Legal news

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

Economic substance became a central notion in the struggle against a tax fraud and tax evasion, a consensus seeming to have been found by the authorities to make a new reference norm in the field. This article aims to demonstrate in which aspects the use of this notion is superabundant, at best, and a source of insecurity for economic actors at worst. Thus, it invites judges and taxation authorities to place their reflection to the limits determined by legal certainty principle.

– The struggle against a tax fraud and tax evasion has a vital importance. The state of public finances consequent of the financial crisis of the 2008 as well as multiplication of aggressive tax optimizations of the transnational companies has persuaded the decision-makers to pass from the legal evaluation of situation to economical one. The uniform term for the complex of actions is economic substance.

– This notion constitutes a keystone of the international and European projects of struggle against a tax fraud and tax evasion. The plan of action BEPS of OCDE (OCDE, Plan d’action concernant l’érosion de la base d’imposition et le transfert de bénéfices, dit. projet BEPS :Edition OCDE, 2013) tends to line up the rules of taxation on the economic substance, preventing the artificial movement of the taxable benefits from the country where the values were created to the another one. The notion of the substance has an essential place in this project for the purpose of integration of the taxation to the economic reality in the most systematic way. The plan includes six actions aiming to dispose the taxation rights on the economic substance:

– Action 5 aims to guarantee benefit taxation under the preferential regime in the state which is the place of the actual activity Implicating that it will be actually provided the taxpayer for the aimed activity in any concrete country to benefit those advantages;

– Action 6 aims to prevent the use of the dummy companies without any economic substance to gain a double exoneration;
– Action 7 leads to modification of the definition of the stable company in such way that it could prevent the artificial avoidance of the stable company status for the purpose of tax base decrease and transfer of the benefit;
– Finally, actions 8, 9, 10 are intended to guarantee that the price of the transfer calculated between linked societies comply with the value creation. Thus, benefit taxation of the group of companies should be lined up better with the economic substance of the societies members, dividing more correctly the taxable income between the tax jurisdictions.

– The State Members of the European Union likewise the OCDE members were engaged to Implement the results of the elaboration of the 15 actions of plan BEPS. Thus, it is consistent that the states will take the measures to inhibit the practice of tax invasion and to guarantee the fair and effective taxation in the Union in the way which would be sufficiently consistent and coordinated. (Cons. EU, dir.

Those considerations were materialized by the adoption of the anti-evasion tax directives of the 12 July 2016. (Cons. EU, no 2016/1164, 12 juill. 2016, préc.)
– The spirit of this directive is summed up by the Council which states that «the current politic priorities in the international taxation domain highlights the necessity to make sure that the taxes would be played in the place where the benefit and values were created» (Ibidem, consid.1.). As
usual, the general anti-abuse clause was included in the directive. This clause refers implicitly to the notion of the economic substance refusing application an assemblage regime which were not set up for the valid commercial reasons reflecting economic reality. The aspects which were innovative in the initial proposition of this directive are those which referred expressly to the notion of the economic substance indicating that the of the assemblage «the tax liability is calculated on the basis of the economic substance in conformity with the national legislation” (Article 7 de la proposition de directive du Conseil établissant des régles pur lutter contre les pratiques d’évasion fiscal qui ont une incidence directe sur le fonctionnement du marché intérieur, 28 janv. 2016), the reference which does not appear anymore in the adopted final version.

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Economic substance and abuse of rights (Substance économique et abus de droit) 20171002

Luxembourg life insurance (l’assurance-vie luxembourgeoise) in financial management
Usually called “Luxembourg life insurance” (l’assurance-vie luxembourgeoise), life insurance contract (or a contract of the capitalization) put on the market by the insurance companies located in Luxembourg, has a great success in Europe and especially in France (the first country collector with 30% of purchase).

Substantially and functionally very similar to French life insurance, it has a lot of undeniable advantages for the depositors concerned about optimization of their property: a leveraged insurance by their regulations, international adaptability possible due to their tax neutrality and the modes of financial management which can be created as required.

Nevertheless, the subscription to the Luxembourg contract is followed by certain specificity which cannot be adapted to all the client profiles, thus the consultation of the financial adviser stays inevitable.

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Luxembourg life insurance in financial management

For the application of the article 1647 E of the General Taxation Code of France (CGI) which had as an aim took into account a contributive capacity of the company according to their activity, the venture capital companies as the societies of capital-investment were subjected to the calculation mode of the added value provided by the 3 of II of the article 1647 B of the same code.

This provisions which fixed the limitative list of the categories of the accountable elements which should be taken into consideration while calculation of added value including into production “products of bank exploitation and secondary products”. Or, those products did not include in conformity with the regulations of the comity of the bank regulations the added value for the equity investment and other shares held on the long term. Also, since the Equity securities held for investment portfolios are intended to stay permanently on the balance of the enterprise and thus don’t have a purpose to be given upon the short term, they should be considered as equal to the category of the shares held on the long term. As a result, the added value on the equity investment and other shares held on the long term are not among the elements that should be included to the added value of the venture capital company (1 re esp.) as well as societies of capital-investment (2 e esp.) and thus which should not be took into account to appreciate if the turnover of the company exceed the threshold to charge the minimal contribution of the professional tax provided by the article 1647 E of the CGI. CE, 8e et 3e ch., 27 mars 2017, no 394693, min.c/Sté Finorpa SCR (1 re esp.) concl. B. Bohnert

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The gains from the equity investment (Les plus-values sur titres de participation) 20171002(1)

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.

fichier à telecharger:
170612 Trust in France (translation)