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The French Parliament recently enacted a law that finally institutes the “fiducie”, the equivalent of a trust under Common Law. Previous plans to introduce the trust into France (1989, 1992, 1994) failed owing to legal and tax obstacles: the Civil Code principle relating to the indivisibility of patrimony, and the fear of facilitating tax evasion or money laundering.
Law 2007-211 of 19 February 2007 has made it possible to remove these obstacles and the new provisions introduced in the French Civil Code (articles 2011 to 2031) provide France with a new legal vehicle allowing to create arrangements equivalent to the trusts of other countries.
1. Definition - The fiducie allows an independent patrimony to be created that is not that of the settlor (the constituant) but which does not form part of that of the fiduciary either. Indeed, the latter is obliged to keep the transferred property, rights and securities separate from its own patrimony, which was impossible under French law before now.
The regulation that applies to the fiducie is very flexible insofar as the Civil Code merely defines the principal characteristics, leaving great freedom to the parties to determine its terms and conditions in a contract.
2. The principal specific characteristics of the French trust are that:
- only legal entities may create a fiducie and, moreover, they must be subject to the corporation tax regime (article 2014 of the Civil Code),
- the fiducie contract may not constitute a gift to the beneficiary; however this restriction is not penalising because the recent reform of the law of inheritance and gifts in France (law 2006-728 of 23 June 2006) makes it possible for the most part to attain similar results under ordinary law.
3. The parties to the fiducie – Any resident of a State of the European Community or of a State or territory that has concluded a tax treaty for the purposes of eliminating double taxation and which contains a clause on administrative assistance for the purposes of fighting against fraud and tax evasion with France may be a settlor of a fiducie.
In order to provide the settlor with a guarantee of the solvency of the fiduciary and of the transparency of the management of funds, only legal entities of the banking and insurance sector (lending institutions, investment firms, life assurance companies) as well as State-approved monetary and financial institutions (the Treasury, Banque de France, la Poste, la Caisse des dépôts et consignations, etc.) may be fiduciaries.
As for the beneficiary of the fiducie, no provision of the Civil Code provides for restrictions in its regard and it may therefore be a legal entity or a natural person. The settlor or the fiduciary may be the beneficiary or one of the beneficiaries of the fiducie contract.
4. Term – The transfer of the property, rights or securities provided for in the fiducie contract is temporary and its term may not exceed 33 years as from the execution of the contract, being specified that the parties may, upon the expiry of that term, agree to renew it.
5. Operation – It is up to the parties to determine the framework of the mission of the fiduciary or fiduciaries as well as the scope of their power of administration and disposal. The remuneration of the fiduciary or fiduciaries does not have to be specified in the fiducie contract.
In order to reinforce the security of the performance of the fiducie contract, unless the parties provide otherwise, the settlor may at any time appoint a third party to ensure the protection of its interests (equivalent of the “protector” of a trust under English law). In accordance with the rules applicable to attorneys in France, the latter may be appointed as third party protectors.
6. Fiduciary Patrimony - The fiduciary patrimony may only be seized by creditors whose claims arise from the holding and the management of the patrimony: neither the personal creditors of the fiduciary nor the creditors of the settlor may seize the fiduciary patrimony. Similarly, the opening of insolvency proceedings against the fiduciary does not affect the fiduciary patrimony.
7. The tax regime of the fiducie is governed by the principle of neutrality of fiducie operations. Especially, transfers of property under a fiducie will not result in the taxation of a capital gain or give rise to transfer duties if they concern real estate. The fiduciary will be liable for property tax and business tax in relation to the property at its disposal by virtue of the contract.
8. Entry into force - Applications – The legal provisions instituting the fiducie came into effect on 22 February 2007, although a decree is shortly expected to be passed in order to specify certain secondary provisions in detail.
Numerous practical applications can therefore already be envisaged thanks to the fiducie, in particular in restructuring and financing operations, such as for instance: securising the creditor by a definitive transfer of the fiduciary patrimony in the event of default by the debtor, facilitating the management of securities in the scope of a syndicated loan, or the performance of defeasance transactions.
Lefèvre Pelletier & Associés, Paris
by Thierry Bernard