 8th, n° 18731/91, John Murray vs. UK.

8 ECHR, Grand Chamber, December 17th 1996, n° 19187/91, Saunders vs. UK.

9 ECHR, Grand Chamber, June 29th 2009, n° 15809/02, O’Hallaoran and Francis vs. UK.

In total, the taxpayer is subject to criminal penalties for refusing to cooperate with the Administration because he has not provided certain information, which, moreover will also be used in criminal proceedings for fraud and which may have already started against him for the same acts.

C. Respect for adversarial and equality of arms

10 – The ECHR noted in its Grand Chamber judgment Rowe and Davis vs. United Kingdom of February 16 th 200010 its constant jurisprudence in matter of the respect of a contradictory debate and of equality of arms. « 60. It is a fundamental aspect of the right to a fair trial that criminal proceedings, including the elements of such proceedings which relate to procedure, should be adversarial and that there should be equality of arms between the prosecution and defence. The right to an adversarial trial means, in a criminal case, that both prosecution and defence must be given the opportunity to have knowledge of and comment on the observations filed and the evidence adduced by the other party. In addition Article 6 § 1 requires, as indeed does English law, that the prosecution authorities disclose to the defence all material evidence in their possession for or against the accused. 61. However, as the applicants recognised, the entitlement to disclosure of relevant evidence is not an absolute right. In any criminal proceedings there may be competing interests, such as national security or the need to protect witnesses at risk of reprisals or keep secret police methods of investigation of crime, which must be weighed against the rights of the accused. In some cases it may be necessary to withhold certain evidence from the defence so as to preserve the fundamental rights of another individual or to safeguard an important public interest. However, only such measures restricting the rights of the defence which are strictly necessary are permissible under Article 6 § 1. Moreover, in order to ensure that the accused receives a fair trial, any difficulties caused to the defence by a limitation on its rights must be sufficiently counterbalanced by the procedures followed by the judicial authorities. »

It – It is common practice that the taxpayer does not have access to all the documents that concerns him during the period of thirty days allotted to him by Article L. 23 C of the TPB to produce justifications.

The Administration does not recognize itself any obligation to communicate those documents when no rectification procedure is initiated. The absence or inadequacy of the the taxpayer is therefore placed at a distinct disadvantage vis-à- vis

the Administration. In addition, the Administration often refuses to disclose to a taxpayer the entire file that it holds, even after the proposed rectification. It can wait until the last moment before the collection, or the very end of the control procedure (TPB, Art. L. 76 B). Here again the taxpayer is disadvantaged. It is difficult to see how such methods serve to safeguard the fundamental rights of others or to safeguard an important public interest. In the final analysis, they appear to be contrary to the requirements of Article 6, §1 in the matter of adversarial proceedings and equality of arms, that is to say, of fairness.

Conclusion

12 – Article 6 of the Convention may apply fully to any tax for free transfer of assets at the highest rate under Article 755 of the GTC, because the taxpayer taxed automatically under the Article L. 71 of the  TPB is the subject of a "criminal charge" in the autonomous sense, i.e. European, of this term. Articles L. 23 and L. 71 of the TPB and Article 755 of the GTC do not satisfy the requirements of Article 6 as regards the burden of proof and the right not to contribute to its own criminal offense. In effect, they reverse the burden of proof, in defiance of the presumption of innocence, and allow the, authorities to exert undue coercion on the taxpayer by forcing him to produce incriminating evidence. Moreover, where the taxpayer does not have access to all the documents of his file before the automatic taxation and even after the proposed rectification, the practice of tax services in the, application of Articles L. 23 C and L. 71 of the TPB and Article 755 of the GTC disregards the respect for the a contradictory debate and equality of arms as required by Article 6.

The combination of these articles does not appear to be compatible with Article 6 as it is sovereignly interpreted by the ECHR. Consequently, the regularity of tax procedures and criminal proceedings based on the contested provisions could be challenged before the French authorities and courts under the Convention, which is directly applicable in the domestic legal order. The irregularity of a tax procedure would not fail to have consequences for the criminal proceedings which would be the prolongation or the accompaniment.

This is particularly so with regard to the burden of proof and the right not to contribute to its own criminal offense. In other words, the traditional autonomy of criminal proceedings in relation to the tax procedure would be faced with the constraints arising from Article 6. Lastly, it cannot be ruled out that, in the future, the application of the legislation in question will give rise to individual applications to the ECHR in the future after the exhaustion of the remedies available under French law. In the light of the ECHR case law, there are strong arguments for the ECHR to find a violation of Article 6.

