French legislation enacted in 2011 made significant changes in French tax treatment of trusts and imposed new reporting requirements on trustees, with penalties for non-reporting equal to 5% of trust assets or, if greater, €10,000. Two kinds of reports are required: an annual report, which for 2013 will generally be due on 15 June 2013 (or 31 August 2013, in some cases), and an event-based report, which is due within one month of creation, modification or termination of a trust. The legislation also changed the treatment of trusts for purposes of income, gift, succession and wealth tax, and established a new special trust tax (prélèvement sui generis, also sometimes referred to as an alternative tax).
This memorandum focuses on the annual reports due from trustees for the year 2013, wealth tax due from the settlor or beneficiaries and the special trust tax. It discusses (1) trusts subject to the reporting requirements, (2) information to be included in the annual report, (3) wealth tax and special trust tax, (4) filing deadline and procedures and (5) other taxes. This memorandum is for informational purposes only and is not exhaustive; legal advice should be obtained to assess the impact of the issues mentioned herein.
- trusts subject to the reporting requirements
Under the applicable rules, a “trust” is defined 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. However, it does not include certain trusts established by a business or group of businesses on its/their own behalf (if 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 taxassistance treaty with France.
The reporting requirements apply to the trustee, referred to in the French legislation as an “administrateur”. This term could cover generally any person who has control over assets or rights in the trust, whether or not he/she has the attributes of a trustee under common law.
The reporting requirements apply to any trust (other than certain pension trusts and, potentially, certain charitable trusts) which as of January 1st of the relevant reporting year met one of the following criteria:
- the settlor or any beneficiary was a French tax resident; or
- the trust included any assets considered to be French assets (referred to herein as “French Assets”).
- information to be included in the annual report
The annual report must contain the following information (as listed in CGI art. 334 G septies):
- identification of the settlor and beneficiaries deemed settlors (see below);
- identification of other beneficiaries;
- identification of the trustee;
- identification of the trust;
- 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);
- 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 date;
- if none of the settlor and the beneficiaries is 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 certain French passive investments (referred to herein as “French Financial Investments”).
The term “beneficiaries deemed settlors” is used in the French trust legislation and the official interpretation thereof to refer to beneficiaries after death of the settlor, for example in referring to beneficiaries who after death of the settlor are subject to French wealth tax on trust assets. Which beneficiaries are covered by this term seems subject to interpretation.
As mentioned above, the annual report is due on 15 June of the relevant year, although French authorities have announced that when the settlor or “the beneficiary deemed settlor” is not a French tax resident annual reports can be admitted up until 31 August of that year.
Violations of reporting obligations are subject to a fine of 5% of trust assets or, if greater, €10,000.
- 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. 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 or “ISF”) on trust assets as of such date. If the settlor is deceased at that date the beneficiaries deemed settlors are subject to wealth tax on such assets as of that date.
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 calendar years (and who became French tax residents on or after 6 August 2008) are subject to wealth tax only on French Assets. 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, also sometimes referred to as an “alternative tax”) 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 tax or (ii) the trust was established in respect of certain pension or retirement arrangements.
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 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 the beneficiaries “deemed settlors” are responsible for paying wealth tax on all trust assets, subject to the territoriality rules summarized above (but only if such deemed settlors’ net taxable 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 deemed settlors do not pay wealth tax which if declared would be due. When there is more than one deemed settlor, trust assets should be allocated among them, 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 territoriality, and whether each beneficiary has paid the relevant wealth tax), plus the question of how to allocate trust assets among deemed settlors, for the purpose of determining what wealth tax or alternative tax is due in respect of each one’s share.
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 deemed settlors (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 may not preclude a claim by French tax authorities against settlors or deemed settlors for payment of wealth tax.
- 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 2012 of a settlor or beneficiary; and French gift tax may apply in case of a transfer to a beneficiary on or after 31 July 2012 that could be considered to be a gift. Imposition of these taxes is subject to applicable treaties. Information reported by the trustees to French authorities could be used to enforce compliance with French income, succession, transfer or gift tax.