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Taxation of trusts in France

Review of the circumstances surrounding the taxation in France of assets placed in a foreign trust
 
The fraudulent concealment of assets in trusts, brought out into the open by the dispute between the widow of Daniel Wildenstein and her two stepsons in connection with the settlement in France of the estate of the well-known deceased art dealer, led French lawmakers to institute a tax framework in France for assets placed in trusts set up abroad.
Case law concerning trusts, which were hitherto not recognized by French law, fully accepted their provisions in France without ever considering them as contrary to French international public policy, unless their effects infringed the reserved share under public policy in domestic law if they concerned real estate assets located in France covered by the French law of succession.
In tax matters, case law had been led to make a distinction between revocable (1) and irrevocable (2) trusts.
 
(1) If the settlor retains the right to reclaim his or her property in his or her personal estate, the assets placed in the trust are part of the settlor's estate when he or she dies.
 
(2) On the contrary, if the settlor does not retain the right to reclaim his or her property placed in the trust, the said property is not included in the settlor's estate when he or she dies, but  is taxed as an indirect donation on the day of death.
 
But this case law only applied to trusts that disappeared when the settlor died (unresolved trusts). The case law introduced by the Wildenstein case recognized the lack of statutory provisions enabling unresolved trusts to be taxed upon the settlor's death.
 
Tax reform of July 29, 2011
 
The taxation introduced by Article 14 of Law no. 2011-900 of July 29, 2011 concerns the possession and transfer of property placed in a trust as well as the income paid out by the said trust. Special filing requirements have been introduced to complete the taxation system.
For that purpose, the lawmaker has defined the notion of trust in French law in order for it to be  classified with respect to French tax law (Article 792-O-a of the [French] General Tax Code).
This law applies to trusts set up by individuals for inheritance or professional purposes, possibly through a legal entity. This definition excludes trusts set up to manage save-as-you-earn schemes or employee stock ownership plans, unit trusts meeting the definition of UCITS (Undertakings for Collective Investment in Transferable Securities) and trusts regarded as unit trusts set up under the law of a State or territory having  entered into an administrative assistance convention with France with a view to fighting fraud and tax evasion.
 

1.Taxation principles

 

        1.A. Taxation of devolved assets until dissociation of the trust's ownership rights

 
Conditions of taxation of assets devolved without charge in France
 
Inheritance tax applies to all transfers without charge of assets and rights, including capitalized income, made by a trust from July 30, 2011, whether or not they are  classified as donations or inheritance under the rules of common law.
 
Previous solutions of case law and administrative legal theory remain applicable to transfers without charge made by a trust prior to July 30, 2011.
 
It should be noted thatfor trusts unresolved on the death of the settlor, the assetsin the trust are taxed on the death of each subsequent settlor, the initial beneficiaries being
in turn deemed the settlor, and so on until the trust ends.
 
The provisions of Article 750b of the [French] General Tax Code pertaining to the territoriality of inheritance tax on transfers without charge under domestic law have been adopted to enable the taxation of all or part of the assets, rights and income held by the trust depending on whether or not the settlor and/or beneficiaries resided in France for tax purposes, under the conditions of the aforesaid Article 750b. These must be combined with the provisions of the international tax agreement on inheritance or donation of the country concerned, which is of a subsidiary nature but has more normative force than the provisions of domestic law.
 
 
Taxation procedures
 
Assets transferred via a trust are subject to the tax rules, whether or not a donation or conveyance through death is recorded upon the death of the settlor, depending on whether or not the trust is resolved by the latter's death.
 
The inheritance tax on transfers without charge is calculated on the initial commercial value of the assets, rights or capitalized income on the date of transfer, according to the family relationship between the settlor and the beneficiary, if a donation or transfer without charge can be established. In that case, inheritance tax on transfers without charge is paid by the beneficiary.
 
If the donation or transfer through death is not established, the transfer is subject to special tax rules.
The transferred estate, including the capitalized income from the assets placed in the trust, is taxed at its net commercial value on the date of the transfer. The death of the settlor is the taxable event for inheritance tax on transfers without charge, whether the assets are transferred upon the death of the settlor or at a later date.
Taxation occurs according to the rules of common law on inheritance tax, if a specified share is transferred to a specified beneficiary. In that case, inheritance tax on transfers without charge is paid by the beneficiary.
A rate of 45% is applied if a specified share cannot be apportioned between the settlor's beneficiary descendants. This concerns situations of co-ownership, when a proportionate share cannot be allocated to each of the co-owners. In that case, inheritance tax on transfers without charge is paid by the trust's administrator.
A rate of 60% is applied on unresolved trusts on the death of the settlor without allocation to beneficiaries or if a share of the trust's estate cannot be apportioned due to the presence of multiple beneficiaries other than the settlor's descendants or not exclusively comprising the settlor's descendants. The same holds when the trust's administrator is subject to the law of an uncooperative State or territory, as well as in instances where the trust was set up after  May 11, 2011 by a person residing in France for tax purposes, on the date of its creation. In that case, inheritance tax on transfers without charge is paid by the trust's administrator.
 
Lastly, if the trust is resolved or dissolved and the beneficiaries of its assets are not the beneficiaries identified at the time of the last transfer and in the same proportions, they will be liable for inheritance tax on transfers as donations without charge.
 

