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Emmanuel Moyne
Bougartchev Moyne Associés AARPI, Paris
emoyne@bougartchev-moyne.com

Geoffroy Goubin
Bougartchev Moyne Associés AARPI, Paris
ggoubin@bougartchev-moyne.com

Léa Zimmermann
Bougartchev Moyne Associés AARPI, Paris
lzimmermann@bougartchev-moyne.com

 

In January 2021, the French Cour de cassation, the highest court in the French judiciary, issued a noteworthy decision regarding the obligation to declare assets held in foreign trusts to the French tax authorities at the same time as inheritance.^[1]

Although French courts recognise the validity of trusts, the legal effects of this Anglo-Saxon law institution still appear difficult to grasp.

The Wildenstein case: facts and proceedings

The criminal case at issue relates to the Wildenstein family, one of the largest art dealer families of the 20th century, more specifically to the estates of Daniel Wildenstein, deceased in 2001, and his son, Alec Wildenstein, who died in 2008.

As Daniel and Alec Wildenstein were both French nationals and domiciled in Paris for tax purposes, the family heirs were required to declare all inheritance assets to the French tax authorities. The tax administration claims that they failed to do so and that they fraudulently concealed assets held within seven foreign trusts. The total amount due would amount to €450m, including penalties and default interest.

Following complaints filed by the tax authorities and other Wildenstein family members, the heirs were prosecuted for tax fraud. A trial eventually took place in Paris in 2016. The criminal court found all the defendants not guilty, due to lack of legal basis and evidence.^[2] The Public Prosecutor’s Office appealed this decision, referring to the case as the longest and most sophisticated tax fraud in the French Fifth Republic.

The Paris Court of Appeal upheld the criminal court’s decision in June 2018.^[3] The appeal judges ruled that under the law in force at the time of the events, the Wildenstein family was under no obligation to declare the trusts’ assets in their inheritance tax statements.

Yet, on 6 January 2021, the criminal division of the Cour de cassation quashed this judgment in full.

The legal effects of trusts

The trust: a dispossession mechanism unfamiliar to French law

Following Article 2 of the 1985 Hague Trust Convention, which France signed but did not ratify, a trust corresponds to the legal relationships created by a person, the ‘settlor’, when assets have been placed under the control of a ‘trustee’ for the benefit of a ‘beneficiary’ or for a specified purpose.

These assets constitute a separate fund and are not a part of the trustee’s own estate. The title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee. The trustee has the power and the duty, in respect of which they are accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed on them by the law governing the trust.

A trust is designated as ‘irrevocable’ when the settlor has definitively disposed of their rights over the trust assets and does not or no longer has the power to recover all or part of the trust assets. It is designated as ‘discretionary’ when the distribution of income from the trust or the division of its property is left to the discretion of the trustee.

The assets located in an irrevocable and discretionary trust are no longer a part of the settlor’s estate.

At the time of the events, as at present, trusts are unknown in French law. Although French courts recognise the validity of foreign trusts, the resulting split of property as well as the constitution of a distinct patrimony (the one assigned to the trust) are unfamiliar concepts to the French.

The irrevocable and discretionary nature of the trusts at stake

In the Wildenstein case, all the trusts’ deeds mentioned that the trusts were irrevocable and discretionary, except for one of the trusts, which was only revocable during the settlor’s lifetime.

Despite the explicit wording of the trusts’ deeds, the appellants (ie, the General Prosecutor, the French State and the French Tax Authorities) had argued that in the case at hand, trusts’ assets were still, in fact, part of the settlor’s estate.

In particular, about the Drawdale trust, they raised that the trustees had ratified only a posteriori the distribution of the income of the company whose shares were placed in the trust. About two other trusts, the Sons trust, and the David trust, they argued that the trustee exercised its investment powers according to instructions made by the settlor, which revealed a limitation of the discretionary powers of the trustees. For the Delta trust, they claimed that the settlor retained power of control over the management of the assets through agreements signed with, among others, the trustee.

In its 84-page decision, the Paris Court of Appeal examined in length each of the trusts to determine whether the arguments raised by the appellants could lead to conclude that the settlors had not effectively dispossessed themselves of the assets.

From this analysis, the appeal judges concluded that while there was room for some doubt as to the reality of the settlor’s dispossession of the trust assets and as to the irrevocable nature of some trusts, all the trusts now appeared to be irrevocable. Like the first instance criminal court, the Court of Appeal considered that in view of the elements submitted, it was not possible to consider that the trusts at issue were fictitious.

