Trust is a widespread institution in foreign legal systems, especially in Anglo-Saxon law, but unknown in French civil law.
However in 2011, France defined trust for tax purposes only.
Trusts are characterised in so much as that property is divided between the legal ownership (‘propriété juridique’ given to the trustee of the trust who becomes the legal owner of the transferred assets) and the equitable interest (i.e virtual property residing in the right or title to assets, property or rights held for the beneficiary by the trustee in whom resides the legal title).
This property split is not to be confused with what we know in France as the ‘demembrement de propriété’ between usufruct and bare ownership.
Quick reminder: The right of ownership gives the owner three types of prerogatives. If we take the example of a property, these prerogatives consist of the right to use the property (i.e. to live in it), the right to receive income from said property (i.e to rent it out), and the right to dispose of the property (i.e. to sell it).
However an owner can divide these prerogatives into two sets: on the one hand what’s called « usufruct » which includes the right to use the property and receive its income, and on the other what’s called the « bare ownership » which includes the right to dispose of the property.
Therefore the right of ownership is the combination of the usufruct and the bare ownership.
In 2011, France defined trust for tax purposes only. Article 792-0 bis of the General Tax Code (Code Général des Impôts) defines trust as all legal relationships created under the law of a State other than France by a person called ‘grantor’ (settlor), inter vivos or mortis causa, in order to place assets or rights under the supervision of a ‘trustee’, in the interest of one or more ‘beneficiaries’ or to achieve a specific goal.
Are therefore considered to be trusts all legal relationships meeting this definition, regardless if they effectively go under the name of ‘trust’ and also regardless of their characteristics (whether revocable or not, discretionary or not, with or without legal personality, etc.).
On the other hand do not meet the definition of article 792-0 bis of the CGI:
- Trusts established by a company or group of companies such as trusts established by companies and dedicated to the management of employee saving schemes or stock option plans.
- Trusts called « unit trusts » that meet the definition of UCITS, Undertakings for Collective Investment in Transferable Securities.
The Grantor/Settlor
Article 792-0 bis of the CGI stipulates that the grantor of a trust is the individual that created it.
This definition allows us to discern the economic reality of a trust whatever its legal appearance or name. In practice, the aim is to determine the ‘real’ settlor of the trust in the event the settlor, sole entity named in the deed of trust, is an entity (….) or an individual acting professionally designated on behalf of the real owner of the assets placed directly or indirectly through one or more corporations, in the trust.
Furthermore the same article foresees taxation of accumulation trusts upon death of the settlor, and then in some cases upon death of the beneficiaries deemed settlors. Said taxation of the assets remaining in the trust takes place upon each change of beneficiary (for example, when the children of the initial beneficiary become replacement beneficiaries upon death of their parents).
The Beneficiary
The tax beneficiary of a trust means the person (one or more) designated to receive the income of the trust made by the administrator (trustee) and/or to receive the capital value of the property or rights of the trust during the life of the trust or at its end.
This definition does not exclude the grantor from also being a beneficiary of the trust, especially in the situation of an ‘inter vivos trust’.
In part 2 we will address trust and estate planning here in France.
