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FRANCE: An Introduction to Private Wealth Law

Private Wealth Law in France: an Introduction

France is a transcontinental country located in the middle of Western Europe, with an estimated population of 68,373 million people, as of January 2024. It is one of the founders of the European Community and of the United Nations, a permanent member of the UN Security Council, and a member of the World Trade Organization, among other international organisations. 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 reputed for its cuisine and art de vivre.

In order to comprehend the French legal system, it should be remembered that France is a civil law country; in a nutshell, judges are not there 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 compared to common law jurisdictions.

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 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 the French réserve héréditaire by application of the foreign law governing their parent's succession to be compensated out of the property located in France. It could be suggested that this more than surprising rule would never apply in practice following a decision dated 15 February 2024, in which the European Court of Human Rights confirmed that forced heirship is not a human right guaranteed by the European Convention of Human Rights.

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 their 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, the settling of an estate after the death of the deceased is dealt with by notaires and/or French lawyers, who apply the law governing the succession.

Having said that, it is highly recommendable to prepare a will, regardless of the country of habitual residence, tax status and citizenship.

As of 17 August 2015, EU Regulation No 650-2012 on successions and wills (the “Regulation”) has considerably modified the rules regarding jurisdiction and the applicable law governing matters of succession in France. Under the Regulation, as a general rule, the law applicable to the succession as a whole (ie, 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, regardless of whether or not this country is a member state of the EU. In addition, the Regulation allows a person to choose the law of the country whose nationality they possess 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 but whose habitual residence is in France can opt for the law of the State of their 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 to individuals in France 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).

Tax treatment in France differs 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 4 B 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 the French tax code in 2011. This law created a new set of rules with respect to wealth tax and 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 imposes 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 to organise the ownership structure of their assets (French or foreign) and to prepare their transmission to future generations, regardless of their citizenship and their country of residence. 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.