FRANCE: An Introduction to Private Wealth Law
Private Wealth Law Practice Area Overview - France
Contributors: Maryse Naudin - Ouri Belmin
France is a transcontinental country located in the middle of Western Europe. Its estimated population in January 2022 amounts to 67,814,000 people.
France is one of the founders of the European Community and of the United Nations, being a permanent member of the UN Security Council, and a member, among other international organisations, of the World Trade Organization. France is also one of the seven leading industrial countries and is ranked as the world’s tenth largest and the EU’s second largest economy. The official language of France is French. The French Republic is a unitary semi-presidential representative democratic republic with a strong democratic tradition. France has been a centre of Western cultural development for centuries (art, literature, philosophy, music, cinema, “haute couture”) and is also well reputed for its cuisine and “art de vivre”.
In order to apprehend the French legal system, it should be remembered that France is a civil law country. In a nutshell, judges are not to make law but merely to interpret it as law arises primarily from written statutes.
As a civil law country, France has very different fundamentals inspiring its laws, as compared to common law jurisdiction.
• There is no French translation of the concept of “estate planning”
The Civil Code’s spirit is meant to apply to everyone equally, with a special focus on protecting the most vulnerable people. Of course, it is possible to derogate from Civil Code provisions, provided that they are not considered as part of the public order (“ordre public”).
In almost all common law countries, inheritance laws provide for absolute freedom of testation, whereas in France, it is subject to some imperative restrictions designed to protect public order. The most important of these, in practice, is by far the forced heirship rules, under which a certain portion of the estate is reserved for certain heirs (“réserve héréditaire”).
While the French Supreme Court confirmed in 2017 that the forced heirship rules are not applicable to successions governed by a foreign law, a new law introduced in 2021 allows children who would not have received, by application of the foreign law governing their parent's succession, the French “réserve héréditaire” to be compensated out of the property located in France. This more than surprising rule would never apply in practice in our opinion.
Civil law also provides the list of heirs (the ultimate remaining successor being the State of France) who inherit from the deceased in the absence of a will. The legal ownership of the deceased’s estate is immediately vested to his/her heirs. There is no such procedure as probate in France.
As a consequence, it is not common practice in France to prepare a will. In most cases, after the death of the deceased, the settling of an estate is dealt with by “notaires” and/or French lawyers, who apply the law governing the succession.
Having said that, it is strongly recommended that a person should prepare a will regardless of their country of habitual residence, their tax status and their citizenship.
As from 17 August 2015, the European Union (EU) Regulation n°650-2012 on successions and wills (hereinafter so called the “Regulation”) considerably modified the rules regarding jurisdiction and applicable law governing matters of succession in France.
Under the Regulation, as a general rule, the law applicable to the succession as a whole (i.e. movable and immovable) shall be the law of the country in which the deceased had their habitual residence (“résidence habituelle”) at the time of death, irrespective of whether this country is (or not) a Member State of the EU.
In addition to the above, the EU Regulation allows a person to choose the law of the country whose nationality he/she possesses at the time of making the choice, or at the time of death, as the law to govern their succession.
As a consequence, since 17 August 2015, a person who is not a French citizen and whose habitual residence is in France can opt for the law of the State of his/her citizenship as the law governing their whole estate.
• Trusts are not known but are recognised in France
The concept of trust is alien to the French Civil Code. This is because there is no distinction between legal and equitable ownership.
However, although it is impossible to create a trust under French law and France has not ratified the Hague Convention on the recognition of trusts, French courts recognise the effects in France of common law trusts, provided they comply with the mandatory provisions of French law.
As a consequence, one may set up a foreign trust to own assets wherever located, notably in France.
Even if French law is to apply to the settlor’s estate and the will or foreign trust does not comply with French forced heirship rules, only the excluded heirs may contest. If they do not contest, the will or the wishes of the settlor may apply.
A French judge would recognise the effect of the will or of the trust, but would attribute to the excluded heirs the portion of the estate or of the trust’s assets they should have received by application of the forced heirship rules.
• Basic rules of French taxation for individuals
The most important taxes applying in France to individuals are income tax (“impôt sur le revenu”), wealth tax on real estate (“impôt sur la fortune immobilière”) and gift and inheritance taxes (“droits de donation et de succession”).
The tax treatment in France is different depending on the tax domicile or residence of the taxpayer. Their citizenship is irrelevant (except when certain provisions of the US-France tax treaties apply). The definition of domicile for French tax purposes is provided by article 4B of the French tax code which may be altered by the definition of residence given by tax treaties signed by France with other countries.
Basically, French residents are subject to taxes on their worldwide income or assets, while non-French residents are taxed on their French source income and assets located in France.
A specific law dealing with the tax treatment of foreign trusts with a French connection was introduced in 2011 in the French tax code. This law created a new set of rules with respect to wealth tax and to gift and inheritance taxes. As a general rule, the same regime applies for wealth tax and gift and inheritance tax purposes as if no trust has been used by the settlor. The 2011 law also provides compulsory reporting obligations on the trustees.
To conclude, despite the fact that there is no French translation of the concept of “estate planning” it is absolutely essential for individuals, regardless of their citizenship and their country of residence, to organise the ownership structure of their assets (French or foreign) and to prepare their transmission to future generations. The use of French legal concepts such as the split of ownership between usufruct (“usufruit”) and bare ownership (“nue-propriété”) as well as common law concepts such as trusts may be combined to achieve individuals’ wishes.