French case law updates on trusts and foundations for the year 2026

FBT Avocats – May 2026
Alain Moreau

A foundation governed by Liechtenstein law was established in 1993 and received, in 1995, a property situated in the south of France. This property was sold in 2021. In connection with this sale, the foundation—or, more likely, the French notary— had classified the foundation as a commercial company for tax purposes.

This taxation was challenged before the Administrative Court of Nice, which handed down a decision on 15 January 2026 in favour of the foundation. Indeed, the court noted of its own motion the misapplication of the French provisions that had led to this taxation, since the foundation, due to its non-profit nature and the absence of any actual profit-making activity, would not have been subject to corporation tax had it been established in France. The crux of the dispute therefore lay in determining whether the Liechtenstein foundation carried out a profit-making activity within the meaning of Article 206-1 of the French General Tax Code.

The French judge analysed the characteristics of the foundation in great detail. He found :

• firstly, that the foundation pursued public-interest objectives in the fields of charity and science, having regard to the beneficiaries designated in its constitutional documents, and that it was exempt in Liechtenstein from direct tax applicable to public-benefit legal entities by virtue of its charitable activities.
• secondly, that the foundation had demonstrated the effective existence of its registered office in Vaduz, supported by a translated copy of its articles of association, and that it was a charitable foundation established in accordance with the founder’s wishes.

From these findings, the judge concluded that the entity could not be regarded as carrying out a profit-making activity within the meaning of French tax law and was therefore not comparable to any form of commercial company under French law. In practical terms, the foundation could not be subject to taxation applicable solely to business entities.

The Council of State, the supreme court in tax matters, handed down a decision on 13 March 2026 concerning a Canadian trust that had made payments to a French beneficiary. The trust’s accounts showed that it was structurally loss-making.

Nevertheless, the Council of State held, as had lower courts previously, that the payments made to the beneficiaries constituted taxable distributions in their hands. Indeed, French tax law, and in particular Article 120 of the General Tax Code, treats any distribution made by a trust as taxable.

To avoid such taxation, one must be able to prove that the sums received are not proceeds of the trust, but income of a different nature, in particular capital repayments, advances on the trust’s assets or a loan. Such proof can only be supported by the trust’s accounting records. Failing this, Article 120 of the General Tax Code establishes a presumption of a distribution of taxable income to the beneficiary.

Under the French tax regime applicable to trusts, this ruling also applies to comparable entities and therefore to foundations. Our advice: to ensure that any payment to French beneficiaries does not constitute taxable income in their hands, it is essential to maintain robust and well-documented accounting records, enabling the origin of the funds and the nature of the payment to be demonstrated for each distribution (for example, repayment of contributions made by the beneficiary, return of funds that they themselves contributed to the foundation, or a loan granted by the foundation).

In the absence of sufficient supporting documentation, there is a real risk that the sums made available to beneficiaries will be taxed.

The present case brought before the Paris Judicial Court concerns the former French wealth tax (ISF). It should be noted that, under the ISF, assets and rights placed in a trust were to be included at their market value in the estate of the settlor or the beneficiary deemed to be the settlor.

The legislator had established a virtually irrefutable presumption of ownership in favour of the settlor of a trust for the purposes of the ISF tax base. This rule applied regardless of the nature of the trust: revocable or irrevocable, discretionary or non-discretionary. In a decision of 15 December 2017, the Constitutional Council had upheld the principle of this taxation, but had attached a reservation of interpretation to it.

It stated that the taxpayer could prevent the taxation if they provided evidence that the assets in question did not confer any real ability to pay tax upon them. However, such evidence could not be derived solely from the legal nature of the trust; the taxpayer had to demonstrate the absence of any direct or indirect benefits derived from the trust’s assets.

In the judgment of 10 March 2026, the central issue was whether a taxpayer resident for tax purposes in France, who had set up a discretionary and irrevocable trust in Jersey, continued to have rights over the trust’s assets. The taxpayer claimed that he had definitively divested himself of the assets, that he did not appear on the list of beneficiaries, that he had no right of inspection or enjoyment over the assets, and consequently, the value of the assets should be excluded from his wealth tax.

However, it follows from the evidence on file that:

• The trust deed entitled the spouses to obtain loans of up to 80% of the net assets.
• Two letters of wishes indicated that the French resident had asked the trustees to pay his wife a monthly sum of EUR 10,000 for the rest of her life.
• He further expressed the wish that funds be allocated to cover the costs of a care home or hospitalisation for his parents.
• He had expressed his wish that a specific investment adviser be engaged to manage the trust’s assets.

On the basis of all these concrete elements, the court held that, since the settlor continued to give specific instructions – whether concerning financial management or the distribution of proceeds – he derived an indirect benefit from the assets, thereby demonstrating actual contributory capacity. As a result, the trust’s assets had to be included in the tax base for wealth tax purposes.

Alain Moreau
Partner, Paris
Co-head of the Tax Group