In a recent case heard in the French Supreme Court, the Cour de Cassation, the tax authority had undertaken an investigation into the income of a British couple resident in France. The investigation covered the period 2009 to 2014.
At the end of the investigation, they were notified of increases in their investment income for the period 2009/13 on which additional taxes and fines were imposed.
The couple were beneficial owners of two trusts (known as fiducies), containing two registered companies, which had been established in Gibraltar, with the legal title of the trusts held by a nominee.
Under French law where a person domiciled in France directly or indirectly holds at least 10% of the share capital or voting rights of a structure based outside of France subject to a preferential tax regime, the income of the structure is deemed to be investment income of the person in proportion to their share capital.
Under the law “A persons shall be regarded as subject to a preferential tax regime in the State or territory in question if they are not taxable there or if they are subject to taxes on profits or income the amount of which is more than half less than that of the tax on profits or on the income for which they would have been liable under the conditions of common law in France, if they had been there.”
Although the securities of the trusts were legally held by a nominee, the beneficial owners of the trusts had powers of management, “in particular those of opening and managing the bank accounts on which they have the signature and receive the benefits.”
The tax authority established that the two trusts invoiced consulting services to companies based in France owned by the couple. The trusts did not pay taxes on income in either the UK or Gibraltar.
Although the couple maintained that the trusts, which were duly declared, did not constitute an artificial arrangement, it was apparent from the investigation that the trusts had no economic activity.
The clients of the trusts were French companies in France owned by the trust holders, who were tax resident in France. The tax authority considered that “the non-economic interposition of foreign entities constitutes an artificial arrangement with the aim of circumventing French tax legislation and evading tax.”
The tax authority established that only part of the ‘profits’ made by the trusts were repatriated to France and that the partners of the trusts had undeclared bank accounts/cards located in Latvia enabling the beneficiaries to have access for their personal expenses, “with the aim of misplacing or restricting the control of the administration.”
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