DA-Tax
French legislation on trusts
This article is for general information only. You should not act or refrain from acting in reliance of it. You should always obtain professional advice on the facts of your particular case. Nothing in this article constitutes financial advice. The owner of this site accepts no liability.
In 2011, France introduced a special tax regime applicable to non-French trusts.
Whilst the introduction of the special regime applicable to non-French trusts was generally welcomed by trustees and law professionals, the concept of trust remains alien to the French legislation. The French legislation on foreign trusts therefore reflects this conceptual incomprehension. The French view of trusts is generally negative and often associated with tax evasion, and it is not a surprise that the French legislation on foreign trusts remains unclear, severe and dissuasive.
Reporting obligations
The legislation is far reaching and seeks to cover every situation where a trust has a connection with France. This will be the case when the settlor, trustee, or the trust’s beneficiaries are French resident, or when the trust owns French assets. When a trust has such connection with France, it ought to comply with French reporting.
Event based return
Trustees are required to declare any creation, modification and revocation of a trust within 30 days.
Modification includes asset distributions and disposals, when further assets are placed into the trust, any change in the trustees or beneficiaries, any change likely to affect the finances, business or the functioning of the trust, etc.
Annual returns
By 15 June each year the trustees must declare the market value of the trust assets as at 1 January.
The assets to be declared will be the worldwide assets of the trust if the settlor or a beneficiary is French resident. Otherwise, the declaration is limited to assets situated in France.
Penalties
Failure to declare will result in a €20,000 penalty. In addition, there will be a penalty of 80% of the tax avoided in respect of trust assets not duly reported.
Additional penalties and criminal sanctions apply in case of fraud, including voluntarily failing to file.
The severity of the potential penalties makes it essential for trustees – and indeed all those involved with French connected trusts – to review their reporting obligations.
Wealth tax
The French wealth tax (Impôt sur la Fortune Immobilière, or ‘IFI’) is a tax on real estate whose taxable base is limited to non-business related real estate assets.
For IFI purposes the trust’s real estate belong to the settlor, even when the trust is fully discretionary. It is possible for the beneficiaries of a trust to be treated as the settlor. This is the case when the actual settlor has died. When this happens, each of the beneficiaries is effectively treated as the settlor (beneficiary who is deemed to be a settlor or ‘BDS’). This happens indefinitely so where any BDS dies, the next beneficiaries become BDSs.
An individual is liable to pay IFI when the net market value of his taxable French real estate assets exceeds €1.3m as at 1 January.
Non-French tax resident settlors or BDS are only taxable on French real estate assets, whilst French resident settlors or BDS are generally taxable on their worldwide real estate assets.
Succession tax
For French succession tax purposes the trust’s assets belong to the settlor or by the BDS when the settlor has died. Succession tax will be due on the trust’s worldwide assets when the settlor or BDS is French tax resident. Otherwise, only French assets may be taxable.
The tax liability will be is determined based on whether the trust’s assets are attributed or not to the trust beneficiaries following the settlor/BDS’s death. Many discretionary trusts will pay succession tax at a punitive rate of 60% so tax planning is recommended.
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