French Trust Reform Retroactive effect to 31 July 2011

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06 January 2012

On 28 December 2011, the French Tax Authorities have released a ruling (the “Ruling”) setting out some of the details of the reporting obligations for trustees introduced by Article 14 of the Loi de Finances Rectificative of 31 July 2011 (the "New Law").

This New Law has introduced the tax legislation of foreign trusts in France, when a settlor, and/or a beneficiary and/or assets are tax resident or located in France, and has introduced wide reporting obligations in France on trustees of such trusts. The New Law states that the reporting obligations should be fully clarified by decree.

See below the provisions of the Ruling. Some of the of the issues arising from it are:

(a) Surprisingly the Ruling states that the obligation to report by the trustees includes trusts in existence, created, amended or terminated as from 31 July 2011, a disclosure therefore before the event causing it, being the taxation as at 1 January 2012.

Trustees should consider this obligation carefully.  In situations where, for example, trusts have been terminated and therefore the trustee is no longer trustee of a trust and there is no trust fund, no new trustee, and no further trust relationship with the beneficiaries or the settlor, it is difficult to see how they would report, as they have no longer the capacity of trustees. Trustees should consider their trust obligations and liabilities in relation to their disclosure position in respect of beneficiaries and settlors and also any secrecy legislation applicable in their respective countries, as they may no longer be protected by their terms and conditions applicable to the relevant trust as they may have terminated.

(b) The Ruling has confirmed that if a trust holds within other assets exclusively French financial assets, i.e. the only French element within the structure is the French financial assets, this will not create an obligation to report if the settlor and the beneficiaries are all non French resident. However, it also states that in the same situation, if the French financial assets were contributed on creation of the trust or when the trust was modified, then the reporting obligation would apply.

(c) The Ruling seems to exclude at least some EBTs from the scope of the reporting obligations. However, it will be necessary to analyse each EBT to ensure that it falls within the criteria set out below. If an employee contributes to the EBT, there is a danger that he would be considered as "settlor", and therefore the exclusion could not apply.

(d) It seems that charitable trusts will have to report as they are not mentioned in the Ruling among the entities exempted.

Trusts Excluded from Disclosure Obligations

A new article 1649AB of the French Tax Code (“CGI”) has introduced an obligation for trustees to report and disclose information relating to the creation, existence, modification or termination of trusts in France.  The same article has also introduced an obligation to disclose the assets of a trust.

The Ruling states that trustees subject to the legislation of a Country that has entered into a convention on administrative assistance with France against fraud and tax evasion, do not have to disclose if:

(e) The trust has been set up to manage pension rights acquired by beneficiaries in respect of professional/employee activities within the context of retirement pension systems which is created by a company or a group of companies;

(f) The trust has been set up by a company or group of companies for their own benefit and the settlor cannot be defined as such under article 2(l) of article 792-0 bis GCI.

Disclosure Obligations set out in the first paragraph of Article 1649AB of CGI

The Ruling confirms that the disclosure has to be made if:

(a) The settlor is French tax resident as defined in article 4B of CGI;

(b) One of the beneficiaries is French tax resident according to the same article;

(c) One of the assets or rights in the Trust Fund is situated in France in accordance with the rules in article 750 ter of CGI.

In these situations, the trustees should file:

(a) A declaration for trusts existing on 31 July 2011, setting out the terms;

(b) A declaration indicating the creation of a trust from 31 July 2011, and its terms;

(c) A declaration for all trusts subject to the declaration for any change or termination of trusts from 31 July 2011.

In relation to trusts where the Settlor and all beneficiaries are not French tax resident, and the assets are not situated in France under article 750ter CGI or include exclusively financial assets as defined in article 885L CGI, the disclosure obligations would be as follows:

(a) The trustees of trusts where the financial assets were placed in trust on the creation of the trust or when the trust was modified, are subject to the disclosure obligation;

(b) In all other situations, the trustees of trusts are not subject to disclosure obligations, apart from when the settlor or a beneficiary become French resident for tax purposes.

Disclosure Obligations set out in the second paragraph of Article 1649AB CGI

The second paragraph of article 1649 AB CGI deals with the disclosure of the assets of a trust when the trust is subject to the annual declaration.  It confirms that the assets to be disclosed are the same as the assets to be reported for the special levy on trusts under Article 990J of CGI.  

The assets, rights and products to be disclosed are the following:

(a) If the settlor is French resident;

(b) If one of the beneficiaries is French resident; and

c) If one of the assets or rights in trust is situated in France under the provision of Article 750 ter CGI then:

(i) If the settlor and/or at least one of the beneficiaries is French tax resident, all of the assets and rights in the trust wherever situated need to be declared, even if these assets are exempted from wealth tax;

(ii) If the settlor and all of the beneficiaries are not French resident, only the assets or rights situated in France need to be disclosed, even if they are exempted from wealth tax, with the exception of the financial assets as defined in Article 885L CGI.

Under article 885L, the financial assets in France are defined as including any investment realised in France by an individual, the income of which, irrespective of their nature and with the exception of capital gains, is subject to or could be subject to taxation as income from moveable capital.

This includes fixed or term deposits in Euros or other currencies, shareholders’ current accounts in a company or any other legal entity which has its registered office or management centre in France, bonds or similar securities, shares, stocks or any rights issued by a company or legal entity which has its registered office or management centre in France, life insurance or capitalisation policies subscribed by insurance companies in France.

However, the following are not included in the list of financial investments for these purposes:

(a) Shares which give a participation in a company which allows their owner to have a certain influence in the same company (in practice are deemed to have such participation shares representing over 10% of the capital of a company);

(b) Shares or stock owned by non-French tax residents in a French or foreign company or legal entity  with assets constituted mainly of French real estate or real estate rights situated in France, taking into account the value of the same compared to the value of the other assets of the company;

(c) Shares or stock directly or indirectly owned for more than 50% by non-French tax residents in legal entities or structures which own French properties or real estate rights situated in France.

These assets must be disclosed by the trustees, even though the settlor of the trust and all the beneficiaries are non-French tax resident.

For more information, please contact Beatrice Puoti on +44 (0117) 902 2765 or email beatrice.puoti@burges-salmon.com

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