When is a trust not a trust?

Saturday, 01 October 2011
Article on the world of administrateurs, constituants and beneficiaires.

The French 2011 supplementary budget, Law n° 2011-900 of 29 July 2011 – de finances rectificative pour 2011 – has caused some surprise and consternation in the worlds of trusts, trustees, settlors and beneficiaries. Whether Law n° 2011-900 has either rectified or straightened out the existing French Code général des impôts (CGI), the tax code, is a moot point.

We have perhaps become inured to the US Internal Revenue Service seeking to impose US tax liabilities worldwide on people it defines as US citizens, even though many such people may not be aware the US thought they were US citizens. The Foreign Account Tax Compliance Act (FATCA) and its possible implications were something to be considered, and the consequences dealt with in due course. The year 2013 is still a way off and you never know, things may yet change under gentle pressure from our banker friends.

The definition of a trust in the french law no 2011-900 is clearly wider than the form known to us

The imposition by Ireland in 2010 on its overseas domiciliaries of a form of offshore wealth tax or domicile levy seemed to be an exercise in the triumph of hope over reality, and its actual effects seem to have been limited.

 However, much of the French Law n° 2011-900 became effective on 31 July 2011 and does, of course, affect any trusts with French constituants or bénéficiaires. You will recall that: ‘Pour l’application du présent code, on entend par trust l’ensemble des relations juridiques créées dans le droit d’un Etat autre que la France par une personne qui a la qualité de constituant, par acte entre vifs ou à cause de mort, en vue d’y placer des biens ou droits, sous le contrôle d’un administrateur, dans l’intérêt d’un ou de plusieurs bénéficiaires ou pour la réalisation d’un objectif déterminé.’ Or, on the other side of the Channel: ‘For the purposes of this code, the term “trust” is the collection of legal relations created under the law of a state other than France by a person acting as constituant by inter vivos deed or on death, in order to place assets or legal rights under the control of an administrateur for the benefit of one or more bénéficiaires or for the purpose of a specific objective.’

This definition of a trust is clearly wider than the form of trust known to us and talked about in the worlds of Honourable Mr Justice David Hayton or Professor Donovan Waters.

Some have translated constituant as ‘settlor’ and administrateur as ‘trustee’, but, as ever, the act of translating language can trap analysis – an example of Heisenberg’s Unsicherheit Prinzip. The more you try precisely to measure something, the more you affect the outcome. Perhaps it is wiser, therefore, to stick to the French words when referring to the CGI.

Those of us who have been following the progress of the proposed Brussels IV succession regulation have been wondering for some time how states such as France would deal with the taxation of estates, when the roles of executors and administrators were imposed on them as a result of a non-French succession and administration law being applied from the state of habitual residence.

Law n° 2011-900 has, I think, given us the answer. Treat estates and trusts as one and tax them all the same. It does make you proud to be a TEP and will certainly keep us all busy.

However, we may well see a flurry of further taxation changes in other EU states attempting to produce similar supplementary budgets in the period leading up to Brussels IV coming into force. Who will be next?

We are still waiting for the EU Commission to produce its suggestions for the harmonisation of inheritance tax to remove interference with the free movement of capital. Perhaps it is time that they got a move on.

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Richard Frimston

Richard Frimston TEP is a Partner and Head of the Private Client team at Russell-Cooke LLP, and Chair of the STEP EU Committee.

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