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French Trust Law

By Spectrum IFA
This article is published on: 3rd March 2014

As a financial adviser to the expatriate community, I am contacted by lots of people who have either already moved to France from another country, or are planning to do so. Amongst many other things, people are seeking advice as to how best to structure their financial assets for tax-efficiency in France. Since most of the people I advise originate from Anglo-Saxon countries, it may be the case that they may have an interest in a trust, which creates difficulties for them, due to the French tax treatment of trusts.

In 2011, France introduced legislation, which defined the taxation rules and reporting requirements, concerning trusts with at least one of the following:

  • French resident settlor;
  • French resident beneficiary; or
  • French situated assets – even if the settlor/beneficiaries are not living in France.

Basically, the law is aimed at the ‘family type of trust’ and generally excludes trusts falling outside of this area. A summary of the taxation treatment is shown below.

Income tax relating to trusts

Distributions received from a trust (whether capital or income) are treated as investment income, in the hands of the taxpayer. Therefore, 100% of the amount received is added to other taxable income of the household and taxed according to the progressive rates of income tax set out in the barème scale, for which the highest rate is 45%. Social contributions (current rate 15.5%) are also chargeable on the amount distributed.

Wealth tax (ISF) relating to trusts

The law aims for transparency, so that the real ‘owner’ of the assets placed in a trust can be identified. This will either be the original settlor or where that person has died, the beneficiary is subsequently deemed to be the settlor.

The trustees are required to report the annual value of the assets of the trust and to pay a levy, based on the highest percentage rate of ISF (currently 1.5%) of the underlying value of the trust’s assets. However, the levy is not payable if the French resident taxpayer has already declared the trust assets for ISF. Failure to report by 15th June each will result in a fine of 12.5% of the value of the total trust assets or if greater, €20,000. The settlor and/or the beneficiaries are jointly and severally liable for the payment of the levy and for any penalty as a result of non-reporting.

Gift & succession duty regimes relating to trusts

Lifetime gifts and inheritance transfers from a trust with a French resident settlor or ‘beneficiary deemed settlor’, as well as to beneficiaries who have been resident in France for at least six out of the last ten years, are liable to taxation; so too is the transfer of assets into a trust. For non-resident settlors, the transfer of French assets into or out of a trust (for example, property) is also caught by the rules.

Using the market value of the assets, as at the date of transmission, the tax liability is as follows:

  • For trusts set up after 11th May 2011, or for trusts set up in a jurisdiction that has not concluded a Tax Information Exchange Agreement with France (referred to as a “non-cooperative territory”), the tax rate is 60% in all cases.
  • For existing trusts, which are set up in a “cooperative territory”, the rate of tax is as follows:
  • if the relationship between the settlor and the beneficiary can be identified, the tax rate and allowance will be according to the standard IHT barème scale;
  • if the beneficiaries are, globally, the descendants of the settlor, the tax rate will be the top rate for descendants in direct line, i.e. 45%; and
  • anything else will be subject to a tax rate of 60%, unless covered by specific exemptions in the French tax code.

 

Overall, trusts do not work well in France and an alternative structure is needed to achieve the same objectives. Therefore, seeking professional advice from someone who understands both the Anglo-Saxon systems and the French system is essential.

The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets.

Article by Spectrum IFA

The Spectrum IFA Group is committed to providing a professional financial advice to the expat community in Europe. The Spectrum IFA Group operates in a number of jurisdictions with 12 offices in France, Spain, Italy, Switzerland, Luxembourg, Malta and Portugal with over 50 advisers.

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