Recognition of Foreign Trusts: The Hague Convention 1985

A French family sets up a Jersey trust, moves a foreign portfolio into it, and a few years later the heirs go to a Paris court to claim their forced share. Whether the French court will recognise the trust, and which law it applies to its assets, depends above all on whether the country has ratified the 1985 Hague Convention — the only international instrument that teaches civil-law jurisdictions to "see" a trust at all.

Where the Problem Came From

The trust grew out of English equity: the Lord Chancellor recognised the beneficiary's right to compel the trustee to manage property for their benefit, and so ownership came to be split into legal and beneficial ownership. Continental codes were built on the Roman tradition of unitary, indivisible ownership, where a single asset does not have two "owners" holding different rights. As long as the trust stayed within the common law this troubled no one; the difficulty began when wealthy families started holding assets around the world through trusts. The Hague Conference on Private International Law took up the question in the early 1980s and in 1985 opened for signature the Convention on the Law Applicable to Trusts and on their Recognition.

Concept

The trust grew out of the common law, and continental legal systems historically did not "see" it: their law has no construct in which ownership is split between a trustee and a beneficiary — we cover the mechanism itself in our discussion of how a trust is structured and the types of trusts. The problem becomes tangible once a trust acquires assets or beneficiaries in a civil-law country: the local court has to characterise a relationship its code does not provide for.

The Hague Convention 1985

The Convention lets contracting states recognise a trust created under the law of its "home" jurisdiction and apply that law to it. Only fourteen states have ratified it. Among civil-law jurisdictions these are Italy, the Netherlands, Luxembourg, Switzerland, Liechtenstein, Monaco, San Marino, Malta and Panama, plus mixed-system Cyprus; the United Kingdom extended the Convention to its offshore territories — Jersey, Guernsey, the Isle of Man, the BVI, Bermuda and Gibraltar. France and the United States signed it but never ratified, while Germany, Spain, Austria, Belgium and Russia are not party to it at all. The Convention entered into force on 1 January 1992 and has attracted few major new members since.

How Recognition Works

The Convention's logic is best read article by article. Article 6 lets the settlor expressly choose the law governing the trust — usually the law of a classic trust jurisdiction such as Jersey, Guernsey or the Cayman Islands (on how they work, see our discussion of Jersey and Guernsey trusts). If no choice is made, or the chosen law does not know the trust, Article 7 points to the law with which the trust is most closely connected: the place of administration, the location of the assets, the trustee's residence. Article 11 describes the minimum effect of recognition: the trust assets form a separate fund, the trustee's personal creditors cannot reach them, and they do not fall into the trustee's bankruptcy, estate, or division of matrimonial property. It is for this effect that trusts are used for asset protection.

Recognition has its limits. Article 13 lets a court refuse to recognise a trust whose significant elements — apart from the choice of law, the place of administration and the trustee's residence — all point to a country with no institution of the trust; this is a valve against purely artificial constructs. Article 15 preserves the mandatory rules of whichever law the forum's conflict rules designate: the heirs' forced share (forced heirship), spousal protection, creditors' rights. A court may perfectly well recognise a trust and at the same time draw its assets into the forced share.

What This Means in Practice

In a country that does not recognise trusts, the assets or the beneficiary may be recharacterised — for instance, treating the property as the settlor's own for forced-share or tax purposes. So for families from such jurisdictions a foundation is the steadier choice: it is a legal entity and is recognised without any convention — whether a Liechtenstein foundation or a Panama foundation.

Typical Situations

Italy ratified the Convention without making the Article 13 reservation, and Italian families freely set up the so-called trust interno: a trust under English or Jersey law over Italian assets and with Italian beneficiaries. The Italian tax authority and courts recognise such trusts, and over thirty years an extensive body of practice has grown up around them.

France took a different path. It has no trust of its own — only the narrower fiducie (2007). French law does nevertheless take account of foreign trusts, above all for tax purposes: since 2011 the Tax Code has contained a definition of the trust, a duty on the trustee to report the trust's French connections, and a special levy on undeclared assets. Even without ratification, a trust is recognised in France, albeit in a truncated, mainly fiscal form.

Russia is not party to the Convention, and Russian law does not know the figure of the trust. For Russian tax residents a trust surfaces through the CFC and beneficial-ownership rules: the settlor or beneficiary is readily treated as a controlling person, with all the attendant reporting duties and tax on undistributed profit — more in our discussion of trusts and CFC.

Where This Is Heading

The Convention itself remains a niche instrument: it has gained no major new members since 2017. The main changes are coming from the transparency side — automatic exchange under the CRS, beneficial-ownership registers and the EU anti-money-laundering directives have made trusts markedly more visible to tax authorities. In parallel, the EU Succession Regulation (Brussels IV, 650/2012) took trusts themselves out of its scope but subjected cross-border succession to a single applicable law, and the forced share under it may well reach the trust's assets.

Conclusion

Before setting up a trust for a family from a continental jurisdiction, one checks whether that jurisdiction's law recognises trusts and how it taxes them. Often the answer points toward a foundation or a hybrid structure.

This material is for informational purposes only and does not constitute individual legal advice.

Sources

• HCCH — Convention of 1 July 1985 on the law applicable to trusts (full text)
• Recognition of Trusts Act 1987 — legislation.gov.uk