KRAMER LEVIN NAFTALIS & FRANKEL LLP REID FELDMAN TELEPHONE+33 1 44 09 46 03 RFELDMAN@KRAMERLEVIN.COM 4 7 AVENUE HOCHE – 75008 P ARIS F RANCE – TE L. +(33) 1 4 4 09 46 00 – FAX (33) 1 4 4 0 9 46 01 A LSO AT : 1177 A VENUE OF THE A MERICAS – N EW Y ORK N Y 10036 - 2714 – TE L . + 1 (212) 715 9100 – F AX + 1 (212) 715 8000 S IL I CO N VALL E Y: 9 9 0 MA RS H R OAD – ME NL O PARK, CA 9 4 0 2 5-1 9 4 9 – TE L: +1 ( 6 5 0 ) 7 5 2 1 7 0 0 – FA X +1 ( 6 5 0) 7 5 2 1 8 0 0 95254 29 June 2016 M E M O R A N D U M Reporting requirements under French law for trusts with connections to France French legislation enacted in 20111 imposed reporting requirements on trustees and changed the treatment of trusts for purposes of income, gift, succession and wealth tax, and established a new special trust tax (prélèvement sui generis). The rules relating to tax treatment of trusts are set out in the French Code général des impôts (“CGI”) and in official interpretation published by French tax authorities.2 Two kinds of reports are required: an annual report, which for 2016 in most cases is due on 15 June 2016, 3 and an event-based report, which is due within one month of creation, modification or termination of a trust. This memorandum focuses on the annual reports due from trustees for the year 2016, requirements regarding event-based reports showing distributions to beneficiaries, wealth tax due from the settlor or beneficiaries and the special trust tax. It discusses (1) trusts subject to the reporting requirements, (2) measures announced 11 May 2016 relating to creation of a public registry of trusts, (3) the form of the annual report and information to be included therein, (4) wealth tax and special trust tax, (5) filing deadline and procedures for the annual report, (6) event-based reports for distributions made in 2015 and (7) other taxes. (1) trusts subject to the reporting requirements Under the applicable rules, a “trust” is defined4 to include a trust as that term is understood in common-law jurisdictions and also other legal relationships, such as a stiftung or potentially other arrangements involving companies or contractual relationships.5 However, it does not include certain trusts established by a business or group of businesses on its/their own behalf (where the settlor was not an individual) or certain collective investment vehicles in the form of trusts having a trustee established in the EEA or another state with a tax-assistance treaty with France. 6 1 The French trust legislation was contained in article 14 of the Amended Finance Law n° 2011-900 (loi n° 2011-900 du 29 juillet 2011 de finances rectificative). 2 See Bulletin Officiel des Finances Publiques – Impôts (“BOI”). 3 The due date is August 31st when none of the settlor or all beneficiaries deemed settlors is a French tax resident. See BOI-PAT-ISF 30-20-30 20121016 §370. 4 CGI art. 792-0 bis I 1 5 The term “administrator” covers not only a “trustee” but more generally any person who has control over assets or rights in the trust, whether or not they have the attributes of a trustee under common law, and a “settlor” (for which the French text uses the term “constituant”) includes not only the person who created the trust but also any individual who places assets into a trust, if it was created either by a juridical person or by another individual acting in a professional capacity (such as an attorney or an investment manager). 6 See BOI-DJC-TRUST-20130715 §60. Although reporting requirements do not apply for these trusts the assets therein may nevertheless be subject to French gift, succession or wealth tax. 2 PLEASE NOTE THAT THE STATEMENTS HEREIN ARE INFORMATIONAL ONLY AND DO NOT CONSTITUTE LEGAL OR TAX ADVICE. THE READER SHOULD CONSULT HIS/HER TAX ADVISOR TO DETERMINE HIS/HER OBLIGATIONS UNDER FRENCH LAW. The reporting requirements apply to any trust as defined above (other than certain pension trusts7 ) which as of January 1st of the relevant reporting year met one of the following criteria8 : • the settlor or any beneficiary was a French tax resident; • the trust included any assets considered to be French assets (referred to herein as “French Assets”9 ), other than certain financial investments (referred to herein as “French Financial Investments”10); or • in the case of the event-based report, French Financial Investments were placed in trust at its creation or modification.11 (2) French public registry of trusts France plans to put on-line, beginning 30 June 2016, a “public register of trusts”. This is an unprecedented initiative, to make public personal information held by tax authorities, with the announced goal of fighting tax evasion, money-laundering and financing of illicit activities. The trusts included in this register are those for which a report (in the form of an information return) has been communicated to French tax authorities, pursuant to article 1649 AB of the 7 A pension trust is not subject to reporting requirements if its trustee is located in a state with a tax-assistance treaty with France and it was established to manage pension rights acquired by a beneficiary in respect of professional activity pursuant to a pension plan established by a business or group of businesses. See BOI-PAT-ISF-30-20-30-20150304 §300. 