By Virginie Deflassieux | French Tax Director at BDO Ltd Guernsey
It is hard to believe that the French tax authorities (“FTA”) can levy a €20,000 penalty for a mere reporting omission even in the absence of any tax prejudice, but this is a reality for French-connected trust parties.
The July 2011 French tax legislation on trusts was part of a broader set of French tax measures aimed at combatting tax fraud and evasion. Originally enacted on the premise that all trusts are suspicious tax evasion vehicles, this law has caught thousands of legitimate trusts in its wake.
Here we look at the factors that make a trust reportable in France and at the main areas of potential exposure to the French tax system.
Scope of French Reporting
The French reporting triggers and types of disclosures have evolved since July 2011. Currently, a trust or trust-like arrangement (eg foundations, bare-trusts, etc) is reportable in France if:
It has at least one French resident party, or
It holds French assets as follows and regardless of its parties’ residence status:some text
French real estate assets held directly or indirectly.
Works of art, collections, vehicles, chattels, livestock, and any other movable assets.
Since 2019, the reporting is extended to French financial assets or rights therein and related capitalised income. However, aside from rare exceptions, the reporting does not apply if these assets are held through a non-French underlying entity or collective investment scheme.
From 2020, non-EU situated trusts must report within a month when acquiring French real estate or starting a commercial relationship with a France-based person or entity.
Reporting Obligations and Disclosures
Where a trust is within the French reporting scope, the trustee is responsible for filing, which is two-fold:
The annual reports due before 15th June. These state the trust parties, assets and their market value at 1st January.
The event reports which disclose any changes affecting the trust’s finances or the way in which it operates. This definition is very board and includes changes to the trust parties, deaths, additions, removals, distributions of capital or income, loans, termination and so on. These types of reports are due within one month of the event.
The reports must state the details of all the trust parties, protectors and any person who may exercise control over the trust assets. The level of disclosure of the trust assets depends on the circumstances. For instance, where the only French tie is a French situs asset, it is only this asset and its value that needs to be reported.
Surprisingly, to this day, the French reporting continues to be a paper filing exercise, unlike in the UK where this is done and updated online.
All trust parties are jointly and severally liable to the €20,000 penalty for incomplete or missing reports. So far, the FTA have tended to refrain from applying penalties in the context of spontaneous remedial filings and depending on circumstances, but such leniencies may not last in the present economic climate. Whilst the statutory limitation for this penalty is four years, an extended ten-year limitation applies in respect of any tax liability associated with trust distributions, income, or assets.
Main Areas of Exposure to French Taxes
The 2011 legislation amended numerous articles of the French Tax & Procedural Code (“FTC”) to incorporate a tax framework for all trust matters into French Tax Law. It also introduced Article 792-0 bis defining trusts for French taxation and inheritance (“IHT”) & gifts tax rules and Article 1649 AB setting out the French reporting obligations outlined above.
Trust distributions may incur French income tax, gifts tax or IHT considerations depending on circumstances. The settlor’s death may be a trigger for French inheritance tax. The French legislation created specific rates for situations where the assets remain in trust after the death. IHT rates may be as high as 60% and may be recurring when a beneficiary subsequently passes away. Indeed, after the death of the original settlor, the beneficiaries are treated as “deemed settlors” so in turn, their demise may trigger the same considerations.
Where trust assets are exposed to French wealth tax but not reported by the taxable party, the trust may become liable to the “sui generis” charge at 1.5% on relevant trust assets. The taxable party is the settlor or the “deemed settlor” if the original settlor has passed away. Exposure to wealth tax also depends on the tax residence of the taxable party.
It is important to note that even if a taxable party has no wealth tax exposure, by being under the table threshold for instance, the sui generis charge exemption is conditional on the annual reports being filed. Given the ten-year statutory limitation for wealth tax on trust assets, it is therefore vitally important to ensure the trust filing is up to date.
Wealth tax applies to all types of assets, (excluding French financial assets in the hands of non-French tax residents), prior to 2018. From 2019, it is applied only on French real estate assets even if held indirectly through a trust. Trusts (and companies) which hold French real property (whether directly or indirectly) may also be liable to an annual 3% tax on the market value of the asset unless they duly report the ultimate beneficiaries before 16 May every year on tax form 2746 to claim an exemption from this levy.
The intricacies around the potential French tax exposure of an individual party depend on many factors, such as residence, asset value and situs, receipt of trust distributions and do on so. In this era of increased reporting and transparency, trustees are often seeing their role extend to law and regulation enforcement beyond the borders of the jurisdiction in which they are established. Given the ever-evolving legislation, interpretations, and ongoing grey areas, it is vitally important to regularly review and monitor any exposure to the French tax system to minimise any risk.
Virginie Deflassieux French Tax Director at BDO Ltd Guernsey
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