New French law on tax relating to property trusts

Investors with financial structures that are related to French property interests are being urged to review their situation after the French government passed a new law on the tax treatment of trusts.

The measures concern settlements which have a French resident settler, at least one French resident beneficiary or hold French real estate.

Under the new law, trustees of such settlements will have a requirement to disclose the creation, changes to or winding up of such trusts, as well as the market value of the trust funds on 01 January every year. These assets may be subject to French wealth tax in the hands of the settler or beneficiary.

Failure to disclose this information will trigger a penalty of €10,000 or 5% of the underlying asset value, whichever is the greater.

‘This law is a first attempt at defining the relationship between the different parties to a trust and the way a trust functions within the French Tax Code. As a result the taxation of trust distributions and annual taxes on trust funds by the French Tax Authorities will now be more clearly defined and regulated,’ said Virginie Deflassieux, associate director of PKF (Guernsey) Ltd’s French Tax Service.

In addition to any penalties an annual charge at a flat rate of 0.5%, may be levied on trust funds unless there is full disclosure and payment of wealth tax where applicable.

Distributions from a settlement to a French taxpayer may in some cases trigger French gifts or inheritance tax at rates that vary depending on the relationship between the settlor and the beneficiaries.

Distributions, which are treated as income, would be subject to French income tax in the same category as investment income. The transfer of assets into trust by a French resident would trigger a penal 60% charge, presumably as a means to restrict their use. This charge is not intended to apply retrospectively except in the case of trusts established in tax havens.