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Published on Wednesday 12/10/2016

In a ruling of 19 May 2016 (no. 14VE01214), the Administrative Court of Appeal of Versailles judged that a trust incorporated under British law could be likened to a French public-interest foundation, thereby exempting it from withholding tax on distributed dividends of French origin in respect of income declared for tax years 2010 and 2011.

A British charity trust was in a dispute with the tax authorities in connection with the trust's characterization in French law. The tax authorities disputed the trust's totally altruistic activity, more particularly with respect to the number of paid directors and the amount of their compensation package.

It was therefore a matter of deciding whether for tax purposes the trust in question should be likened to:

- a non-profit-making organization liable for 15% French corporation tax on dividends received, pursuant to article 119 bis, 2 of the general tax code and article 187, 2nd subsection of the 1st indent of the same code (in the version in force from 1st January 2010);

- or a French public-interest foundation exempted from corporation tax in pursuance of article 206, 5 of the general tax code.

In its ruling the administrative court of appeal firstly accepts the altruistic nature of the trust's management, comparing it to a French non-profit-making organization. It justifies its decision by applying prior legal precedents of the Council of State for the period pre-dating 1st January 2010 (Council of State rulings of 22 May 2015, nos. 369819 and 369820), which considered that the specific activity of the trust and the difficult duties of its directors warranted a higher threshold for receiving their remuneration, which in the end did not seem excessive. However, this characterization did not completely exempt the trust from taxation. Secondly, the appeal court then attempts to liken the trust to a French state-approved foundation. To that end, it again bases its arguments on the aforementioned legal precedents, noting its position with regard to the law of its state of residence (British law) to ascertain whether it met the conditions of domestic law for being characterized as a state-approved organization, namely: the irrevocability of allocation of properties, their vesting in the event of dissolution, accounting obligations and financial accountability and the power of the British supervisory authority (article 18 of the law of 23 July 1987).

After making a comparison in the particular case, in the light of these four criteria, the court of appeal confirms that in this instance the trust can be likened to a French state-approved foundation due to the similarities between the criteria of domestic law and those of British law.


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