Print Posted By Lost in France on 15 Nov 2012 in Living in France - Banking, Taxes and Finance

French Tax Bulletin - November 2012

Trust Instruction Published On 16th October 2012 

The much awaited Instruction complementing the new French tax measures affecting trusts with French resident parties or French situs assets has proved to be a bit of "a damp squib.

The Instruction does offer clarification on how the new measures integrate into the existing wealth tax regime and gift and inheritance tax rules as defined in the French tax code, but it remains quite general and does not deal with the subtleties of certain trust situations.

The text reiterates the definition of a trust but broadens this to include any trust-like arrangements and relationships regardless of how it is constituted. Foundations and certain nominee arrangements may thus be concerned if they result in legal relationships which are similar to those found in a trust deed.

The French administration confirms that where the settlor cannot be readily identified, they will look to the "real economic settlor i.e. the person who contributed to the trust fund, even in the context of corporate settlors.

As expected, where the settlor(s) of a trust has died, the Instruction confirms that the trust assets are to be divided equally between the remaining beneficiaries, treated as "deemed settlors, for the purpose of wealth tax. The split may however be different if backed up in the terms of the trust or in any annex documents or provisions. The text extends the same allocation to the annual trust charge which may be payable in certain situations in lieu of wealth tax.

The general wealth tax assessment rules defining the exposure, exemptions, deductions of assets and liabilities for the purposes of determining the net taxable value, similarly apply to the assets held in trust. Therefore the text confirms the application of the temporary wealth tax exemption in respect of non-French assets held by individuals in their first five years of French tax residence. This applies to individuals who have not been French residents at any time in the five year period preceding their arrival in France.

However, when it is the trust that pays the annual charge in lieu of the wealth tax, none of the wealth tax exemptions (antiques, art collections, professional assets etc) apply. In addition, double tax treaty provisions do not apply to this specific charge which aims at penalising the omission of "proper wealth tax reporting by the taxable party to the trust. Thankfully the Instruction specifies that the trust charge is limited to the "share attributable to the taxable party. It is important to note that the taxable party may be a resident or non-resident of France in respect of French situs assets. Indeed, non-residents of France may have an exposure to French wealth tax if the net value of French assets (held directly or indirectly including now via a trust) exceeds the wealth tax limit.

In terms of gifts or inheritance tax the Instruction corrects an omission in the previous law texts and specifies that French residents who receive a gift or an inheritance from outside France but who have spent less than six years in France out of the ten years preceding receipt, are not exposed to French gifts or inheritance tax. Exposure thereafter is subject to those rules and charges subject of course to any relevant double estate duty treaty provision.

In terms of successions the Instruction envisages three scenarios:

i) Provided that a specific share of the trust assets is distributed out to a designated beneficiary normal inheritance tax rates apply after any relevant tax free allowance.

ii) Where the trust assets cannot be split and thus are due "globally to beneficiaries who are all descendants of the settlor, the distribution as a result of a succession or lifetime gift triggers a charge of the highest rate applicable to transfers between ascendants and descendants which currently is 45%.

iii) Trust assets which remain in trust after the death of the settlor (or deemed settlor) are subject to a 60% charge. This charge also applies in the situation where trust assets are distributed to persons who are not exclusively descendants and if the share cannot be individually identified as attributable to each of the beneficiaries. Subsequent Distribution of Assets which have Remained in Trust

In the case of subsequent attribution of assets through distributions or terminations of a trust there should be no further gifts tax due, provided that the split of trust assets between the identified beneficiaries is identical to the one resulting from the succession. In the absence of proper evidence of the original split or, if the subsequent attribution differs from the split documented at the last transfer, gifts tax may apply. In this situation, the first beneficiary will be deemed to have gifted the asset to the new one(s).

Although not specifically stated, this rule would almost certainly affect distributions of assets of settlements in existence as at 31 July 2011 and reportable for the first time as at 1 January 2012 and subsequent years. It could also affect trusts concerned by the one-off reporting obligations depending on the type of modification that has taken place. As the law entered into force on 31 July 2011 the application of French taxes including gifts and succession taxes affect changes or events which have taken place between 31 July 2011 to date.

One can see how the addition of beneficiaries (or perhaps even removal) may affect subsequent distributions from the trust.

It is clear that there are still many areas of uncertainty and it is increasingly difficult to navigate the changes. Those trusts where the "rights of the various parties can be clearly identified are the ones that are likely to be the easiest to handle.

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This document has been prepared as a general guide. It is not a substitute for professional advice. Neither PKF (Channel Islands) Limited nor its directors or employees accept any responsibility for loss or damage incurred as a result of acting or refraining to act upon anything contained in or omitted from this document. PKF (Channel Islands) Limited is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.


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