Wealth tax: Beginning January 1, 2012, French residents with worldwide assets between 1.3 million and 3.0 million Euros are subject to a wealth tax of 0.25%, and 0.5% from 3.0 million Euros. New residents are exempt from the wealth tax on non-French situs assets for 5 years. Non-residents are subject to the wealth tax only on French situs assets, with an exemption for certain French financial assets. US citizens or residents with a second home, land or businesses in France could therefore be subject to this tax.
New tax regime for trusts (other than irrevocable charitable or pension trusts): A French resident trustee pays income tax on income derived from trust assets. If the trustee is a French non-resident, only French source income is subject to French tax. Beneficiaries are subject to income tax on distributions of income but not of principal. Under the US-France tax treaty, there is generally no double taxation so when a US trust distributes US source income to a French resident, a tax credit equal to the French tax is allowed against US tax. Despite the treaty, careful tax planning is necessary if a beneficiary lives in France.
The French gift tax is not imposed when the trust is created or when assets are transferred to the trust. Beginning July 31, 2011, either a gift tax is due when the trust assets are transferred to the beneficiaries, or the inheritance tax is due when the settlor dies, whichever occurs first. The tax rate depends on the family relationship between the settlor and the beneficiaries, generally at 45% for direct descendants and 60% for others. The gift or inheritance tax is paid by the beneficiary. If the beneficiary resides in France, such taxes are assessed on worldwide assets; if the beneficiary resides outside of France, on French-situs assets only.
The settlor is subject to the wealth tax described above on all assets held in his or her trusts. If the settlor died before January 1, 2012, the French resident beneficiaries are considered “deemed settlors” and are subject to wealth tax on all of the trust assets. If the settlor fails to pay the wealth tax, beginning January 1, 2012, a new tax called “prelevement” will apply. The prelevement is payable by the trustee at a rate of 0.50% per year.
Exit tax: Moving away from France won’t necessarily relieve a French resident’s tax burden because an exit tax could apply. If an individual had been a French resident continuously for 6 years, depending on the level of the individual’s participation in certain businesses, he or she could be subject to an exit tax of 31.3% on any unrealized gains on assets. The exit tax might be deferred if the individual moves to a destination country that has entered into tax disclosure agreements with France.
The French tax law changes are very complicated, so individuals with French connections should contact their US advisors immediately who, in turn, should coordinate their planning with French advisors.