Trust established in a tax-preferred country: settlor is deemed to hold 10%

17 February 2022

In principle, any individual domiciled in France who holds, directly or indirectly, at least 10% of the shares, units, financial rights or voting rights in a legal entity established or incorporated abroad and whose assets are mainly composed of financial and monetary assets is taxable in France on the income of this entity (whether distributed or not) when it is subject to a privileged tax regime (art. 123 bis of the French Tax Code).

Since January 1st, 2022, there is a legal presumption of ownership when the taxpayer is the settlor or the beneficiary deemed to be the settlor of a trust within the meaning of Article 792-0 bis of the French Tax Code: in this case, the 10% ownership condition is deemed to be met.

This presumption is intended to apply regardless of the type of trust (and therefore, in principle, including when it is a discretionary and irrevocable trust) and the State or territory in which it is located (as long as it is subject to a privileged tax regime).

It should be noted that a presumption of 10% ownership already exists when the individual has transferred assets or rights to a legal entity located in a non-cooperative State or territory.

The taxpayer may rebut the presumption of ownership by providing evidence to the contrary. This proof to the contrary may not only result from the irrevocable nature of the trust and the discretionary power of its administrator.

However, in case the trust is said to be “discretionary and irrevocable”, it cannot, by definition, be considered as being held or controlled by its settlor (or by the beneficiary deemed to be the settlor). In this respect, we recall that a decision of the Paris Administrative Court of Appeal held that the conditions for the application of Article 123 bis of the French Tax Code were not met in the case of irrevocable and discretionary trusts insofar as, in this situation, the taxpayer has no rights over the trust assets.

We therefore await with interest the comments of the administration on this point. Clarification of the nature of the evidence that can be considered as probative would indeed be welcome.