If this were the case, France would be required to amend its legislation to bring it into line with its international commitments and avoid new convictions.

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170427 The obligation to report offshore accounts and the right to a fair trial

In the case where, at the request of the taxpayer, the auditor carries certain accounting documents, the documents taken must be returned in their entirety before the end of the audit operations.

As the failure to return to the taxpayer all or part of the accounting documents which have been carried away may deprive the latter of an oral and contradictory debate, it results that the accounting audit is irregular in its whole, which results in the discharge of all tax adjustments resulting from the irregular audit, even if some of them are not directly based on the examination of the documents taken away and not returned.

In the present case, one company argued that the refund was incomplete by specifically designating the documents not returned.

A deed delivered by a bailiff, whose mentions are authoritative until falsification, indicated that eight boxes with archives were handed over to the manager of the company.

Even if this document has been accompanied by a document entitled "Minute of return of accounting documents and supporting documents", this document, which is not signed by either the taxpayer or the representative of the

Administration, cannot attest to the actual content of the boxes. Moreover, the deed of the bailiff, as it is drafted, is not intended to list the documents contained in the boxes, but only to authenticate the actual delivery of these boxes to their addressees.

In those circumstances, since the applicant disputed having received all the accounting documents taken away, the Administration cannot prove, which is its responsibility, that it returned all those documents before the end of the audit operation.

Council of State (“Conseil d’Etat”), 8th and 3rd Chamber, November 23 th , 2016, No. 392894, “Société Mimosa”.

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170425 Tax audit – Irregularity of accountability audit

Does the right to use a domain name on the Internet follow the tax regime of the intangible assets (« immobilisations corporelles ») entered into the registrant’s balance sheet and what should be the value for which it is registered?

Following an audit of its accounts, eBay, a sub-subsidiary of the US firm eBay Inc., was subject to corporate income tax supplements as a result of:

The reinstatement in its opening balance sheet for the year 2003 of the sum of 4,695,570 euros, representing the value of the domain name “ebay.fr” which it had registered in 2001 with the French Association for Internet naming (“Association française pour le nommage Internet en coopération”, “AFNIC”), which the tax administration considered to be an immobilized intangible asset to be included in the company’s balance sheet ; and

The reinstatement in its 2004 and 2005 income statement of amounts corresponding to the royalties which it renounced to collect for the provision to its parent company, the Swiss company eBay International AG, itself daughter of eBay Inc., of the right to use the domain name ebay.fr. The Tax Administration regarded those amounts as profits indirectly transferred abroad within the meaning of Article 57 of the General Tax Code (“Code Général des impôts”, “GTC”) and which gave rise to the withholding in application of Article 119 bis 2° of the GTC.

These adjustments have been contested by eBay France in the context of the present dispute, which resulted in a judgment of 30 April 2013 by the Administrative Court of Appeal of Paris (Cour d’Appel de Paris, 10th Chamber, April 30 th 2013, No. 12PA02246 and No. 12PA02678, “eBay France Company”).

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170425 Tax regime for rights to use a domain name on the Internet

1 – The present study focuses on the exit tax system. Known in many legal systems, including in France, it is marked by an obvious technicality. It envisages the taxation of unrealized gains on social rights in the event of a transfer by the taxpayer of his fiscal domicile to another State. Regarding the French exit tax, it is necessary to distinguish whether the transfer takes place to another EU country, to Iceland or Norway, in which case a deferment of taxation (“sursis d’imposition”) can be obtained by right, or to another State.

According to recent studies, tax exile has attractions whose vigor does not weaken. Among the factors to be taken into account for candidates at departure, the transfer of the tax domicile of natural persons outside France entails the taxation of unrealized capital gains (“plus-values latentes”) on certain of their holdings. The related mechanism, known as the “exit tax”, is found, in varying modalities, in foreign legal systems (1). In general, the exit tax is a very technical mechanism, as the French case illustrates (2).

1. The exit tax, a widespread mechanism in State legislations

2 – One of the objectives pursued by the tax legislator is to combat certain forms of tax evasion, in particular when they result in the relocation of the most important incomes and assets. This explains why many countries, like France (A), have set up exit tax systems, showing a contrasting international tax landscape (B).