8 See BOI-PAT-ISF-30-20-30-20150304 §290. 9 As used herein, “French Asset” means any asset situated (or deemed situated) in France, consisting of: • any French Financial Investment (see footnote 10); • all securities or other rights in a company or other legal entity having its registered seat or operational headquarters in France which do not constitute French Financial Investments; • French real estate held directly or held indirectly via any number of intermediate holding arrangements (provided that all intermediate holding entities are more than 50% held, directly or indirectly, by the settlor/beneficiary and certain family members); • shares of any non-French company, not publicly traded (with some exceptions), whose French assets consist principally of French real estate not used for the company’s non-real-estate operations (these holdings are considered French Assets in proportion to the value of such French real estate compared with other assets held by the company); • French clientele and related assets (so-called fonds de commerce) of business activities conducted in France; • any debts of French debtors; • any bank account with a French branch of a financial institution; • any personal property situated in France (motor vehicles, precious metals, works of art, etc.); • intellectual property (patents, trademarks, copyrights, etc.) registered or used in France. 10 As used herein, “French Financial Investment” means any asset situated (or deemed situated) in France if the revenue therefrom (if any) is considered under French tax rules to consist of income from securities (revenus des valeurs mobilières), including: • term deposits with French branches of financial institutions; • loans from shareholders to a company or other legal entity having its registered seat or operational headquarters in France (as well as other interest-bearing debt of a French debtor); • life insurance (or capitalization contracts) subscribed with French insurance companies (or branches) in France; • securities issued by the French State; • securities (shares, bonds and other securities) issued by a company or other legal entity having its registered seat or operational headquarters in France, other than (i) shareholdings permitting exercise of influence over the company or entity (presumed to be the case for certain holdings of 10% or more) and (ii) shares in French companies whose assets consist principally of French real estate not used for the company’s own operations (including shares in companies whose principal assets consist of such real estate). 11 See BOI-PAT-ISF-30-20-30-20150304 §330. 3 French tax code. Such reports are required since 2011 for trusts of which at least one of the trustees, settlors or beneficiaries is domiciled for tax purposes in France or which contain assets situated in France (except for financial investments, if none of the trustees, settlors or beneficiaries is domiciled in France). The reports are filed annually and upon the occurrence of events affecting the trust: its creation; its modification including among other things change of its terms or its mode of operation, change in trustee, change or death of a “beneficiary deemed settlor” or distribution, transmittal, attribution or placement into the trust of assets; or its termination. The creation of the register and placing it on-line are provided for in decree n° 2016-567 of 10 May 2016 (text attached hereto, with translation), according to which information available to the public will include “the name of the trust and it address” as well as its date of creation (and termination, if applicable) and the identity of the trustees, settlors and beneficiaries (full name, date and place of birth for an individual or name and identifying number for a legal entity). Apparently the information in the register will be derived from reports filed with French tax authorities, but will not include information about the terms of the trust or its assets or the addresses of settlors or beneficiaries. It is expected that an administrative order of the Budget Minister will establish a “secure authentification procedure” permitting members of the public (after identifying themselves) to access the register and consult data on the trusts included thereon. Data can be accessed using search criteria including among other things the name of the trust; the identity of the trustee, settlor or beneficiaries, the place the trust is established; or the date it was created. The use of this register will be governed by general conditions set out by the Budget Minister. Pursuant to the decree, persons listed in the public register will not be able to exercise the right to object to their personal information being included therein. When this measure was announced, French officials noted that the tax administration currently has information on 16,000 trusts identified as such and that transparency and exchange of information regarding beneficiaries will result “ending use of shell companies for tax evasion, moneylaundering and financing illicit activities”. But French officials also stated that “the difficult point will be to