France: New Decree Clarifies Trustees Reporting Obligations
On 15 September 2012, a long-awaited decree was published1 that clarifies the obligation placed on trust administrators2 (i.e., trustees) to disclose information on trusts where such trusts have a “French connection.” This is one of the many recent measures designed to reinforce France’s fight against tax evasion and improve the collection of tax information.
The new reporting obligation was introduced by Article 14 of Law No. 2011-900 of 29 July 20113, but the law was silent on how the reporting requirements would need to be met (for details see the following issues of Flash International Executive Alert: 2012-020 (18 January 2012) and 2011-140 (14 September 2011)).
Now that the Decree has clarified some important details, nonresident trustees may be challenged to fulfil, in a short period of time, their compliance obligations.
The Decree specifies how:
• trustees declare the creation, modification, and extinction of trusts;
• to disclose the way they operate, as well as the value of assets held in the trust on January 1 of each year.
The Decree also states how the specific payment on trust assets will be paid, where it is due.
French Connection Trusts
A trust with a French connection is a trust where the settlor, deemed settlor, or any of the beneficiaries are resident for tax purposes in France or if the trust includes an asset or an interest situated in France.
Commentaries and guidance are expected shortly from the French tax administration. Despite the level of detail contained in the Decree, there are still many questions unanswered. For instance, the settlor and deemed settlor are both defined in the legislation, but not the beneficiary (does it include, for instance, non-vested members or any defined class of beneficiaries?).
Reporting Obligations under the New Rules
These new rules involve two separate but related reporting obligations.
Reporting the Creation, Modification, or Termination of Trusts
The first reporting requirement occurs when a trust is created, modified, or terminated. Within a month of such an event, trust administrators (trustees) must provide details of the trust. A modification in a trust is defined as any change in the terms and content of the trust (change in trustee, beneficiaries, etc.).
Trustees will need to state whether trusts are discretionary or not, whether they are revocable or not and how they operate – particularly with regards to the powers that trustees may have to appoint capital or distribute income. In addition, the administrator is required to report the nature of the change (appointment of capital, distribution, and beneficiaries). There is no specific form for the declaration.
With respect to trusts that have been created, modified, or terminated between 31 July 2011 and 15 September 2012, the declaration is due on 31 December 2012.
Reporting the Trust and the Value of the Trusts on 1 January
A separate declaration is required to disclose information which is similar to that required above, but also the assets held in the trust on 1 January and their value where the assets are subject to the specific tax on trust assets. There is no specific form for this declaration either.
According to the law, the reporting obligation applies, irrespective of any wealth tax obligations, where:
• either the settlor or one of the beneficiaries is a French tax resident, or
• when at least one of the assets of the trust is situated in France.
When neither the settlor nor any the beneficiaries is a French tax resident, the reporting obligation applies only to assets situated in France, but not where the French assets are made up exclusively of financial assets (as defined in article 885 L of the French tax code). French financial assets are defined as investments made in France by individuals, the income of which is taxed as passive financial income (for instance, receivables on a French company, shares or bonds issued by a French company).
The declaration is due on 15 June but the deadline for 2012 is pushed back to 30 September 2012.
Payment of the specific 0.5-percent tax on trust assets where the tax is due (i.e., if wealth tax reporting obligations have not been met) is made at the same time. Again, there is no specific form for the declaration.
Although it will be difficult for the French authorities to enforce the legislation against foreign trustees, one should bear in mind that beneficiaries or settlors are jointly liable for the declaration and the payment of the specific tax on trust assets where it is due (i.e., when French wealth tax obligations have not been fulfilled). The penalty for non-declaration is high, with a fine of 5 percent of the whole of the trust assets, with a minimum €10,000, plus, potentially a wealth tax charge of (currently) 0.5 percent of the value of the assets. It is difficult to understand how the French tax authorities can expect compliance with the provisions from nonresident trustees in a period of 10 working days. However, given the magnitude of penalties it is advisable that trustees, settlers, and beneficiaries of trusts with a French connection contact their tax advisers immediately.