1. The exit tax, a mechanism known from French law

3 – Mechanism initially set up. – A first mechanism, repealed in positive law, was introduced by the Finance Act for 1999 (French General Tax Code, “Code General des impôts” hereinafter “GTC”, art. 167 bis).

It provided for the taxation of unrealized capital gains on the substantial investments held by natural persons transferring their tax domicile outside France.

At the date of transfer of domicile, were taxable the following assets:

• the unrealized capital gains realized on the substantial participations held by the French tax resident taxpayer in respect of at least 6 of the 10 years preceding his departure from France;

• and capital gains placed on deferral of taxation (“report d’imposition”) without condition of duration of tax residence.

In both cases, the taxpayer could benefit from a deferment of payment allowing deferring the effective taxation of capital gains on the transfer, redemption, redemption or cancellation of the securities concerned, on condition to provide sufficient guarantees for the recovery of the debt to the Treasury.

This system was sanctioned by the Court of Justice of the European Communities (CJEC) in 2004 and was repealed by the 2005 Amending Finance Law  (“Loi de Finances rectificative pour 2005”) because of the incompatibility of some of its provisions with Community law, concerning the need to systematically provide sufficient guarantees to benefit from the derferment of payment.

4 – New system introduced in 2011. – A new exit tax system was introduced by the Amending finance law for 2011 for transfers since March 3, 2011 appears in Article 167 bis of the GTC.
In its version of 2011, it provides that taxpayers who are taxpayers domiciled in France for at least 6 of the 10 years preceding the transfer of their domicile abroad are taxable on the unrealized gains on social rights, securities, Rights held in companies,
hold, on the date of the transfer, one or more direct or indirect participations:

• granting them at least 1% of the profits of a company;

• or whose cumulative value exceeds € 1,300,000.

In order to be compatible with European Union law, this new arrangement no longer determines the suspension of payment for the provision of adequate guarantees only in the event of a transfer of residence in a third State to the economic area (EEA) or Liechtenstein.

5 – Modulation of capital quotas in 2013. – The Amending finance law for 2013 modulated the capital quotas concerned by departures since January 1, 2014: the exit tax is now applicable to the holdings of more than 50% of the profits or of a cumulative value exceeding 800,000 €.

6 – Alignment of the exit tax rules with the internal tax regime for capital gains carried forward. – The Amending Finance Law for 2016 aligned the rules for determining the rate of taxation of capital gains placed under deferral pursuant to Article 150-0 B ter of the GTC, prior to the transfer of residence, On the rules governing the taxation of such capital gains under national law (GTC, Article 200a, 2b).

7 – Transfer of corporate headquarters. – The exit tax also concerns the transfer of company headquarters.

The Court of Justice of the European Union (CJEU) has transposed the principles set out in its case-law relating to the mechanisms of the exit tax of natural persons, in particular in the judgment “National Grid Indus BV” where it sanctioned the mechanism of taxation of unrealized capital gains during the transfer of business seats provided for by Dutch law, for infringement of freedom of establishment since the immediate recovery of taxation was disproportionate to the objective of preservation of the distribution of the tax burden between Member States.

In this judgment, a company had transferred its place of effective management from the Netherlands to the United Kingdom and had been taxed for an unrealized exchange gain (“gain de change latent”) on a receivable in connection with that transfer, whereas this tax did not exist in the event of a transfer of a seat within that State.

It should, however, be pointed out that the Court seems to have accepted the obligation for taxpayers wishing to benefit from a deferred tax, to provide guarantees, contrary to its previous position concerning the exit tax of natural persons. The position adopted in that judgment has been confirmed several times.

Accordingly, Article 221 §2 of the GTC has been amended in order to bring French legislation into conformity with European regulations and to allow companies to opt for the split payment over 5 years of the tax due on account of the unrealized capital gains on the assets of the company, when its head office is transferred to the European Union, Iceland or Norway.

It may be noted that the capital gains tax does not take place, in this case, if the transfer of the registered office is not accompanied by the transfer of the assets, that is to say if the latter remain on the balance sheet of a French permanent establishment of the company.