        1.B. Taxation of assets held

1.B.1 Wealth tax on real property assets

 
Conditions of taxation in France
 
Article 14 of Law no. 2011-900 of July 29, 2011 lays down a general principle  with respect to wealth tax on assets placed in a trust, limited to real estate assets since January 1, 2018, if their taxable value exceeds €1,300,000. Prior to that date, all assets, rights and security holdings having the same taxable value and held for inheritance purposes were taxable from January 1, 2012. Case law solutions and administrative law theory prevailing before the provisions of the aforesaid Article 14 continue to apply to previous situations.
 
The provisions of Article 750b of the [French] General Tax Code also apply with regard to the territorial provisions of the real property assets wealth tax. Therefore, if the settlor or the beneficiary deemed to be the settlor  resides in France for tax purposes, then all his or her worldwide real estate assets placed in the trust are liable for the real property assets wealth tax. Otherwise, only French real estate assets placed in the trust are taxable. These must be combined with the provisions of the international tax agreement on wealth tax.
 
Irrevocable trusts deemed charities, namely trusts whose exclusive beneficiaries are non-profit persons or organizations and whose administrator is subject to the law of a State or territory having signed an administrative assistance convention with France are not liable for real property assets wealth tax. The same goes for "retirement" trusts, with the caveat that their administrator must be subject to the law of a State or territory having signed an administrative assistance convention with France.
 
 
Taxation procedures
 
In order to be able to levy real estate property wealth tax placed in a trust, the law considers them to be part of the settlor's estate for tax purposes, whether or not beneficiary. Irrevocable trusts managed in a discretionary manner by their administrator are also liable for real property assets wealth tax. To avoid this tax, the settlor must prove that the real estate assets do not bestow on him or her any ability to contribute the direct or indirect benefits he or she may gain from the trust[1]. It is liquidated on the net commercial value of the trust's real estate assets held on  January 1 of each year. Taxation applies according to the rules of common law applying to the real property assets wealth tax, and the tax is due by the settlor, who must pay it after spontaneously filing a tax return under the conditions of common law. If there are several beneficiaries regarded as settlor and if the trust instrument or an amendment thereto does not state any specific breakdown of the trust's assets, the assets are deemed to be shared out between them in equal proportions.
 
If the taxpayer fails to file a tax return for the real property assets wealth tax or the tax return stipulated by Article 1649 AB of the [French] General Tax Code[2] when the real estate assets are under the real property assets wealth tax threshold, a special levy on trusts applies (Article 990 J of the [French] General Tax Code). However, trusts exempt from the real property assets wealth tax (charity and retirement trusts) are exempt from this levy. The rate of the levy is 1.5% of the commercial value of the real estate assets held by the trust on January 1 of each year, without the benefit of the common law exemptions for the real property assets wealth tax. The provisions of international tax agreements pertaining to wealth tax do not apply to this levy. It must be paid to the foreign companies tax department by the trust's administrator no later than June 15 of each year. If no tax return is filed, the tax authorities may automatically tax the settlors and individual beneficiaries jointly and severally liable for this levy, for which they are legally liable.
 

1.B.2 Annual 3% tax on real estate

 
Applicability
 
Trusts owning real estate or property rights located in France that represent more than 50% of their French assets held directly or otherwise for inheritance purposes are liable for the annual 3% tax.  Real estate allocated to the work-related activity of a legal entity with which they have an arm's length relationship are not included in this 50% share.
The following trusts are not liable for this tax:
- trusts located in a European Union State or a State that has signed an administrative assistance tax convention with France or a State having stipulated an equal treatment clause;
- trusts whose properties in France have a commercial value of less than €100,000 or whose ownership share thereof is under 5% of their commercial value;
- trusts that have undertaken  to disclose to the tax authorities any real estate assets of the trust and its members holding more than 1% of the trust's rights within two months of acquiring the  real estate or an ownership share thereof, or have filed an annual tax return by May 15 of each year disclosing to the tax authorities information similar to that referred to in the disclosure undertaking to be filed within 2 months of acquiring the real estate asset.
 
Taxation procedures
 
The tax is paid each year by May 16 on the commercial value of the taxable properties and property rights owned on January 1 of the year concerned. This tax must be paid by the trust's administrator.
 
 
2. Filing requirements
 
Article 1649 AB of the [French] General Tax Code requires the administrator of a foreign trust to file two series of tax returns in France. This obligation applies whenever:
 
- the trust administrator's country of residence for tax purposes is France;
 
- the settlor or one of his or her beneficiaries resides in France for tax purposes (on January 1 of each year);
 
- the trust holds a property located in France.
 
The first tax return concerns the creation, modification or extinction of the trust and the substance of its terms. It must be filed within one month of the event concerned.
 
The second tax return concerns the commercial value, on January 1 of the year, of the assets and property rights and their capitalized income placed in the trust. It must be filed by June 15 of each year.
 
Persons breaching these filing requirements are liable for a €20,000 fine and an additional tax assessment for failure to file is increased by a 80% penalty in respect of assets placed in undeclared trusts. Furthermore, the recovery deadline in the event of failure to declare expires on December 31 of the sixth year or the tenth year, depending on whether or not the trust is located in a low-tax country.
 
The same Article 1649 AB stipulated the development of a public register of trusts under the aegis of the tax authorities listing declared trusts, the names of their administrator, settlors and beneficiaries and the date of creation of the trust. However, this register was declared unconstitutional[3].

 
 
See also, on the same topic : 
 
 

[1] Constitutional Council priority ruling on constitutionality, 15-12-2017, no. 2017-679
[2] See §2.filing requirements
[3] Constitutional Council, priority ruling on constitutionality, 21-10-2016, no. 2016-591
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