France’s 2022 Financial Law, enacted on 31 December 2021, provides that the settlor or deemed settlor (beneficiary) of a trust is presumed to satisfy the 10% holding requirement of article 123 bis of the French Tax Code (FTC). The presumption, which is rebuttable, applies as from 1 January 2022.
Article 123 bis of the FTC provides that the income of an entity that is organized in a state or territory outside of France, subject to a preferential tax regime (i.e., a tax rate of less than 40% of the French tax rate on the same income), and whose assets consist primarily of financial and monetary (i.e. passive) assets must be included in the taxable basis of a French tax resident taxpayer if:
- The taxpayer holds, directly or indirectly, at least 10% of the shares or financial rights in the entity; or
- The entity is located in a non-cooperative state or territory (as defined in FTC article 238-0 A).
Trusts are considered to be within the scope of this article. However, a number of issues have been raised regarding the application of the 10% holding requirement to the settlor or the beneficiary/deemed settlor of a trust. In a decision of the Paris Administrative Court of Appeals dated 24 June 2020, the judges refused to apply article 123 bis because of the discretionary and irrevocable nature of a non-artificial trust.
The amendment introduced by the 2022 finance law provides that the 10% holding requirement is presumed to be satisfied in the case of a French tax resident settlor or deemed settlor. However, the presumption is rebuttable, even though the amendment specifies that the discretionary and irrevocable nature of a trust cannot be considered proof contrary to the 10% holding requirement (i.e., cannot rebut the presumption).
In other words, it seems that the French legislator has chosen to apply specific 123 bis conditions to trusts. Indeed, the amendment exempts the French tax authorities from having to prove the 10% holding rate when a trust benefits from a favorable tax treatment: the exemption has already been implemented for trusts located in a non-cooperative state or territory.
In practice, this means reviewing and ensuring that a trust does not benefit from a favorable tax regime within the meaning of article 238 A of the FTC. Otherwise, the trust’s settlor or deemed settlor (beneficiary) could be subject to tax on the trust’s income, increased by 25%. In addition, another reporting requirement would apply, given that the settlor or deemed settlor would be subject to the reporting obligations provided in article 123 bis, in addition to the potential requirement to file TRUST1 and TRUST2 returns, as well as “3% tax returns,” if applicable.
All things considered, the French tax authorities’ views on trusts are what is important here. The finance law amendment removes any doubt regarding the applicability of article 123 bis to trusts. However, one question remains: if the French tax authorities do not succeed in proving the 10% holding requirement, how can the taxpayer prove that they do not meet this requirement? Wouldn’t the presumption imposed on the taxpayer be, in fact, irrefutable (i.e., unable to be disproved)? This may present an opportunity to refer the matter to the Constitutional Council.