8 – ATA Directive. – The further development comes from the European Union. On January 26 2016, the European Commission published a “package on the fight against tax evasion”, including a proposal for a Directive, including a clause providing for an exit tax mechanism, which codifies the principles of the “National Grid Indus”, which was approved by the Member States on 21 June 2016 and adopted by the Council of the European Union on 12 July 2016. The Directive introduces an exit tax mechanism for companies which transfer their head offices in order to reserve for the State of origin the taxation of any unrealized capital gains in its territory. Member States have until December 31 2018, to transpose the Directive into their national law.

9 – Challenges. – In addition, it should be noted that the terms of the exit tax arrangements continue to be regularly challenged.

The French State Council (“Conseil d’Etat”) recently referred three questions to the CJEU for a preliminary ruling on the compatibility of the exit tax with the freedom of movement of persons under the Luxembourg Agreement of 21 June 1999, signed between the European Community and its Member States, on the one hand, and the Swiss Confederation, on the other hand, in the case of a taxpayer who has been taxed in respect of the exit tax (in the version prior to January 1 2005) his domicile for tax purposes in Switzerland.

In this case, the taxpayer claims that he moved to Switzerland in order to continue to engage in self-employment as part of the management of his holdings under conditions characterizing the pursuit of an economic activity

He was already practicing in France before his departure and therefore requests the discharge of the additional charges which have been charged to him in accordance with Article 167a of the GTC.

2. The exit tax, a mechanism which is in other legislations

10 – Some States sanction the transfer of residence of natural persons more heavily than France does. – Some States link the taxation of natural persons unlimitedly (United States) or limited in time (Germany: taxpayers continue to be taxed in Germany for the ten years following the transfer of their domicile in a State with lower taxation when they maintain economic links with Germany).

• United States. – This taxation of ordinary income according to nationality is sometimes cumulated with a mechanism similar to the exit tax. For example, the United States have introduced a system known as the “mark to market tax”, which affects American citizens renouncing their US citizenship and long-term residents who terminate their residence in the United States. Taxation applies to contributors of which:

• the average taxation of income over the 5 years preceding the transfer of tax residence exceeds a certain amount ($ 160,000 per year in 2015);

• or whose asset value exceeds $ 2 million at the date of the transfer of residence for tax purposes;

• or who have not filed the form n° 8854 certifying that they have fulfilled all their tax obligations during the 5 years preceding the transfer of their domicile.

Under this plan, the taxpayer is deemed to sell all assets at market value at the date of transfer of his or her domicile. The taxpayer is then taxed on unrealized capital gains after deduction of an allowance of $ 690,000 (for a transfer in 2015).

• Germany. – Germany provides that a taxpayer who has been subject to German income tax on the basis of all his income during the 10 years preceding the transfer of his tax domicile to another State and who, after the transfer of its tax residence, is no longer subject to German income tax, is taxed, during this transfer, on account of unrealized capital gains on its shareholdings in German companies, when he has held, directly or indirectly, at least 1% of the capital of the company at any time during the 5 years preceding the transfer of domicile.

11 – Other European states apply a similar scheme to the French exit tax.

• Norway. – Norway provides that the transfer by a taxpayer of his residence for tax purposes outside Norway makes him taxable on unrealized capital gains on certain of its financial assets (in particular shares and interests in Norwegian companies), with the possibility To apply for a deferral of tax under certain conditions. It is also provided that its liability to tax ends at the end of a period of 5 years following the date of his transfer if his has retained its assets.

• Denmark. – Denmark provides that the taxpayer who transfers his domicile outside Denmark shall be subject to an exit tax on account of his assets which are not subject to Danish tax (movable or immovable assets). More specifically, the exit tax applies to unrealized capital gains on all shares held by the taxpayer transferring his domicile when their cumulative value exceeds DKK 100 000, provided that he has been a Danish resident for at least 7 of the 10 years preceding the transfer of his residence Its fiscal domicile.

The taxpayer may benefit from a tax deferral under certain conditions, in particular on condition that he files a tax return with the Danish tax authorities each year following the transfer of the domicile. This option ends when the asset generates income or when it is sold, and in principle each year the contributor must pay 1/7 of the amount of the deferred tax.

• Netherlands. – The exit tax regime set up in the Netherlands and amended since September 15 2015 provides that a tax assessment formalizes the amount of the exit tax relating to the unrealized capital gains realized on the substantial participations Held by a Dutch taxpayer transferring its tax domicile outside the Netherlands, with a mechanism for deferral under guarantee. It is expected that the Dutch exit tax will have to be paid in the event of the distribution of reserves or the sale of shares. It should be noted that there is no longer a time limit allowing the taxpayer not to be taxed on the capital gain realized before the transfer of his residence.

