France and Reporting Obligations for Trustees
The French tax authorities released on 28 December 2011, a ruling (dated 23 December 2011)1 clarifying some of the details of the reporting obligations for trustees introduced by article 14 of Amended Finance Law for 2011 of 31 July 2011 (Loi de finances rectificative pour 2011). For details of the wider impact on wealth tax, donations, and inheritance taxes, and the new tax of 0.5 percent on trust assets, see Flash International Executive Alert 2011-140, 14 September 2011.
Article 1649AB of the French General Tax Code (“CGI”) introduced an obligation for trustees to report to the French tax administration and disclose information relating to the creation, existence, modification, or termination of trusts in France, as well as the market value of trust assets where they fall within the scope of the 0.5-percent specific tax on trust assets. The rules apply if:
• the settlor is a French resident (as defined in article 4B of the CGI); or
• at least one of the beneficiaries is a French resident (as defined in article 4B of the CGI);or
• at least one of the assets placed in the trust is a French asset as defined in article 750 ter of the CGI.
The ruling reduces slightly the scope of the reporting obligations by excluding certain types of trusts from the reporting obligations. On the other hand, the authorities have adopted an unexpected position by extending the reporting obligations to trusts that existed on 31 July 2011, i.e., when the new French legislation on trusts came into force.
Trusts Excluded from Reporting Obligations
The following trusts, if established in a jurisdiction which has signed a treaty with France to prevent tax evasion and fraud, are outside the scope of the reporting obligations:
• Trusts established to manage pension rights acquired by beneficiaries in respect of professional activities within the context of retirement pension plans created by a company or a group of companies. This means that occupational pension plans set up in the form of a trust are outside the scope of the reporting obligations.
• Trusts established by a company or a group of companies for its own account, the settlor of which is not an individual (or an entity transferring in the trust the assets of an individual). This could mean that the law excludes Employee Benefit Trusts (“EBT”) from the scope of the reporting obligations. However, it will be necessary to analyze the specific arrangements. For instance, if employees contribute to the EBT, they could be considered as “settlors.”
Reporting Obligation for Trusts Existing on 31 July 2011 and Not Only on 1 January 2012
The ruling indicates that the trustee will need to report trusts in existence, created, amended, or terminated after 31 July 2011, and not just based on situations as at 1 January 2012 (the taxable event being 1 January of each year).
If trusts have been terminated prior to 1 January 2012, trustees should consider this requirement carefully as they no longer have the capacity of trustees. They should also consider their obligations in respect of beneficiaries and settlors and also any legislation applicable in their respective countries.
Reporting Value of Trust Assets under Second Paragraph of Article 1649 AB of CGI
The second paragraph of article 1649 AB CGI deals with the disclosure of the market value of assets of a trust when the trust is subject to the annual reporting obligations. The assets to be disclosed are the same as the assets to be reported for the special tax on trusts under article 990J of the CGI.
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.
The ruling confirms that 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 CGI).
French financial assets are defined as investments made in France by individuals, the income of/for which is taxed as passive financial income. The assets covered by this definition include: receivables on a French company, shares issued by a French company, bonds issued by a French legal entity, and life insurance policies taken out with a French insurance company.
However, the ruling specifies that if the French financial assets were contributed on creation of the trust or when the trust was modified, then the reporting obligation would apply. Although the wording is not entirely clear, this could mean that where trustees have invested in French financial investments during the life of the trust, they will not need to report the trust, except if the settlor or one of the beneficiaries becomes a French tax resident.
The following are not included in the list of financial assets for these purposes and will have to be disclosed by the trustees even though the settlor of the trust and all the beneficiaries are non-French tax resident:
(a) Substantial participations in a company representing over 10 percent of the share capital.
(b) Shares in a French or foreign company or legal entity with assets constituted mainly of French real estate or real estate rights situated in France.
(c) Shares held directly or indirectly for 50 percent or more by non-French tax residents in legal entities or structures which own French properties or real estate rights situated in France.
There are still many unanswered questions following the publication of the ruling and despite some welcome exclusions, the reporting obligations remain quite onerous and daunting. It will be necessary for trustees, settlors, and beneficiaries to review their respective positions. If the reporting obligations are not met, the penalty could be up to EUR 10,000 or 5 percent of the value of the assets in the trust, whichever is the higher.
However, implementing legislation is still required in the form of a decree, which has not yet been issued. This will provide details of how and when the return should be filed.