French Wealth Tax on Trusts
Our first article of this « Trust-Trilogy » started out by stating that in 2011, France defined trusts for taxation purposes only. The article also gave the main terminological basis of trust.
Our second article detailed this new taxation on estate planning (gifts and successions).
In this article we will look at the French wealth tax regime on the taxation of trusts.
Wealth tax (impôt de solidarité sur la fortune, ISF) provisions relating to property or rights held in trust, the sui generis levy due in the event said assets are failed to be declared and the reporting obligations are codified under articles 885 G ter, 990 J, AB 1649 CGI, 1736 and 1754 of the French General Tax code (Code Général des Impôts, CGI),
For more information on the concept of trust, settlor and beneficiary, see part 1 of our Trust Trilogy.
I. When are the assets held in trust subject to wealth tax?
A) Two types of trusts are excluded from wealth tax
- Trusts whose beneficiaries are all qualified as charitable organizations
Said trusts must be irrevocable and the trustee must be subject to the law of a State having concluded with France a double tax treaty to combat tax fraud and tax evasion.
In such cases the assets placed in trust are not to be included in the taxable base for wealth tax.
- Trusts settled by French residents specifically for retirement purposes are also excluded from this tax.
B) French territoriality rules
The principle of the current legislation is transparency.
Article 885 G ter of the CGI stipulates that property and rights placed in a trust, including their capitalized revenue, are taxable for wealth tax in the grantors name, as if they had never left his estate.
This rule makes the tax base irrelevant to the contents of the trust deed and thus the nature of the contract (whether it be revocable, irrevocable, discretionary or not).
Under France’s own rules (article 750 ter of the CGI), subject to international tax treaties (BOI-PAT-ISF-20-20), are subject to wealth tax:
- The assets or rights placed in trust whose settlor or beneficiary that has become settlor are a tax residents of France, and thus regardless of where said assets or rights are situated, be it in France or abroad;
- The assets or rights (excluding the financial investments referred to in Article 885 L of the CGI) situated in France having been placed in trust by a settlor or a beneficiary that has become settlor who are not tax residents in France.
When assets held in trust are subject to wealth tax they are taxed under the ordinary rules on wealth tax (scope, tax base, exemptions).
Thus, to give an example, taxpayers whose net fortune exceeds the threshold of ISF who have not been French tax residents during the five years preceding the year in which they become a French tax resident are only liable for wealth tax on the assets placed in trust that are situated in France; and this until December 31st of the fifth year following the year in which they have established their tax residence in France.
Reminder: the financial investments as defined under article 885 L of the CGI include all investments made in France by an individual and whose revenue of all kind, except capital gains, fall or will fall within the category of investment income (‘revenus de capitaux mobiliers’).
Are mainly concerned cash and term deposits in euros or currency; shareholder’s current accounts held in a company or a corporation that has in France its headquarters or place of effective management; bonds and bills of the same nature, bonds, shares and subscription rights issued by a company or corporation that has its headquarters in France or the centre of its effective management, life insurance policies or endowment contracts signed with insurance companies established in France.
However, are not considered financial investments:
- shares representing sufficient influence in a company (in practice, are presumed equity securities, investments representing at least 10% of the capital of a company ; this threshold is judged globally at the level of the trust);
- shares held by non-residents, in a French or foreign company/corporation, whose assets are primarily made up of real estate or rights in immovable property situated on French soil, in the proportion of the value of said property or rights in relation to the total assets of the company (second subparagraph of Article 885 L of the CGI);
- shares owned more than 50% by non-residents (directly or indirectly owned) in corporations or organizations that own real estate or real estate rights in France (second subparagraph of Article 885 L of the CGI).
C) The impact of international tax treaties
The internal French rules seen above are subject to the provisions of international tax treaties, since Article 885 G ter of the CGI falls under the scope of double taxation avoidance where income and wealth tax are concerned.
Therefore in cases where double taxations are characterized, i.e. when a same person is subject to wealth tax in more than one State, double taxation avoidance rules are applied.
When the taxpayer is a French resident, the tax paid abroad is deducted from the French tax due. However the taxpayer must prove he/she actually paid foreign tax.
II. When the assets held in trust are subject to the sui generis levy
The main purpose of the new sui generis levy on trusts is to sanction the non-disclosure of assets placed in trust in respect to wealth tax.
This levy is not subject to the provisions of international conventions on double taxation avoidance with respect to income and wealth taxes.
A. Exclusion of two categories of trusts
By law two categories of trusts are excluded from the sui generis levy’s scope:
- Irrevocable trusts whose sole beneficiaries are covered by Article 795 of the CGI and whose trustees are subject to the law of a State or territory who has concluded with France a double taw treaty on double tax avoidance.
- Some trusts set up to manage pension rights.
B. Liable taxpayers
The taxpayers liable to the statutory levy owed on trusts are the settlors and the beneficiaries deemed to have become settlors.
C. The tax base
The base of the levy is made up of:
- All assets and rights placed in trust whether they are situated in or outside France, including their capitalized income for the people who reside in France for tax purposes;
- The assets and rights placed in trust and situated in France, including their capitalized income (other than financial investments under Article 885 L of the CGI), for people who are not French tax residents.
In the case where several beneficiaries are also the settlors of the trust and in the absence of express distribution of assets in the trust deed or any additional annexes, the assets of the trust will be deemed equally distributed between each of them.
The base of the levy, as wealth tax, is set on the net market value of the assets, rights and capitalized income contained in the trust on January 1st of the tax year.
The sui generis levy rate corresponds to the highest rate of wealth tax.
D. Exemption of assets, rights or products properly declared to wealth tax or who fall under section 1649 AB of the CGI
The levy is not payable in respect to assets, rights and capitalized income:
- Included in the scope of wealth tax of a settlor or beneficiary having become a settlor liable to wealth tax and having declared and paid his/her tax properly. In this regard the non-declaration of assets or rights due to their exemption does not make them subject to the levy; this also applies to assets non-declared in accordance with tax treaties.
- that appear on the specific statement related to trusts under section 1649 AB of the CGI, when the assets of the settlor or the beneficiary having become settlor falls below the wealth tax threshold.
The net value of the estate taken into account includes the assets, rights and capitalized income placed in trust.
The exemptions applicable for wealth tax, including those relating to the nature of certain assets (business assets, shares subject to lock-up, art …), do not apply.
E. The recovery of the sui generis levy
The levy must be paid by the trustee.
The trustee, the settlor and the beneficiaries, other than those having satisfied their own reporting obligations, and their heirs, shall be jointly and severally liable for payment.
The levy follows the same rules and penalties of those applied in the matter of death duties.
III. Tax reporting obligations
Two tax reports must be filed.
Firstly, a « factual » statement following the creation, modification or extinction of a trust, said statement contents the content of the trust.
And on the second hand, an annual return containing the net market value of the assets and rights held in trust and their capitalized income on January 1st of that tax year.
Penalties for non-compliance of reporting requirements
Breaches of reporting obligations are exposed to a fine of 10.000 € or, if higher, an amount equal to 5% of the total value of the assets, rights and capitalized income situated in and outside France, that are placed in trust.