Trusts: How are they taxed in France?
2011 saw a significant turning point in French tax law, which has impacted on a great number of unsuspecting people.
The additional French Budget legislation of 29 July 2011 created a specific wealth tax and French IHT/gift tax regime to apply to trusts. The intention of the French legislator was not to give any legal effects to trusts under French law, but to enable France to tax trust assets and/or their participators when there is a connection with France.
The starting point is article 792-0 bis of the French tax code (the Code Général des Impôts), which gives a fiscal definition of a trust as follows (translation from French):
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“The collection of legal relationships created under the law of a State other than France by a person, acting as constituant by inter vivos deed or taking effect on death, which places assets or legal rights under the control of an administrateur for the benefit of one or more beneficiaries or for the purpose of a specific objective”.
Two words are deliberately not translated, because to do so would restrict the meaning they seem to be given by French legislation.
- The meaning of constituant is the person, or entity, who transfers assets to the It includes the settlor of a trust, whether created during lifetime or by Will, but it could be wide enough to extend to a deceased person where the wording of his Will might imply the creation of a situation falling within the legal definition, whilst not creating a settlement as we recognise it under English law. Furthermore, there is a term bénéficiaire réputé constituant – the settlor has died and the beneficiaries stand in the shoes of the settlor, for French tax purposes;
- The meaning of administrateur certainly includes the trustees of a trust, but it could extend to personal representatives of an estate.
What trusts are affected by the legislation?
All types of trusts existing as at 30 July 2011, and created afterwards, could be affected. There is just one set of tax rules to govern all affected trusts – whether they be relevant property trusts or immediate post-death interests, revocable or irrevocable etc. – whereas we know that UK tax law provides different inheritance tax regimes for different types of trust.
There are a few exceptions, where the rules will not apply.
The law will apply where there is some connection with France. This could be any of the following:
- The constituant is resident in France;
- One or more of the beneficiaries is resident in France;
- One or more of the trust assets is situated in France.
If there is no connection whatsoever with France, then the law doesn’t apply.
What taxes are relevant?
The two main taxes concerned are wealth tax (impôt de solidarité sur la fortune – ISF) and inheritance tax / gifts tax.
Article 885 G ter of the French tax code provides that assets held in trust are part of the estate of the constituant for wealth tax. After his death, the assets are part of the beneficiaries’ estates, as the deemed constituants. Thus, the trust assets remain linked to the constituant. If the constituant is French resident, all trust assets are subject to ISF, regardless of where they are located. Some assets are exempt (eg some financial assets).
If the estate of the constituant / deemed constituant exceeds the wealth tax threshold (currently €1.3 million), when the trust assets are taken into consideration, then the trust assets must be reported on the individual’s tax return. Below this threshold, the trust administrateur must report the value of the trust assets on an annual declaration – a Trust 2 form. The Trust 2 filing deadlines are 15 June, or extended to 31 August if the constituant is non-French resident. Failure to comply obligation would lead to a levy at a rate of 1.5%. This is currently the highest rate of wealth tax, applicable on a net estate of over €10million, so a harsh price to pay for non-disclosure.
Inheritance Tax and Gifts Tax
The tax regime here incorporates in part the general rules of inheritance tax, but also creates a new set of rules. If we take the case of Robert who dies leaving his estate to his executors to distribute to his two children, who are resident in France. Robert’s death is a trigger event for tax.
- The normal rules of French IHT will apply if there is a transfer of a determined portion of assets to an identifiable beneficiary. So Robert’s children would each benefit from a nil rate band allowance of currently €100,000, and the balance of what they receive will be taxed on an increasing scale of rates.
- If Robert had set up a trust in his lifetime for a class of beneficiaries being his children and remoter issue, there is a deemed transfer of a global portion of the estate to beneficiaries who are all descendants of the constituant. Tax will be paid at the highest rate applicable between parent and child, which is 45%, with no nil rate band allowance applying.
- If Robert included other people, such as friends, in the class of beneficiaries, the rate applicable will be the highest rate of IHT, thus 60%, with no nil rate band allowance available. The rate of 60% applies in all cases not covered by the first two scenarios.
Furthermore, if assets remain on trust at the death of the constituant, a further tax charge could arise on the ultimate distribution of assets to beneficiaries, if each beneficiary doesn’t receive the portion of the trust fund they were deemed to have been “allocated” on the death of the constituant (which will be an equal division unless the trust documentation provides otherwise).
The French administration has given some examples of how the tax may be applied, but they are not sufficiently comprehensive to give clarity for the types of situation that might arise.
The administrateurs must file an annual declaration on Trust 2 form to report the value of the relevant trust assets as at 1 January. The deadline is 15 June or extended to 31 August where the constituant or the deemed constituant are non-resident.
They must also file an “event” declaration on form Trust 1 within just one month of any event affecting the trust. This will include the creation or termination of a trust, the addition of assets, changes in the composition of beneficiaries or trustees (including the death of either), and distributions to beneficiaries.
The penalty for failure to file a Trust 1 or Trust 2 declaration is €20,000 or 12.5% of all trust assets, whichever is the greater.
Liability for the penalties could extend to the constituant and deemed constituant.
The French Government has, by recent actions, shown that it is taking a serious stance in this area of law. The penalty was originally the higher of €10,000 or 5% of the trust assets, and the Government has initiated a register of trusts. This, combined with the flow of exchange of information between the UK and France under the European Directive on Administrative Cooperation will make it easier for the French tax authorities to investigate non-disclosure.
This highlights the need for good risk management procedures for clients. There will be a constant need for Trustee clients to keep their adviser updated on all aspects of a Trust, and be pro-active in ensuring that they are made aware of beneficiaries and settlors moving to or from France.
Where are we, as we approach the fourth anniversary of this new regime? Some guidance is given by the French administration, but there is still uncertainty to be grappled with. Unlike the FATCA regulations, there has been no France / UK agreement directly related to trusts and so knowledge of French law is crucial. Ignorance of the law is not going to be a reasonable excuse. This is a complex aspect of French law, but it seems that it’s here to stay and so we must stumble on through the tax minefield. It reinforces the point that tax isn’t getting any easier. However, some careful structuring of clients’ affairs can avoid the potential tax traps.
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