The case originated from the death of a taxpayer who was France resident, leaving his son as heir.
During his lifetime, the deceased had placed significant assets into several trusts, governed by the laws of Bermuda and Guernsey, with the stated purpose of managing and protecting his wealth.
After his death the heirs filed an inheritance tax return, but the tax authority later challenged its completeness and accuracy.
The tax authority issued a notice of assessment (proposition de rectification), claiming that the assets placed in the trusts should be included in the taxable estate. The authority argued that the deceased had not effectively disposed of these assets, meaning they remained part of his estate for tax purposes.
The tax authority relied on French tax law, which requires that for assets in a trust to escape French inheritance tax, the settlor must have “irrevocably and effectively” disposed of them.
The son contested the assessment, on numerous substantive and technical grounds, but his appeal was rejected, resulting in a final appeal to the Supreme Court, the Cour de Cassation.
The Supreme Court ruled that the deceased had not effectively disposed of the trust assets, as he had used prerogatives in respect of the assets controlled by the trust indicative of the right of ownership, effectively treating them as his own. As a result, the trust must therefore be regarded as having remained in his patrimony until his death and transmitted to his heirs.
The Court reiterated that, to avoid taxation in France, the settlor of a trust must have “irrevocably and effectively disposed” of the assets placed in the trust.
The Court emphasised that the validity of the trust under foreign law is not decisive; only effective dispossession matters.
The Court also validated the regularity of obtaining information from the Cayman Islands and Ireland, based on tax information exchange agreements. The heirs had contested that as the information obtained by the tax authority pre-dated the entry into force of the exchange agreements it could not be used. The Court ruled that the failure to declare trusts may constitute an intentional act subject to criminal prosecution, justifying the exchange of information even for estates predating the exchange of information agreement.
If you are considering using a trust structure in France we would strongly urge you to read our guide below and to take advice from a seasoned professional.
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