Significant decision regarding trust taxation in France
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Since 2011, France has had in place a specific taxing regime for trusts. The legislation governing this regime is very widely drafted and covers all trust arrangements in the same way. As such, it has no real basis in reality; it is simply a contrived approach to tax assets held in trust structures.
The main impact of the law is that assets within a trust are treated as belonging to the settlor (or “constituant” as it is referred to in France). This means that the value of these assets falls within the settlor’s estate for wealth tax and inheritance tax (generally at higher rates than assets held outside a trust).
The rules also contain declarative obligations for trustees and heavy penalties for failure to comply with these obligations. The French Revenue previously published a database of all declared trusts (including names of beneficiaries) online, which was accessible to any French taxpayer. This database was removed within 48 hours after an injunction was granted.
Because of the way in which trust arrangements are defined by the French legislation, it is often complex as to how the declarations ought to be filed. This is because commonly used arrangements under English law do not necessarily translate well into French Law or are simply treated as tax avoidance.
Up to now, there has been little feedback from the authorities as to how these declarations are to be dealt with. There has also been no case law on which to base an approach to this law. A recent decision though may well reduce the effective scope of the law.
Whilst on the face of it the decision which confirms that the law is in conformity with the French constitution, it recognises that the application should be more nuanced. Up to now, even if a settlor is prohibited from benefiting from the trust and in practice they are excluded, the French tax laws would still treat that individual as owning the assets for wealth tax purposes. This decision recognises that where a settlor is excluded from benefit from a genuinely irrevocable, discretionary trust, then they should not necessarily be taxed as owning the assets.
This will require closer scrutiny in all cases as it will not only be the wording of the trust deed which is relevant but also the practical approach of the trustees and whether the settlor does benefit either directly or indirectly from the trust. This may be difficult to prove but is at least a departure from the strict approach which applies under the legislation.
In any case, trustees are still obliged to file the usual declarations in France. Our experience is that many trustees remain unaware of these obligations and continue to run the risk of cumulative penalties and interest. It is often the case that no tax is actually at stake in France as a result of these trusts but the penalties are applicable regardless and the French tax amnesty scheme ends 31 December 2017. Any trustees who are managing a trust which has any connection to France (French assets, French resident settlor or French resident beneficiaries) should contact us urgently for a consultation.
Graeme Perry, Solicitor
Sykes Anderson Perry Limited