distinguish between the legal use of these measures and concealing something” . It is true that many perfectly legitimate trusts, set up purely for wealth-management and estate-planning purposes, not involving tax evasion or illicit activities, will be listed in the new register. (3) form of the annual report and information to be included therein The annual report is required to be prepared on an official form labeled “2181 TRUST2 (Cerfa 14807)”, available on internet.12 The form is in French (there is no official translation) and must be filled out in French. The annual report is to provide the following information13: 1° identification of the settlor and beneficiaries deemed settlors (see below); 2° identification of other beneficiaries; 3° identification of the trustee; 4° identification of the trust; 12 Prior to 2014, the use of this form was optional. 13 See CGI annexe 3 art. 334 G septies. 4 5° content of trust terms (including those in the trust deed and any additional terms governing its operation), including an indication of whether or not it is revocable, whether or not it is discretionary, and rules governing the allocation of assets and rights placed in trust and products including income thereof, provided however that this information need not be provided if it was furnished in a previously filed event-based report); 6° if the settlor or any beneficiary was a French tax resident as of January 1st of the relevant year, the detailed inventory and net asset value of all assets in the trust at that date14; 7° if none of the settlor and the beneficiaries was a French tax resident as of January 1st of the relevant year, the detailed inventory and net asset value at that date of French Assets in the trust other than French Financial Investments. The reference in item 1 to “beneficiaries deemed settlors” is a term used in the French trust legislation and the official interpretation thereof to refer to beneficiaries after death of the settlor, for example to beneficiaries who after death of the settlor are subject to French wealth tax on trust assets. The statutory language referring to this term does not provide guidance as to what the term means, beyond stating that it refers to a beneficiary after the death of the settlor.15 The term might arguably refer to beneficiaries who become principal income beneficiaries of the trust after the death of the settlor.16 (4) wealth tax and special trust tax French wealth tax is assessed on taxpayers with taxable assets in excess of €1.3 million; if that threshold is reached progressive rates are applied to net taxable assets exceeding €800,000, on a progressive scale of rates beginning at 0.5% and reaching 1.5% in taxable assets in excess of €10 million.17 For assessment of French wealth tax there are various exemptions (including for financial investments by non-residents and for “professional assets”/“biens professionnels”) and reductions (including for a principal residence). The settlor if alive as of January 1st of the relevant year is subject to French wealth tax (impôt de solidarité sur la fortune) on trust assets as of such date, but if the settlor is deceased at that date the beneficiaries deemed settlors are subject to wealth tax on trust assets.18 The assessment of wealth tax is subject to rules as to territorial application of French tax set out in French law and in relevant tax treaties. In general, French tax residents are subject to wealth tax on assets wherever situated, but non-residents are subject to tax only on French Assets other than French Financial Investments. Taxpayers who have been French tax residents for fewer than five 14 According to the interpretation of French officials published March 4, 2015, the detailed inventory can be set out ins an attachment to the official form, provided that the attachment is in French and in a prescribed format. See BOI-PAT-ISF-30-20-30-20150304 §410. 15 CGI article 792-0 bis II 3. 16 It should also be noted that the official interpretation refers to a “fiscal beneficiary”, meaning someone to whom trust income or assets is “attributed”, but whether the attribution is the one made the trust deed or by the trustee is not specified. See BOI-DJC-TRUST-20130715 § 110: “The fiscal beneficiary of a trust means the one or those to whom are attributed trust income paid by the trustee and/or capital of assets or rights of the trust during its existence or upon its termination”. (“Le bénéficiaire fiscal d’un trust s’entend de celui ou ceux désignés comme étant attributaire(s) des produits du trust versés par l’administrateur du trust et/ou comme attributaire(s) en capital des biens ou droits du trust, en cours de vie du trust ou lors de son extinction.”) 17 There are small deductions when assets are at least €1,300,000 but less than €1,400,000 or at least €3,000,000 but less than €3,200,000. 