11 Feb Tax Alert – trusts
The Wildenstein case, Tax fraud, Inheritance and Trust
1. In its decision on June 29th, 2018, the Paris Court of Appeal recognized that the prosecution was performed outside the statute of limitations. It should be recalled that at this time, the statute of limitations for tax fraud was of three years and that prosecutions only started in 2011. Indeed, according to the Paris Court of Appeal, the statute of limitations for tax fraud by concealment started to run when the first inheritance tax return was filed on April 23rd, 2002, within the legal deadline of six months after the death. The second disputed inheritance tax return, filed on December 31st, 2008 (relating to the same estate and the same reporting failures) could not constitute a new tax fraud, this offence being definitively completed at the time of the first declaration, whereas the second return aimed to establish and pay inheritance tax due following the death.
2. In its decision dated January 6th, 2021 (No. 18-84,570), the French Supreme Court considers that the Paris Court of Appeal “disregarded the law provisions” and judged that the statute of limitations was “regularly interrupted” because, regarding tax fraud, the special statute of limitations for public action (provided for in Section L.230 of the French Tax Procedures Code) starts to run, in case of omission of declaration, on the day on which the return should have been made and, in case of concealment of taxable sums, on the day on which an incorrect return is filed with the French tax authorities.
3. Furthermore, the French Supreme Court also censured the decision from the Court of Appeal on another important point. It should be remembered that the Court of Appeal considered that prior to the introduction of the Law No. 2011-900 on July 29th, 2011, there was no “sufficiently clear and certain obligation to report assets placed in a trust”, which is to say that the tax fraud (mentioned above) could not be established in the case at hand.
The French Supreme Court rejects this statement and considers on the contrary that:
“even before the entry into force of the Law No. 2011-900 on July 29th, 2011, when the settlor of a foreign law trust, even qualified by the trust deed provisions as discretionary, irrevocable and which did not terminate upon his death, has not irrevocably and effectively dispossessed himself of the placed assets, his heirs must declare them at the time of the inheritance. As a consequence, the failure to comply with this obligation is likely to characterize the offence of tax fraud.
Therefore, it belongs to the judge to analyze the effective management of the trust, in order to determine whether the settlor has, in practice, continued to exercise prerogatives with respect to the assets placed in the trust which are indicative of the exercise of the right of ownership, so that he or she cannot be considered to have really renounced to the assets”.
The French Supreme Court then judges that:
- it cannot be considered that there was no obligation, prior to the Law No. 2011-900 on July 29th, 2011, to declare to the French tax authorities the assets placed in trusts not terminated at the settlor’s death;
- in case the settlor of an irrevocable and discretionary trust did not dispossess himself of the assets placed in the trust, these assets are considered to have remained the property of the settlor, liable to inheritance tax.
4. The French Supreme Court thus referred the case before the Paris Court of Appeal. We will follow with great interest the decision that will be rendered by the Paris Court of Appeal.
In any case, this decision reminds us to what extent it is not easy to analyze the tax consequences in France in the
context of a trust having a connecting factor with France, whether it is the settlor (who has become a) tax resident of France, one (or more) beneficiary(ies) who is (are) a French tax resident or, more generally, a trust holding French assets, whether movable or immovable.
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