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Trusts, foundations and charities

Trusts

Are trusts legally recognised in your jurisdiction? If so, what types are available and most commonly used?

Trusts as institutions do not exist under French law. However, French case law recognises the validity of trusts set up abroad and the effects that those trusts may have in France provided that they respect the laws in effect in the country in which they were created and they do not infringe the mandatory rules of French law (eg, forced heirship).

What rules and procedures govern the establishment and maintenance of trusts?

Article 1649 AB of the French Tax Code defines French reporting obligations of trustees of trusts having ties with France. The trustee must file a French tax form if the settlor, the trustee or at least one of the beneficiaries is a French tax resident or if the trust holds an asset or a right located in France.

The following French tax forms must be completed:

  • an annual return which discloses the valuation of assets, rights and proceeds held by the trust, as well as general information on the trust on January 1 of each year; and
  • an event-driven return which concerns the occurrence of any event relating to the settlement, modification or termination of a trust and must be filed within one month after the event occurred.

Failing to comply with these requirements would result in a penalty of €20,000 per return.

How are trusts taxed in your jurisdiction?

Up until the adoption of the law on July 29 2011, France had no tax legislation dealing with the tax treatment of trusts in respect of gift and inheritance taxes as well as wealth tax.

Proceeds of trusts, regardless of the consistency of the assets contained in the trust, are subject to French personal income tax, on distribution only.

The usual French personal income tax rates are applicable, on top of which additional social taxes apply.

Assets held by a trust are considered to be owned by the settlor or deemed settlor for wealth tax purposes and are therefore taxable as part of the individual’s taxable assets (charitable trusts and pension trusts may be exempt under certain conditions).

The settlor (or the beneficiary deemed settlor) is subject to the net wealth tax on:

  • all the real estate assets held by the trust regardless of the location of such assets if French resident; or
  • on real estate assets located in France only if non-French resident.

A 1.5% standalone tax is due in the event of non-disclosure of assets placed in a trust for French wealth tax purposes. The 1.5% tax would not be due if the assets have been duly included in the settlor’s wealth tax basis or if the settlor’s assets remain below the wealth tax threshold if such assets have been officially disclosed by the trustee.

Finally, French gift or inheritance taxes are applicable on the gratuitous transfer of trust assets to the beneficiaries during the life of the settlor or after his or her death. Different rates apply depending on whether the assets are attributed to an identified beneficiary.

Foundations and charities

Are foundations and charities legally recognised in your jurisdiction? If so, what forms can they take?

A foundation is an act by which one or several individuals or legal entities agree to irrevocably allocate some assets, rights or resources for the purpose of carrying out non-profit and public interest works. Irrevocable allocation guarantees the continued operation of the foundation, since these assets or resources cannot be withdrawn.

Foundations can be set up for cultural, scientific or charitable purposes only and, thus, cannot be considered as a substitute for trusts (except to a limited extent in the case of charitable trusts).

What rules and procedures govern the establishment and maintenance of foundations and charities?

Foundations cannot be freely used as charities in the private sector and should be controlled by a representative of the Administrative Supreme Court. They acquire legal personality and the right to receive gifts or legacies on special authorisation only, which can be granted under very strict conditions and provided that the only purpose of the foundation is to promote public welfare.

How are foundations and charities taxed?

Public utility foundations benefit from a corporate tax exemption in respect of their income deriving from non-profit activities.

Individuals making donations to public utility foundations under the aegis of a public utility foundation can deduct 60% of the contribution from their French income tax, up to 20% of the donor’s taxable income.

Compliance issues

Anti-avoidance and anti-abuse provisions

What anti-avoidance and anti-abuse tax provisions apply in the context of private client wealth management?

Investments in financial structures established in a country with favourable tax regime 

Individuals who directly or indirectly hold at least 10% of shares, financial rights or voting rights in a legal entity established outside of France which is subject to a favourable tax regime is taxed in France on the accrued amount by the foreign entity irrespective of actual distribution.

The income realised is taxed in the hands of its French resident shareholder based on 125% of the amount of income calculated. If the entity is located in a non-cooperative state, the 10% participation requirement is deemed to be met.

Remuneration for services paid abroad 

Article 155A of the French Tax Code provides that the individual shareholder of a rental company or of a company receiving income for services rendered by a person resident or established in France is taxed as if the income was received by him or her directly if:

  • the individual controls the foreign entity;
  • the entity has no other preponderant commercial or industrial activity; or
  • the entity is subject to a favourable tax treatment.

French reporting obligation regarding foreign investments 

French residents who own a foreign account or a foreign life insurance policy must report their existence to the French tax authorities. Failing to comply with these requirements is sanctioned by fines for non-disclosure, an 80% penalty and taxes due in addition to late payment interest.

Anti-money laundering provisions

What anti-money laundering provisions apply in the context of private client wealth management (eg, beneficial ownership registers)?

 Anti-money laundering regime 

All transactions suspected of involving money laundering or terrorist financing are reported to the Intelligence Processing and Actions Against Clandestine Financial Circuits cell of the Ministry of Finance and Budget.

Beneficial ownership register 

French legislature introduced a new duty to declare the ultimate beneficial owner(s) of all non-listed corporate entities registered in France. This led to the creation of beneficial ownership registers at seats of the commercial courts where corporate entities have a presence in France.

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