18 CGI art. 885 G ter. 5 calendar years (and who became French tax residents on or after 6 August 2008) are subject to wealth tax only on French Assets.19 Tax treaties may modify these rules. To the extent that assets in the trust are not reported on wealth tax returns by the settlor or the beneficiaries, and are not included in the trustee’s annual report for a settlor or beneficiary who falls below the threshold for wealth tax (now €1.3 million), a special trust tax (prélèvement sui generis) is imposed, equal to the maximum rate of wealth tax (currently 1.5%). The special trust tax is paid by the trustee, with joint and several liability of the settlor and the beneficiaries (except to the extent they declared trust assets on their own wealth tax return or the trustee reported with respect to that settlor or beneficiary and he/she falls below the wealth tax asset threshold of €1.3 million). The tax must be paid along with the filing of the annual report. There is an exemption from wealth tax and the special trust tax for irrevocable trusts whose trustees are established in a state with a tax-assistance treaty with France and either (i) the trust’s beneficiaries (including all income as well as remainder beneficiaries) are composed exclusively of charitable or public-interest entities which as donees/legatees are exempt from gift/succession tax20 or (ii) the trust was established in respect of certain pension or retirement arrangements.21 The deadlines for paying the wealth tax and the special trust tax are as follows: May 31st, for wealth tax of French residents with net taxable assets of more than €1.3 million but less than €2.57 million (the wealth tax filing for such taxpayers is part of the general income tax filing); June 15th, for wealth tax of other French residents and for the special trust tax; July 15th, for wealth tax of residents of other European countries including Monaco;22 and August 31st, for wealth tax of other non-residents. If the settlor was alive as of January 1st of the relevant year, it will be relatively straightforward to apply the foregoing rules. The settlor will be responsible for paying wealth tax on all trust assets (if his/her taxable assets, including trust assets, are at least equal to the threshold, currently €1.3 million), subject to the general and treaty-based territoriality rules summarized above. To the extent that the settlor does not pay wealth tax which if declared would be due (taking account of the threshold and of territoriality rules), the trustee is required to pay the special trust tax on trust assets (subject to the territoriality rules). In these cases the issues presented for trustees will include determining what trust assets are subject to wealth tax or special trust tax, taking account of the rules of territoriality (including the settlor’s tax residence as of January 1st of the relevant year), and whether the settlor has paid the relevant wealth tax, since if not the trustee must pay the special trust tax. After the settlor’s death, if assets remain in the trust those beneficiaries considered “deemed settlors” will be responsible for paying wealth tax on all trust assets, subject to the territoriality rules summarized above (but only if such beneficiary’s net taxable assets, including trust assets, are at least equal to the threshold, currently €1.3 million). Further, the trustee is required to pay the special trust tax on trust assets (taking account of territoriality rules), to the extent that the deemed settlors do not pay wealth tax on trust assets which would be due. When there is more than one deemed settlor, trust assets should be allocated among deemed settlors, for purposes of reporting and payment of the wealth tax or special trust tax. In these cases the trustee must consider the same issues as those presented for trusts prior to the death of the settlor (determining what trust assets are subject to wealth tax or special trust tax, taking account of the rules of 19 Under the US-French treaty on income and capital taxes, article 23(6), a similar provision applies to any U.S. citizen who is not also a French citizen, and is not limited to those who became a French resident after 6 August 2008. The provision applies if the taxpayer has been a French tax resident for fewer than five years and was not a French tax resident for any of the previous three years. 20 For wealth tax, CGI art. 885G ter, see also BOI-PAT-IS-30-20-30-20121016 §§30, 40; for the special trust tax, CGI art. 990J II. The exemption may apply to similar non-French entities under certain conditions. 21 For wealth tax, BOI-PAT-ISF-30-20-30-20150304 §50; for the special trust tax, CGI art. 990J II. 22 The applicable text does not limit this rule to E.U. countries, but simply mentions “countries in Europe”. D. adm. 7 S 513 n° 5 and n° 6, 1 October 1999. 