Ownership presumption

Article 123 bis of the Code is an anti‑abuse mechanism that has existed since 1999, providing for the taxation of profits of a foreign entity held by a French tax resident. This regime applies if the foreign entity:

• holds a majority of financial assets;
• benefits from a privileged tax regime;[1] and
• is at least 10 per cent directly or indirectly owned by a French tax resident (this refers to the ownership of shares, financial rights or voting rights in the entity).

The Finance Bill 2022 reinforced the anti‑abuse rule by providing that the 10 per cent holding requirement is presumed to be satisfied in the case of a French‑tax‑resident settlor or beneficiary deemed settlor.[2] Under this presumption, the French tax authorities (the Authorities) will no longer need to determine the participation in the trust held by the settlor to tax the relevant income on a look‑through basis. The first application of this new presumption will concern income received as of 1 January 2022, which will be subject to tax in France in 2023.

However, the following question arises: if the presumption applies, how would the Authorities quantify the threshold of participation? Although the law is silent on this matter, one can assume that it will be up to the taxpayer to provide, during their exchanges with the Authorities, the exact proportion of the participation in the foreign entity. On which legal grounds should this be considered, however, given that the civil rules of ownership are not appropriate to common‑law trusts?

One will note that these new provisions highlight the difficulty of drawing analogies with French civil‑law concepts, such as ownership. Indeed, how can the taxpayer determine their holding participation in a trust if the latter does not distribute any income or distributes income according to the aleatory needs of the settlor?[3]