Tax authorities of civil law jurisdictions such as Monaco, France and even Russia to a certain extent are not comfortable with trust and fiduciary arrangements.
The concept of ownership in civil law countries is not similar to the concept of “legal versus equitable ownership” which exists under Anglo-Saxon laws. This difference triggers various consequences and questions in civil law countries such as: who is the owner of assets owned through trust or fiduciary arrangements or who is the person liable to tax?
The question of who should be considered as the owner of a company owned through fiduciary arrangement has important impacts when this company owns property in France or in Monaco.
Both France and Monaco have specific laws to be able to determine who is the ultimate beneficial owner (UBO) of a property. The two systems are different and whilst Monaco aims to determine who is the individual ultimate owner, France wishes to have all the chain of participation declared.
Moreover, there may be some interaction between the tax rules and the Anti Money Laundering (AML) regulation, which also aims to determine the owner and the origin of the funds used to buy a property.
Practical example relating the French property ownership
Under French law, any structure which owns directly or indirectly real estate located in France, is subject to the “3% annual tax”, except for some special exemptions. This 3% tax is levied on the market value of the real estate on 1st January of each year.
Exemptions can be granted if certain conditions are fulfilled which consist mostly of the disclosure of all companies above the property owning company, up to the ultimate individual owners.
When a trust or a fiduciary agreement has been interposed in a property holding structure, the question is therefore whether the trustee/fiduciary company should be declared as the owner of shares of the property holding company?
In this respect a recent French Civil Supreme Court decision (Cour de Cassation in a decision dated 18th October 2016) gave us some answers.
It ruled that it is first necessary to analyse whether the foreign fiduciary arrangement could be assimilated to a French fiduciary arrangement (“contrat de fiducie”). If so, it should be considered as transparent and therefore not declared.
In this case, French real estate was owned by a French SCI held by a Luxembourg SOPARFI, which shares were held through a Luxembourg fiduciary company for the benefit of an individual.
Traditionally, the practice was to consider declaring the trustee (or fiduciary company) as it is the legal owner of the company as per the statutes, companying registry etc. Then in a next step, the ultimate beneficial owner of this trust/fiduciary arrangement should be declared..
In the case we are considering here the French SCI had declared in the 3% annual tax return the Luxembourg company. In turn, the Luxembourg company had declared in its tax return only the ultimate beneficial owner of the fiduciary arrangement directly (the “interposed” fiduciary company was not declared).
The French tax administration put forward the argument that according to the Article 990 E of the French Tax Code, the Luxembourg company should have declared the fiduciary company, which in turn should have declared the ultimate beneficial owner of the fiduciary arrangement.
This decision is important because of the unique nature of the interpretation of article 990 E made by the Cour de Cassation. The judge concluded that the beneficiary of a foreign legal arrangement similar to the French Fiducie (by reference to the French law of Fiducie n° 2007-211 of 19th February 2007) must be considered as the holder of the assets and that it was not necessary either to declare the “foreign fiducie” or the foreign fiduciary company.
It is also important to note that whilst the Court of appeal did not qualify correctly the Luxembourg fiduciary arrangement, its decision has been validated by the Supreme Court because it founded its decision on other elements of proof. These elements of proof were brought by third parties such as banks and the auditor and confirmed the name of the ultimate beneficial owner of the structure. These documents are similar to the ones which are used to determine the name of the UBO for AML purposes. There is clearly a link made between documentation and analysis undertaken for AML regulation purposes and utilisation of these documents for tax reasons. A coherence is therefore achieved even if the legal concepts were not necessary analysed.
Monaco property and trust arrangements
Regarding Monaco, trustees or fiduciary companies owning directly or indirectly Monegasque real estate are in a quite different situation because the Principally of Monaco has signed the Hague Convention on the recognition of trusts.
It is also important to highlight the fact that in Monaco the ultimate beneficial owner of a trust owning real estate in Monaco is not disclosed to the authorities where it is owned through an “opaque” structure, but that this information should be known by its Monaco tax representative.
In the case of change of beneficial ownership of the opaque structure, a registration fee of 4.5% is due on the value of the property, but it is not necessary to disclose the new beneficial owner’s identification to the authorities.
Changing fiduciary arrangements when a Monaco property is involved need to be done carefully in order to ensure there is no possibility to interpret this change as a change of beneficial owner.
In Monaco, a “Mandataire agréé” has to complete every year a declaration indicating whether or not a change of beneficial owner occurred in the legal entity.
This article is published in issue 20 of MONACO БИЗНЕС (Monaco Business) Magazine -
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