6 territoriality, and whether each beneficiary has paid the relevant wealth tax), plus the question of how to allocate trust assets among beneficiaries, for the purpose of determining what wealth tax or special trust tax is due in respect of each deemed settlor’s share. For purposes of wealth tax and the special trust tax, taxable assets are to be assessed at their “net fair market value” (valeur vénale nette).23 It may be arguable that considering this basic rule the allocation among beneficiaries can be made taking account of the present value of the interests of each one. However, it is also arguable that, by analogy with rules applicable to calculation of wealth tax, trust assets should be allocated, for purposes of wealth tax and the special trust tax, only among current principal income beneficiaries. Note that the official interpretation of French authorities states that when there are several beneficiaries deemed settlors “and if there is no express allocation of the assets of the trust in the trust deed or in any ancillary provisions [e.g., a letter of wishes], the assets of the trust are deemed to be allocated in equal shares among each of the beneficiaries deemed settlors”.24 This language might be interpreted to allow the trustee to make allocations based on all the provisions of the trust deed which impact the rights of beneficiaries (and not just those provisions, if any, which expressly allocate shares of assets among beneficiaries). However, in some cases it may be appropriate for the trustee to make allocations on a per-capita basis. It is not certain what would be the position of French tax authorities or French courts on such questions. If the special trust tax is paid late it may be subject to a penalty equal to 5% of the tax, plus interest (currently 0.4% per month, i.e. 4.8% per annum). If the special trust tax is not paid when due the settlor (if alive) or beneficiaries (and their heirs), other than those who have reported their rateable share of taxable trust assets for French wealth tax purposes or whose rateable share of taxable Trust assets plus other taxable assets total less than €1.3 million, will be jointly and severally liable therefor. Payment of the special trust tax by the trustee does not preclude a claim by French tax authorities against the settlor or beneficiaries (as applicable) for payment of wealth tax. It should be understood that the special trust tax may be paid by the trustee and that the cost thereof (including any penalties and interest) will be payable from and chargeable against trust assets to the extent that relevant information is not provided to the trustee accurately, completely and in a timely manner or does not show that the beneficiaries (or the settlor, if applicable) either have paid wealth tax on their rateable share of taxable trust assets or are exempt from wealth tax because their taxable assets (including their rateable share of trust assets) fall below the €1.3 million threshold. (5) filing deadline and procedures for the annual report The annual report is to be filed by the trustee by June 15th, except if on January 1st of the relevant year the settlor (if alive) or all beneficiaries deemed settlors were not French residents, in which case the annual report report must be filed by August 31st . When the report is finalized, it should be signed and sent by DHL or registered mail with return receipt to the following address, to arrive no later than the due date: Direction des résidents de l’étranger et des services généraux (DRESG) 10, rue du Centre 93465 NOISY LE GRAND CEDEX 23 CGI art. 885 G ter (wealth tax) and art. 990 II (special trust tax). 24 BOI-PAT-ISF-30-20-30-20150304 §70 and §190. 7 (6) event-based reports for distributions made in 2015 Pursuant to a position published by French tax authorities on 4 March 2015, 25 in their view all distributions made by a trust (including routine distributions of income) are required to be the subject of an event-based report. Such reports are generally required to be filed within one month of the date of the distribution, but the position states that all distributions of interest and dividends paid on securities held as portfolio investments can be grouped together and reported once each year, in an event-based report to be filed in January of the year following the one during which the distributions were made. (Any other distribution, such as a distribution of the proceeds of sales of securities, should be the subject of a separate event-based report filed within one month of the distribution.) Although we believe that this position of French officials, pursuant to which all distributions from trusts must be the subject of event-based reports, could be challenged as being inconsistent with the underlying law, to avoid conflict with the tax authorities it is prudent to comply with position described above. (7) other taxes As mentioned above, the French trust legislation has changed the treatment of trust income and assets for income, gift and succession tax purposes (including establishment of a new transfer tax by reason of death). In summary, distributions from the Trusts to French tax residents (other than distributions of capital) are subject to French income tax; French succession tax or transfer tax by reason of death may apply upon the death on or after 31 July 2011 of a settlor or beneficiary; and French gift tax may apply in case of a transfer to a beneficiary on or after 31 July 2011 that could be considered to be a gift. Imposition of these taxes is subject to applicable treaties. Information reported by trustees to French authorities could be used to enforce compliance with French income, succession, transfer or gift tax. These taxes are not discussed further in this memorandum but we could advise on those subjects separately. * * * Reid Feldman firstname.lastname@example.org 25 BOI-PAT-ISF-30-20-30-20150304 §440.