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French Taxation

Trusts in France

Wednesday 07 November 2018

Trusts structures may well be widely used by Anglophones to protect and manage family assets, but they do not exist in France.

Until changes in law 2011, France had no legislation dealing with the tax treatment of trusts, such as that relating to gifts, inheritance and wealth tax.

Although the law now recognises the validity of trusts set up abroad, and the effect they may have abroad, in France they must comply with French laws, granting no exemption from forced heirship inheritance rules.

Only if used in tandem with European Succession law, which grants individuals the right to adopt the inheritance laws of their country of nationality, would it be possible to circumvent French heirship rules. However, it is not the trust that grants such exemption, but European law.

Robert Kent, Director of French tax and investment consultants Kentingtons comments that: "The whole purpose of the 2011 changes was to improve the control of trust structures and to limit and even prevent their use, in submitting the trustees to substantial administrative obligations and the income of the trust to additional taxes."

Accordingly, there are substantial reporting obligations on trustees of international trusts if the trustee or at least one of the beneficiaries is a French tax resident, or if the trust holds an asset or a right located in France.

The trustees must ensure submission of an annual return which discloses the valuation of assets, rights and proceeds held by the trust, as well as general information on the trust on January 1 of each year.

In addition, where there are changes in the trust (modification or termination) a noticed must be filed within one month after the event occurred. The bank account of the trust must also be declared.

A firm of expensive accountants or lawyers would no doubt be able to set up a legal structure overseas that disguises the identity of the beneficial owner, and which authorities would find difficult to penetrate, but the costs of doing so would be substantial.

In addition, failure to comply with the disclosure requirements results in a substantial financial penalty and, potentially, a prison sentence.

Strictly speaking, there is no obligation to declare 'testamentary' trusts, which hold no assets and which only come into effect after death, but you would be as well to be open with your tax office about it.

Proceeds of trusts, regardless of the consistency of the assets contained in the trust, are subject to French personal income tax, although only if the income is distributed. Income earned that is retained in the trust is not taxed.

The usual French personal income tax rates are applicable, on top of which additional social taxes apply.

Assets held by a trust are considered to be owned by the settlor or deemed settlor for wealth tax purposes and are therefore taxable as part of the individual’s taxable assets, although charitable trusts and pension trusts may be exempt under certain conditions.

The settlor is subject to the net wealth tax on all the real estate assets held by the trust regardless of the location of such assets if French resident, or on real estate assets located in France only if non-French resident.

All transfers of real estate into and out of the trust are subject to stamp duty and capital gains tax if the assets are located in France.

A 1.5% standalone tax is due in the event of non-disclosure of assets placed in a trust for French wealth tax purposes. The tax would not be due if the assets have been duly included in the settlor’s wealth tax basis or if the settlor’s assets remain below the wealth tax threshold if such assets have been officially disclosed by the trustee.

Finally, French gift or inheritance taxes are applicable on the gratuitous transfer of trust assets to the beneficiaries during the life of the settlor or after his or her death. Different rates apply depending on whether the assets are attributed to an identified beneficiary.

Trusts that are located in countries that do not have a tax agreement with France are subject to inheritance taxes payable at the rate of 60%.

You can read more in our free, on-line Guide to French Inheritance Laws and Taxes.

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