12 – Other States have introduced different systems of taxation to penalize the transfer of residence.

• Ireland. – Ireland taxes taxpayers who are considered to be ordinary tax residents for three tax years and transfer their domicile outside Ireland, considering that they remain resident until the end of the third tax year following the transfer of their tax domicile: they will therefore be liable to pay Irish tax on some of their income.

• United Kingdom. – The United Kingdom does not have an exit tax as such but reserves the right to tax foreign income not taxed in the UK at the return of the taxpayer to UK, if this transfer of the domicile outside the UK took place less than 5 years before his return (so-called “temporary non-resident regime”). This system concerns all repatriated incomes and not exclusively capital gains.

13 – The issue of exit tax is now introduced in certain tax treaties.

An amendment to the Franco-German tax convention signed in 2015 introduced a specific clause to the exit tax in the Convention: Article 7 of the Convention now provides for a taxation shared between the two States in the event of the transfer of securities by a individual resident who has discharged an exit tax in the other State during the transfer of his domicile.

2. The French exit tax, a highly technical mechanism

14 – The technicality of exit tax devices can be illustrated from French law.

We will see the substantive aspects (A) and the declarative aspects (B), as well as the modalities of the suspension of payment and the events leading to the tax relief or refund (C).

fichier à telecharger:
170208 Exit tax, inventory of a disputed mechanism

Please find bellow the procedure to follow and the list of the documents requested in order to obtain:

– In first part, the condition to obtain a long-stay visa, with distinction between the “residence card to be requested within 2 months of arrival” and the “temporary residence permit”.

– In second part, the conditions to get a short-stay visa. We hope that this legal opinion will help you for your application. Best regards.

I. Condition of application to the “long-stay visa”

A. “The long-stay visa”

There are several kinds of long-stay visas:

 Visa “Residence card to be requested within 2 months of arrival” This visa bears the mention “residence permit to be requeted within 2 months of arrival”. It allows you to enter France and to obtain a residence permit (1).

 Long-stay visa valid as a residence permit (VLS-TS): valid from 4 to 12 months This visa, known as VLS-TS, is unique. It is valid as a residence permit and prevents you from applying to the prefecture during its period of validity (2).

1. The long-stay visa “residence permit to be requested within the 2 next months arrival” If you wish to ask for a long-stay visa (valid 10 years), you must address to the French consular authorities in your home country.

This visa is granted to you in order to benefit from a residence permit (annual, multiannual or 10 years according to your situation), in particular in quality of:

– Family of a French citizen,

– Liberal or independent profession,

– Worker (employee on mission, European credit card, seasonal, competences and talents) or family of worker,

– Pensioner or spouse of pensioner,

– Artist.

2. The long-stay visa “temporary residence permit”

The long stay visa allows certain categories of foreigners to enter France and to stay from 4 months to 1 year without having to apply immediately for a residence permit. Once you are in France, some formalities must be completed with the French Office of Immigration and Integration (OFII) to validate the visa. You can obtain a long-stay visa equivalent to a residence permit for one of the following reasons:

– Husband of French,

– Student,

– Trainee,

– Employee (holder of a contract of indefinite duration),

– Temporary worker (with a fixed-term contract) or posted worker,

– Visitor (you must be able to live on your own resources in France and you undertake not to work),

– Spouse of a foreigner who is a beneficiary of a family reunification

3. Common conditions of delivery for both long-stay visas

1. Moment of the request

– As soon as your file is complete.

– You inform sufficiently early with advance near the qualified consulate.

2. Place of application

If you wish to ask for a long-stay visa, you must address yourselves to the French consular authorities in your home country.

3. Conditions of application

– To fill and sign the form CERFA n°14571*05 for a long-stay visa.

– You must present a passport : for a long-stay visa “residence permit to request in the 2 next months arrival”, at least 3 months after the date expiry of your visa, and for a “long-stay visa being worth residence permit”, at least during the validity your visa.

– Your biometric data are recorded in a file, called “Visabio”: These data are the digitized pictures of your photograph, and your digital fingerprints (child of less than 12 years is not concerned). The other documents required vary according to the duration and from object of the visa you ask.