In any event, as noted by the defence, the reality of the dispossession can only be challenged by reference to the law governing the trusts. Yet, none of the elements raised proved that the trusts did not operate in accordance with the trust deeds and the law governing the various trusts.

The Cour de cassation’s refusal to acknowledge the legal effects of foreign trusts

In its decision, the Cour de cassation explained that, in such a situation, the judge had to analyse the tangible operation of the trust concerned to determine whether the settlor had, in fact, continued to exercise a right of ownership on the trusts’ assets.

Despite the in-depth analysis of the trusts conducted by the Court of Appeal, the Cour de Cassation ruled that the statements of the appeal judgment were ‘ambiguous or even contradictory’, and that they did not enable the Cour de cassation to control whether the settlors had effectively dispossessed themselves of the assets of the trusts.

As the Court gives no further explanation on the elements that led to this conclusion, one may wonder whether what the Court deems ‘ambiguous and contradictory’ is indeed the mechanism of the trust itself.

In any case, in so ruling, the Cour de cassation demonstrated a clear disregard for the legal effects of foreign trusts and refused to acknowledge the dispossession mechanism provided for by the trusts’ deeds.

Foreign trusts and tax fraud

The absence of a legal obligation to declare trust assets at the time of events

The Paris Court of Appeal had also ruled that the heirs of the Wildenstein family were not legally required to inform the French tax authorities about the trusts’ assets.

Indeed, no specific legal provision existed in French law on that matter at the time of Daniel or Alec Wildenstein’s death. Article 750 ter of the French General Tax Code now specifically provides that assets detained through foreign trusts are subject to inheritance tax. Yet this provision was only introduced in 2011, through the Amending Finance Act of 29 July 2011.

The appellants argued that some Court decisions had already considered that such assets could be subject to inheritance tax, even before 2011. However, the Court of Appeal considered that this case law could not apply to the Wildenstein case.

The appeal judges also noted that during debates before the French National Assembly, the General Rapporteur of the 2011 Act had underlined that the tax regime on trusts was not always clear, giving rise to a situation of legal uncertainty, therefore the need for a new law.

The Court of Appeal concluded that there was no obligation, sufficiently clear and certain, to declare trust assets in inheritance tax statements. Consequently, the defendants were found not guilty.

The Cour de cassation’s unconvincing attempt to overcome this lack of legal basis

Despite the lack of legal provision, the irrelevance of the cited case law, and the legal uncertainty of the situation, the Cour de cassation held that failure to declare the trusts’ assets was such as to characterise the offense of tax fraud in the case at hand.

According to the Court, even before 2011, heirs were required to declare assets located in foreign trusts at the time of inheritance.

In reaching this conclusion, the Court relied in particular on a decision of the commercial division of the Cour de cassation handed down on 15 May 2007.^[4] Such a choice is rather surprising. Indeed, in the 2007 case, heirs of the deceased settlor were the designated beneficiaries of the trust, and the trust deed provided for the closing of the trust on the death of the settlor. At the time of inheritance, the assets were accordingly directly transferred into the heirs’ estate. On the contrary, in the Wildenstein case, the trusts at issue survived the death of their settlor. Therefore, as noted by the Court of Appeal, this decision cannot apply to the facts at hand.

Even more surprising is the Cour de cassation’s reasoning about the 2011 Act. For the members of the Court, far from revealing the absence of a legal basis before 2011, the introduction of a specific tax regime only confirmed that transfers made through trusts can be subject to inheritance tax.

On the basis of these flawed considerations, the Cour de cassation asserted that there was indeed a legal obligation to declare such assets prior to the 2011 Law, and that such ruling did not infringe the requirement of legal foreseeability.

A case to follow closely

Other judges of the Paris Court of Appeal will now have to rule again on the Wildenstein case. Indeed, the Cour de cassation never rules on the facts of a case and is exclusively required to interpret a rule of law. As a consequence, when a decision is quashed, the case is referred back to an appellate court.

It should be noted that although lower courts usually follow the Cour de cassation’s ruling, the Court of Appeal is not legally bound to comply with the terms of this ruling. Furthermore, even if the Court of Appeal follows the ‘rules’ laid down by the Cour de cassation, the judges could still find that there is no factual basis to convict the heirs.

In other words, this decision does not put an end to the Wildenstein case. The proceeding must still be closely followed, as it will set the tone for future case law on foreign trusts.