This article provides a summary of the rules on the taxation of trusts in France. The changes were enacted into law in July 2011 with the aim of preventing tax avoidance through the use of trusts.
As a civil law jurisdiction France has never formally recognised trusts, until now. The new measures, introduced in the French Tax Code (FTC), provides some clarity to the tax position of foreign settlements (such as those created in accordance with Manx law) which have either a French resident settlor, a French resident beneficiary, or where the trust holds French assets.
By a decree dated the 15 September 2012 the tax residence of the settlor or beneficiary is determined on the 1 January each year.
The definition of a trust in France
The FTC defines a trust as:
‘The legal mechanism created in another jurisdiction than France by a person referred to as the settlor, during his life or upon death, in order to manage assets or rights under the control of a trustee, for the benefit of one or more beneficiaries or for the realisation of a specific purpose.’
This definition is not dissimilar to the common law definition of a trust except that this definition refers specifically to trusts created in accordance with the laws of another country, as opposed to French law because it is not possible to create trusts under French law.
Income that is distributed as and when it arises will be taxable in the hands of the beneficiary if the beneficiary is resident in France. If the income is not distributed and is instead accumulated within the trust, it will not be taxable.
Gift tax applies on the creation of or transfer of an asset into a trust. The specific rate of gift tax depends on the relationship between the settlor and the beneficiaries.
If the settlor is resident in France then the rate of tax is 60%.
If the settlor is not resident in France and:
- the beneficiaries are French resident;
- are descendants of the non-resident settlor; and
- the assets of the trust are situated in France;
then the liability to gift tax will be assessable on the beneficiaries at 45%.
If the beneficiaries are not descendants of the settlor, but meet the same criteria above then the beneficiaries will be assessable at 60%.
Where neither the settlor nor the beneficiary is resident in France or if the beneficiary is a charitable entity then there is no liability to gift tax.
Inheritance tax (IHT) applies on the death of the settlor.
The rate of IHT depends, in a majority of cases, on the relationship between the settlor and beneficiary.
IHT will be taxable at a rate between 45% to 60%.
- If the share of each beneficiary cannot be identified but they are descendants of the settlor, then the rate of 45% will apply.
- In all other cases 60% will apply.
For example, if the settlor was tax resident in France on the date the trust was created.
IHT is also due, at a rate of 60%, if:
- The trust is established in a non-cooperative jurisdiction.
Where IHT is due, the trustees are responsible for paying this to the French Treasury.
Where the beneficiary is a charitable entity, then the trust is exempt from IHT.
Individuals are subject to a progressive rate of wealth tax on a yearly basis if their net assets exceed EUR1,300,000.
Until the introduction of the new tax regime of foreign trusts in France in the FTC, French resident settlors and beneficiaries were exempt from wealth tax.
Under the new regime the settlor, or if they are deceased the beneficiaries, are subject to wealth tax on trust assets if:
- they are resident in France; or
- if the assets of the trust are situated in France.
Where the settlor or beneficiary is liable to wealth tax, any liability is added to the value of their net assets.
If the settlor or beneficiary fails to pay any wealth tax due then the trustees will be liable to pay a special levy of 1.5%, which is due each year and is based on the market value of the trust assets on 1 January each year. The trustees are responsible for making the special levy payment however, the settlor and beneficiaries are jointly liable with the trustees for the payment.
These new wealth tax provisions came into effect on 1 January 2012.
The FTC creates an obligation for trustees of a settlement to disclose the creation, changes to or the winding up of a trust.
The obligation to disclose has retrospective effect. This meant that trusts created on or after the 30 July 2011 up to and including the 15 September 2012 had to file the declaration before the 31 December 2012. Where a trust is created, changed or comes to an end on or after the 16 September 2012, the declaration must be filed within a month of the event.
There is also an annual reporting obligation which must contain 'the fair market value' of the trust assets as at the 1 January each year. It should also include the 1.5% special levy, where the settlor or beneficiary have failed to pay any wealth tax due. The return must be received by the Centre for Non-Residents by 15 June each year.
Failure to comply with the reporting obligations mean that the settlor and beneficiaries will be liable to a penalty of €20,000 or 12.5% of the value of the trust assets, whichever is greater.
You are likely to have discussed the possible impact of the FTC with your clients. However in some cases specialist advice may be required for example, to ascertain if your client (whether they are a settlor or beneficiary of a trust) is regarded as tax resident in France and if they are that they ensure that they make the relevant disclosures to the relevant tax authorities, where necessary.
Whilst the FTC has clarified the tax position on foreign trust settlements, the tax implications of settling a trust as a French resident may be outweighed by the potential IHT planning if your client is a UK expat and/or if your client does not intend to reside in France permanently.
There may be other financial planning tools which you may consider as more suitable for your client’s needs. For example, the Old Mutual International beneficiary nomination is available to our Old Mutual International clients. For more information on how the Old Mutual International beneficiary nomination works see our article ‘Old Mutual International Manx law nominations’.