A colleague in Paris kindly mentioned that a senior lawyer from the Conseil Constitutionnel - French Constitutional court - gave a seminar on the Constitutionality of fiscal deeming provisions in Paris.
The speaker outlined the position in a recent referral from the Conseil d’Etat registered as received on 10th July, 2017 under the Question Prioritaire de Constitutionalité procedure concerning the constitutionality of certain of the deeming provisions in article 123 Code général des impôts. That broad brush provision refers to fiducies and other comparable entities - i.e. trusts. The affair will be heard in the autumn.
Whilst granting the referral procedure on certain points, the Conseil d’Etat abstained from referring certain others on the basis that these had already been the subject of a decision by the Constitutional Court, which had admitted their constitutionality, but subject to a reservation that the taxpayer be allowed to produce evidence as to the actual taxable income concerned.
The point here is that article 123 CGI refers, presently, to “fiducies” or other comparable structures (implying trusts) as one of the vehicles falling within its scope.
In past decisions, the Conseil Constitutionnel has not directed its attention to any executive decree, or instruction, as these fall outside the scope of its constitutional reference. It is basically only statute which falls within its remit. What it has however started to do is to qualify the constitutionality of deeming provision of the types inserted into article 792-0 bis CGI at several points and render these subject to a requirement that the taxpayer be allowed to provide evidence rebutting the presumption as to the taxable forfeitary basis laid down in any anti-avoidance article. The point here is that article 792-0 bis CGI and the statutory amendments to other articles in the CGI that the 2011 and 2013 legislation made only function as statutory fictions attributing ownership on a fictional basis, and then attempting to make those presumptions irrebuttable. The chain of fiction then is enforced by penalties which were declared disproportionate to the extent that they were in proportion to the value of the Trust Fund. The Conseil Constitutionnel has not asked to adjudicate upon whether the actual taxation legislation was constitutional or not.
It is common knowledge that the French tax administration has deliberately gone beyond its powers in many areas to serve its political masters’ need to sweep in any tax revenue possible by hook or by crook. In any jurisdiction with a constitution, there is always a backlash to such administrative and executive abuse of the lawmaking machinery.
That can be aligned with a successful prior DC reference by the Sénat challenging a draft Finance Bill on transferring Wealth Tax liability to a person who does not have the income rights in the capital asset concerned, and is therefore unable to pay the tax means that the entire article 792-0 bis CGI régime can be queried as contrary to the constitution and in particular to the principles of equality before the law and of equality before “les charges publiques”. In layman’s terms, the conceptual status of these constitutional norms and values strikes down any attempt to attribute a tax liability on a fictional basis to a person who doe not have the means to pay it.
Whilst stressing that the terms and objectives of article 123 CGI are not the same as the presumptions upon fictions established by article 792-0 bis CGI and the taxation provisions which depend upon it, the outcome of this QPC will need to be followed closely by any lawyer advising trustees in this area.
The action of the administration in deliberately drafting a set of fictional presumptions based upon the pre-millennium IRS Grantor Trust régime, and ignoring the complex trusts régime initiated in its own instructions on the US Tax Treaty issued in the 1970s needs to be challenged, as it is being given a fictional force of law, despite having no legal basis whatsoever.
A colleague, Mark Lindley TEP, CTAPS of Bootle Hatfield has kindly pointed out, below, that Bornhauser, a French cabinet d’avocats has filed a recours with the Conseil d’Etat as to the administrative instruction commenting the trusts assorted with a claim for QPCs to be made to the Conseil Constitutionnel, presumably as to the constitutionality of the legislation.
Cabinet Bornhauser are merely indicating that this has been done, and there is insufficient detail to be able to analyse the full implications of their pleading for the overall industry, as yet.
However the issues raised in their defence of their clients are not the only challenges available against the legislation when taken as a whole.
So there is no point in simply awaiting the result of this laudable challenge, where your clients are being taxed in other ways, particularly in relation to the fiscal forced heirship provisions, as such they may be dubbed, in article 792-0 bis II;
In that respect, please see the links to their announcements, as I can do little else except provide the links to the French articles by Bornhauser which should be self explanatory for French speakers:
http://blog.bornhauser-avocats.fr/index.php/2017/07/02/regime-fiscal-des-trusts-les-qpc-sont-deposees/
and
http://blog.bornhauser-avocats.fr/index.php/2016/10/14/mende-trust-trois-mois-perdus/
The procedure that they have adopted is to ask the Conseil d’Etat for a referral to the Conseil Constitutionnel on specific points in the case presented to it.
They comment on a failed form of French variant on a crowdfunding initiative by two of their French colleagues attempting to use an association which had then been unable to prove a sufficient interest in the outcome to be heard. However the Rapporteur public at the Conseil d’Etat did state that on the substance he would have recommended that the QPC to the Conseil Constitutionnel be allowed.
There are therefore two preliminary issues relevant here: the first is that the Conseil d’Etat decides to refer, and secondly that the Conseil Constitutionnel accepts and accedes to the position that the law in question raises constitutional issues.
Rather than take on the offending statute directly, Bornhauser are suing the administration on the Conseil d’Etat for excès de pouvoir as a matter of administrative law in the drafting of their Instructions commenting on the law and the definitions in it, and are backing that with QPCs as to whether the law itself can be challenged. A mere instruction by itself cannot usually be considered by the Conseil Constitutionnel as unconstitutional as it is an exercise of administrative or executive power, not a statutory instrument. However its interpretative user can be.
The Trust profession should give the cabinet Bornhauser full credit for initiating making this inevitable challenge to the French administration’s mindset on trusts with a view to obtaining their effective recognition and economic treatment, not a fictional deformation as a form of grantor trust and claiming penalties on a fiction upon a fiction.
However, given the probability that only part of the statutory mechanism will affect an individual client’s position, it is likely that only a small section of the offending legislation will be reviewed by the Conseil Constitutionnel on the Bornhauser reference.
Peter Harris
Overseas Chambers