Recent Developments in France, by Marc Bornhauser for the Sydney Congress of The International Academy of Estate and Trust Law
After a frantic rise of taxes on individuals, France enjoys a sort of « tax pause ». However, it doesn’t mean that taxes are not increasing. It only means that the rise is more or less hidden from public knowledge.
Our President’s only last attempt to set up a significant reform, the introduction of a PAYE System, has been postponed till his last Tax Bill this fall and frankly, as everybody from the left wing (the year without taxation is inacceptable) to the right wing (no way the employers will manage the taxation of their employees) is against it, I should not gamble the farm on its success.
Fortunately, the judges are our only civil servants not being on strike nowadays and the fiscal species have been particularly busy lately.
Concerning individuals, I selected four decisions of interest I shall comment.
The two first ones deal with the capital gain tax on shares. To have you understand the situation, I need to remind you of the first big tax reform set up by our Dear President: The incorporation into the brackets of income tax of capital gains deriving from the sale of shares in lieu of a proportional rate.
As a mitigation against a taxation up to 64.5% (including social contributions and the exceptional contribution on highest incomes) instead of a maximum of 43.5% in 2012 (38.5 % in 2011, 34.5% in 2010, just to show you the trend here), the law has provided that according to the time the seller has owned his shares, he will enjoy a deduction from the capital gain which may be as important as 85% after 8 years in certain circumstances, the actual taxation on this case being at a maximum rate of 28.5%.
But the Tax Administration have taken afterwards positions which penalized hugely the taxpayer. In an administrative regulation, they said:
– that in case a capital loss occured, the deduction for duration of possession was applicable to the loss offset against other capital gains,
– that the capital gains realized before 2013 but the taxation of which have been postponed (in case of merger or contribution in kind for instance) did not enjoy this deduction for duration when they become taxable.
On the first point, the Conseil d’Etat has held on 12th October 2015 that such limitation to capital losses was illegal. I am proud to say that it was my firm which won the case.
On the second point, the Conseil d’Etat held that the interpretation of the Tax Administration was correct, but asked our constitutionnal judge (the Conseil Constitutionnel) through a Priority Question of Constitutionnality whether it was in accordance with our constitution or not.
On 12th April 2016, the Conseil Constitutionnel held that for capital gains postponed before 2000, as the report of taxation was optional, no violation of the Constitution occured but the capital gain must be reassed in order to take inflation into consideration.
But for capital gains postponed at the end of 2012 because they were in the scope of a new anti-abuse legislation aimed at regulating contributions in kind of shares to a controled company before their sale, the report of taxation was complusory and the Conseil Constitutionnel held that the taxpayer cannot be taxed at another rate than the one applicable in 2012, ie a maximum of 43.5%.
Concerning Net Wealth Tax, section 885 O quater of the French Tax Code provides that when a taxpayer onws a shareholding in a company which is exempt from Net Wealth Tax as a professional asset, only the value of the assets owned by the company which are used for its business are tax exempt.
Justified by a litteral interpretation of the law, taxpayers have taken the position not to declare non-professional assets owned by subsidiaries and sub-subsidiaries. The Tax Administration have lately tried to challenge this position, but on 20th October 2015, the Cour de cassation held that the taxpayers were right and the tax administration wrong.
However, please note that this regulation needs the shareholding in the subsidiary possessing non-professional assets to be of professional use for the holding company. It means that a subsidiary managing a business and owning for instance a resort will be fully exempt, but if the resort is the sole asset of the subsidiary it will be taxable.
Last but not least, the Cour de cassation held on 27th May 2015 a very important decision concerning the shareholders owning shares whose property was stripped between an usufruct and a bare ownership.
In this situation, the question of which right on the property gets the dividends distributed by the company has been troubling lawyers since a very long time.
Three differents thesis were considered:
– The dividends belonged to the usufructor in any case;
– They belonged to the usufructor when they came from ordinary profits and to the bare owner when they derived from reserves or, a small variant, from exceptional profits such as capital gains;
– They belonged to the bare owner but under an usufruct, which means that the usufructor takes them, the bare owner having just the right to get them at the end of the usufruct (usually, the death of the usufructor).
If the judge have taken so much time to held a case on this situation, it is because everyone agreed that the bylaws of the company may settle the question appropriately, which was of course generally the case.
Fortunately, a situation where the bylaws were silent gave the opportunity to our supreme court to hold that the dividends belonged to the bare owner under an usufruct.
This solution is the most favorable for the taxpayer since it allows him to set up sophisticated schemes such as the conclusion of a quasi-usufruct convention on these dividends, which allows the usufructor to spend them, but ensures the bare owner a right to get back at the usufructor’s death a credit equal to their amount. I even consider that it is possible to introduce by a convention a clause indexing this amount on a panel of index such as S&P 500, Treasury bonds and inflation.
The important point is that this credit will be deductible from the usufructor’s taxable assets for the computation of the Inheritance Tax due at his death.
I shall finish my presentation by informing you of a very disturbing decree the Government has passed very lately (on 10th May 2016) in order to create what they called « trust transparency »: a public registar of trusts.
At the end of June, the French Tax Administration will put online the name of all French residents who are beneficiaries of trusts they know of, since the trustees are supposed to have revealed their identities since 2012 through specific returns sanctioned by huge penalties (12,5% of the trust assets for each missed return, whose the French beneficiary is also liable).
With François Tripet we are going to see whether we may challenge this decree before the Conseil d’Etat on the ground that it constitutes an excessive attempt to the right to respect for private life. Indeed, if I do not contest the right for France to impose, even on the foreigners the trustees may be, obligations to ensure taxes dues in France are actualy paid (even though the level of the penalty may be challengeable, but that is a different question), François and I do not see why transparency should go this far, especially in a country such as France where journalists and politicians of all side keep telling the public how evil trusts are.
We will keep you informed on this controversial issue when news occur.