French taxation of foreign trusts
French legislation which radically changed the French approach to trusts came into force on
1 January 2011. The legislation is unusual, in that French law does not actually recognise the
concept of a “trust” and so, as the rules currently stand, it is unclear in several respects
exactly how they apply in practice. What is clear, however, is that careful consideration is
needed in relation to any trust which has connections with France.
Trusts subject to the regime
The regime applies to all trusts and similar structures where:
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the settlor is now resident/domiciled (in the French sense) in France;
any beneficiary is resident/domiciled in France; or
any of the trust assets are situated in France.
The regime is very wide. It covers all types of trusts, including discretionary and charitable
trusts, and still applies even where no French tax will actually be payable. It also appears to
apply to estates in the process of administration, as well as other bodies and arrangements
such as foundations.
“Settlor” is given a wide definition. It initially includes the person who “established” the
trust or, if the trust was established by a professional or a non-human legal entity, the
person whose assets were initially transferred to the trust. However, if the original settlor
has died, the trust’s “beneficiary” (the legislation does not address the possibility of multiple
beneficiaries) takes over and is deemed to be the settlor for all purposes.
Similarly, there is no qualification on “beneficiary”. Any potential French resident/domiciled
beneficiary would appear to suffice, even if he has never actually received assets from the
trust and is unlikely to do so in the future.
Disclosure requirements
If the trust falls within the ambit of the regime, the “administrator” of the trust (in practice,
usually the trustees) must submit a report to the French authorities setting out:
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in the first year, the fact that the trust has been created;
any modifications to the trust;
in the last year of the trust’s existence, the fact that it has been dissolved;
the identity of the settlor or any deemed settlors; and
the terms of the trust.
A further report must be submitted each year, setting out the fair market value of the trust’s
assets on 1 January of that year. (If the trust is subject to the regime because a settlor or
beneficiary is French-resident, this must cover all the trust assets wherever situated. If the
trust is only subject because it includes French-situs assets, only those assets must be
reported).
Penalties
Failure to file the necessary disclosure triggers a fine of €10,000 or, if higher, 5% of the
current value of the worldwide trust assets. The trustees, settlor and beneficiaries are
jointly liable for payment of this fine. Failure to pay is a criminal offence for which, in
theory, a prison sentence can be imposed.
Taxation
Wealth tax
The regime also imposes an annual charge to French wealth tax on the assets of all affected
trusts. The regime initially assumes that the trust assets remain part of the settlor’s (or the
deemed settlor’s) net assets for the purposes of the wealth tax. A French-resident settlor
will be subject to wealth tax on all of the trust’s worldwide assets, while a non-French
resident settlor will only be taxed on French-situs assets.
Wealth tax is charged on the settlor irrespective of the actual terms of the trust. A settlor
who is excluded from any benefit will still have to pay tax on the trust assets. The usual
French charitable exemption still applies and a full exemption also applies for the first five
years that an individual is resident in France.
If, for whatever reason, the trust assets are not included as part of a settlor’s personal
wealth tax return (for example if certain French tax reliefs apply to the rest of his assets),
the trustees will instead be taxed at a fixed rate of, currently, 1.5%. None of the usual
deductions (including the charitable exemption) are then available. The trustees are
primarily liable but, if they do not pay, the settlor and beneficiaries are also jointly liable.
Inheritance/transfer tax
Finally, a tax charge is levied on transfers from the trust. When a settlor dies, he is deemed
to transfer the entire trust fund to “the beneficiary” (there is again no acknowledgement of
the possibility of multiple beneficiaries) even if the assets are in fact kept in the trust.
Charitable trusts and certain corporate pension trusts are excluded.
The charge is levied on the trust’s worldwide assets if:
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the settlor or deemed settlor is French-domiciled; or
if the recipient beneficiary is French resident (or was for at least 6 of the last 10
years)
at the time of the death/transfer. Otherwise, tax is only charged on French-situs assets. The
rate varies:
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If the exact value that is “due to”1 any given beneficiary can be calculated, the rate
will depend on the relationship between the settlor and the beneficiary, as usual for
French inheritance tax (usually between 45% and 60%).
If the particular value due to each beneficiary is unclear, but all the beneficiaries are
descendants of the settlor (e.g. on the death of the settlor of a discretionary trust
where all the discretionary beneficiaries are his children) the assets are taxed at
45%.
Otherwise, the assets are taxed at 60%.
The rate is automatically increased to 60% if the settlor was French-resident, or if the trust is
subject to the law of a “non-cooperating state” (this looks to the proper law of the trust, not
the place where it is resident). These are states which France considers to be unhelpful in
tax transparency and information exchange. (The list does not include any of the Channel
Islands.)
The trustees are liable to pay this charge. If the trust is subject to the law of a noncooperating state, the beneficiaries are also jointly and severally liable.
1
The exact meaning of this phrase is uncertain. If the trust is terminated on the settlor’s death and the trust assets
are actually transferred to the beneficiaries, the position is clear, but if, for example, a beneficiary has a
reversionary interest in the capital of a particular share of the trust fund, this may also be considered to be “due to”
them.
If the settlor or deemed settlor is domiciled outside France, a Double Tax Treaty may provide
relief against the charge.
Income tax
Distributions from the trust (whether of income, accumulated income, gains etc) are taxed as
dividends paid to the beneficiary, with a possible ensuing French income tax charge. France
will not charge any CGT, either on gains made while assets are held in the trust or when the
gains are paid out.
Contact
Tim Fullerlove
Partner
T: 01722 427 651
E: [email protected]
Adam Herbert
Partner
T: 01722 427 543
E: [email protected]
The contents of these notes are intended as a guide for readers. They can be no substitute for specific advice.
Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent
changes in the law.