Since July 2011 the French Tax Code (“FTC”) contains a definition of trusts and outlines French reporting obligations for French connected trusts.
This information gathering exercise is an obvious cross-referencing tool of tax details when it comes to French personal income, wealth, inheritance taxes, and any unreported foreign life bonds, policies and accounts for certain trust parties. France maintains a trust register in line with EU legislation.
Although numerous areas still remain uncertain, the relevant FTC Articles provide some guidelines on the French tax treatment of trusts, an area which was formerly very depleted.
FTC Art 792-0 bis defines trusts but without necessarily grasping their true concept. Where there is any uncertainty, the French Tax Administration (“FTA”) is likely to rely on the notion of propriété apparente, and tax the true beneficial owner. The FTA will also seek to identify the true economic settlor. Where the original settlor has passed, all the beneficiaries are treated as “deemed settlors” (bénéficiaires réputés constituants).
Reportable Trusts & Reporting Scope
French reporting obligations apply to trusts, or trust-like arrangements with at least one French resident party. Trusts which hold French assets, including, since 2019, any French financial assets, are reportable even if all the parties reside outside France.
Where a trust is reportable, trustees must state all the trust parties, regardless of their residence, any protector and other parties who have control over the trust, as well as itemise the trust’s assets with their market values as at 1 January on annual form 2181- TRUST2. If the only connecting factor is a French asset, this only needs reporting but all trust parties still need to figure on the form.
Since 2021 trustees who are not established in the EU, must also report:
- If they acquire French real estate – it does not specify if this includes indirect acquisitions. French property ownership makes a trust reportable anyway;
- If they enter into a professional or commercial relationship in France as defined by Article L 561-2-1 of the French Monetary and Commercial Code. The “relationship” concerns regular and ongoing dealings with financial or advisory professionals regardless of the existence of a written contract. In the absence of any comments to the contrary, this may also concern trusts with no French resident parties although, in practice, these instances may not be widespread.
Any relevant changes to trusts within the scope of French reporting must be disclosed, within a month, on event form 2181-TRUST1. This includes alterations to the trust’s terms, powers, parties, appointments of assets on to new trusts, or trust parties as well as loans, distributions, loans etc.
Non-capitalised income distributions made over the course of the year can be reported on one event report by the end of January in the following year. Generally, all legal or factual changes affecting the trust’s finances or modus operandi, should be reported. “Event reporting” applies as long as the trust is exposed to the French system.
French trust reports are filed at the Recette Patrimoniale des Non Résidents, 10 rue du Centre, TSA 50014, 93465 Noisy le Grand CEDEX, France.
Some pension trusts may be exempt from reporting subject to strict conditions. Nevertheless, it is essential to obtain advice especially when it comes to offshore individual retirement trusts.
Trust Charge
French-connected trusts may be liable to an annual 1.5% charge (known as “sui generis” levy), unless the relevant parties have reported their “share” of trust asset in scope for French wealth tax. In the absence of wealth tax exposure or where the tax is duly assessed on trust assets, if applicable, the sui generis levy does not apply. However, annual trust report omissions may lead to the “sui generis” levy (up to ten years in arrears) even if the trust parties are not liable to wealth tax. The FTA confirmed that the “sui generis” levy and wealth tax are not cumulative.
Taxes on Distributions
Any trust distributions, loan write-offs or third party payments (e.g. school fees) should be carefully considered as these are reportable and may trigger French income tax, gift or inheritance tax considerations.
Penalties
The penalties for omission or incomplete reports currently stand at €20,000 and the authorities may apply these up to four years in arrears. For instance, any reports due in 2018 should no longer attract penalties beyond 31 December 2022.
Parties who are authorised to access the French trust register, must report any discrepancies or omissions they may come across to the FTA. The trustee is then notified and must provide them with an explanation in a timely manner. Provided the trustees’ replies are sufficient, the FTA will simply correct the register accordingly without any penalties.
Any French tax liability relating to trust assets or distributions may be assessed (with penalties and interest) up to ten years in arrears.
French measures affecting French-connected trusts make them difficult to use in the context of French assets or French resident parties regardless of where the trust is domiciled.
For more information, please contact Virginie Deflassieux or Catherine Le Pelley.
This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. It cannot be relied upon to cover specific situations without obtaining professional advice.
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