– Proof of your livelihood (cash, travelers checks, international bank cards, etc.),

– Proofs of the guarantees of your repatriation (return ticket, etc.),

– Insurance covering medical and hospital expenses, including social assistance, for the care you may receive in France (the minimum coverage requested is € 30,000)

– If your stay is on a private or family visit, a certificate of welcome or proof of accommodation in a hotel or a host institution,

– Or if your trip is touristic or professional or for the purpose of hospitalization or research, documents on the subject and conditions of your stay in France. Information on these documents is available on the websites of the consulates or is sometimes posted outside of the consulates.

II. Condition of application to the short-stay visa « Schengen »

As a Chinese citizen, to be able to enter and stay up to 3 months in France, you must have a so-called “short-stay” visa. You must present your request near the French consular authorities or another Schengen country The short-stay visa allows you to enter and travel in France and in other Schengen countries. Unlike a long-stay national visa, the Schengen visa does not allow you to settle in France. This visa can be granted to you in particular for:

– a tourist trip,

– a professional trip,

– a family visit,

– receive a short training or an internship,

– perform a paid activity (i.e. if you are an artist on tour in France, sportsman, model, etc.), after obtaining a temporary work permit.

1. Length of stay allowed

The short stay visa allows you to stay up to 90 days in the Schengen countries. It can be issued to:

– One entry

– 2 or more entries

Thus, you have an overall period of 180 days to make an uninterrupted stay of 90 days or several stays of cumulative duration of 90 days maximum. At the end of this maximum period of 90 days, you must leave Schengen. You will be able to return only 180 days after your first entry for a new maximum stay of 90 days, and so on for any other trip.

2. Moment of the request

Not more than 3 months before the beginning of the travel envisaged.

3. Place of application

If you want to obtain a short stay visa “Schengen”, you must present your request to the French consular authorities or to the ones of another Schengen country:

– Either the single country of destination of the travel (thus, if France is the single destination of your travel, the French consulate is qualified),

– Either the principal country of destination of the travel (in terms of duration or object), it comprises several destinations (thus, if you want to spend one week to Germany and a month to France, is the French consulate which is qualified),

– That is to say the country entry in Schengen space, if the principal destination cannot be given (thus, if you intend to spend 15 days to Belgium and 15 days to France for tourism while arriving by Belgium, is the Belgian consulate, which is qualified).

4. Condition of registration

– To fill and sign the form “CERFA” n°14076*02 for the short-stay visa.

– To present a passport (for a visa “Schengen”, at least 3 months after the date expiry of your visa (your passport must also be delivered since less than 10 years).

– Your biometric data are recorded in a file, called “Visabio”:

– The other documents in proof required vary according to the duration and from object of the visa which you ask. Information on these documents in proof available on the websites of the consulates or is sometimes displayed with outside of the consulates.

III. Common part to both procedures (long-stay and short-stay visa)

1. Administrative fees

Your visa application will be examined only after the payment of these fees. If the visa is refused or if you cancel your travel, the paid fee is not refunded to you.

When the reception of the visa applications is delegated to a private person, you must also pay additional service fees to him. If your request is admissible, a receipt corresponding at the expenses of visa you paid is given to you. This receipt means acknowledgment of receipt of your visa application.

2. Deadline

The decision on your visa application “Schengen” must be taken by the consulate within a period of 15 maximum days according to the reception of your comprehensive directory, except typical cases where this time can be carried until 60 days. The time is variable for the national visas of long stay. It depends in particular on your nationality, the reason for your stay in France and on the need for checking some of your civil status documents.

3. Access to the office of the visa service

A certain number of services of the visas of the consulates receive only by prior appointment. In some countries, the management of these appointments is entrusted to private call centers. In other countries, the reception of the visa applications is outsourced: in fact, certified private agencies receive the files of visas solicitations. You can contact them by telephone or via their website to take appointment.

Lastly, in other countries, France ensure the role of “Schengen single window”, to represent the other countries. Contrarily, France can be represented by another Schengen country in some countries.

4. Validation of the visa

In the event of delivery of the visa, a label is affixed on your passport. In the event of refusal, you can present without delay a new visa application. You can also dispute this refusal before the Commission of recourse against the refusal of visa.

fichier à telecharger:
170207 Legal opinion titre de séjour