Today is: 18 May 2012
Please note that international tax and trust law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
Q: I have funds in a Jersey trust which I would like to use for investment in French property. Is this possible?
A: Yes this is possible. You will need to check that your trustees are happy to consider this type of investment but following recent changes to French law acquisitions by trusts should be fairly straightforward now.
Q: Does France have a similar trust system to the UK?
A: No, there is not exactly the same structure in France. Using trusts to invest in France has historically proved problematic as they have not been recognised as a legal entity capable of owning French assets. This has meant that they have been unable to borrow. Any trust investment in France has required indirect ownership via a French company, which adds to the cost and complexity and can have negative tax implications. This approach to trusts has now changed with the introduction of the ‘Fiducie’ system in France, which should make it straightforward for trustees to invest directly in French assets in a similar way to investing in English assets.
Q: This sounds promising. What is the ‘Fiducie’ system?
A: It was first introduced into French Law in 2007 where it permitted corporate entities to place their assets under the management of a third party being the ‘Fiducie’. This fiducie is the equivalent of a trustee. This was aimed at bigger commercial transactions and had limited use. In 2010 the right to place your assets with a fiducie was extended to permit individuals to settle their assets with a fiducie in a manner similar to a trust. The settlor or the trustees can also be the beneficiary. The settlor is allowed to continue using assets after settling the assets into the trust.
Q: How do I go about putting this in place?
A: The fiducie relationship has to be expressly created either by law or by a contract. It is necessary for this contract (comparable to a trust deed) to include a number of aspects including which assets are being put into the trust, the duration of the trust relationship (which may be a maximum of 99 years), the identity of the settlor, trustees and beneficiaries, and the object of the trustees. Once the deed is agreed, it cannot be revoked without the beneficiary’s agreement or a court order. Each trust arrangement will need to be registered with the French National Register. Therefore professional trustees may well end up having several fiducie contracts registered. An important difference to English Law is that the governing contract (or the trust deed) must be registered on the National Register of Fiducies within one month of creation of the fiducie.
Q: Will the governing documentation for my trust be sufficient for these purposes?
A: Provided that the trust deed has provisions which come within the requirements of the French Civil Code it will be accepted without any further documentation being required. There is a good deal of flexibility provided in the law for the role of the fiducie and as such, discretionary trusts should be able to fulfil the requirements of the contract. If French real estate or land is to be settled, the contract will need to be notarised. There will be practical steps which the notaire has to follow in these circumstances.
Q: Will my Jersey based trustees be permitted to act as the fiducie?
A: Although there are restrictions on who can act as a fiducie this should not be a problem when using professional trustees as they should come within the definition of those permitted to fulfil this role. The French legislation does require the settlor and trustee to be resident in an EU state or a country with which France has passed a double tax treaty seeking to allow information exchange in tax matters. Tax Information Exchange Agreements have been entered into between France and the various Channel Islands countries, which should be sufficient for these purposes.
Q: What will be the tax consequences?
A: There must be tax neutrality when assets are held by a fiducie. This means that the settlor will remain the taxable person rather than the fiducie. This is helpful in comparison to the previous position where French tax authorities would consider the trustees to be the owner of all property they hold. They would then be taxed in a manner similar to a company, which tended to be disadvantageous when compared to the taxation of individuals. Although the settlor continues to be viewed as the taxable person, for other purposes any settled assets are considered to have been transferred out of their ownership. This should mean that assets are ring-fenced from bankruptcy proceedings. Steps will need to be taken to avoid any issues with French forced heirship rules but this should be relatively simple to deal with.
Q: Is it now possible to obtain mortgage funding for these structures?
A: Yes. Fiducies can borrow in their capacity as a trustee and charge any assets which the settlor has put into trust. Banks which are lending to fiducies are still restricted in France and are more interested in high value transactions, although this is changing. There is no restriction in France on the level of gearing.
Q: This seems very positive. What are the first steps I should take?
A: The first is to ensure that your trustees are willing to consider foreign assets. When you have the property lined up we can move forward with having the trust deed registered in France. You will also need a notaire who is comfortable with the fiducie system.
February 2011
David Anderson
Solicitor and Chartered Tax Adviser
Graeme Perry
Solicitor
Sykes Anderson LLP