French Reporting Obligations of Trustees
The end of the exemption for trusts which sole French nexus is French financial assets
Since 2011 trustees of trusts having a connection with France are subject to reporting obligations in France.
Such reporting obligations are designed to address the avoidance of French taxes deriving from trusts such as the Wealth Tax and the Gift/Inheritance Taxes (Gratuitous Transfer Taxes).
Originally the text of law was very broad and targeted any trusts (or similar entities like private foundations or even nominee relationships) having a French tax resident settlor or beneficiary or holding French located assets, irrespective of the features of the trust (i.e., even irrevocable or discretionary trusts, or those with French tax resident beneficiaries being only second rank or potential beneficiaries within a broad class of beneficiaries). The penalties for failure to meet the French reporting obligations were and are still very severe on trustees and apply outside of the French borders. The joint liability of the French tax residents involved might be at stake.
Based on the text of law any trusts which sole nexus with France was the holding of a portfolio containing French financial assets were caught within the scope of the French reporting obligations. However, quickly at the end of 2011 the French tax authorities issued a ruling granting an exemption for such cases under specific circumstances.
In December 2017, the Finances Law for 2018 repealed the former French Wealth Tax (ISF) and replaced it by a new annual tax called IFI which solely targets Real Estate Assets. The reporting obligations of trustees were indirectly impacted by such reform because the texts of law made a reference to those applicable to the new IFI. By decree, the section of the French Tax Code detailing the content of the trustees’ annual return was modified so that only French real estate assets should be reported when the trust did not involve any French tax residents. The French guidelines commenting the reporting obligations of trustees were not updated accordingly. It created uncertainties.
The Finances Law for 2019 ”repaired” the text of law governing the reporting obligations of trustees by making it clear that the reporting obligations of trustees are due as soon as:
- There are French tax residents involved (either settlors, beneficiaries or trustees) or
- The trust holds French assets (not only French real estate assets). All the French assets have to be reported.
The guidelines commenting the reporting obligations of trustees needed to be updated. On 2 May 2019, they were purely suppressed. As a consequence, as of today there is no longer any exemption available of reporting obligations for trusts which sole French nexus is the holding of French financial investments.
At this stage, it is unclear whether this is intentional or whether further guidance or a new ruling could reinstate the exemption of reporting obligations for trusts which sole French nexus is the holding of French financial investments.
Practical consequences for trustees
Trustees should list all their trusts directly holding portfolios (not through the interposition of a foreign company) and review whether such portfolios contained French financial securities as at January 1st, 2019 or contain such securities today.
Technically such trusts now fall within the scope of the reporting obligations in France which means that:
- By June 15, trustees should file an annual return reporting the situation of such trusts as at January 1st, 2019 and
- Any event impacting such trusts should be reported within 1 month to the French tax authorities, it being reminded that in the event where the settlor would pass away or the French securities would be distributed to a beneficiary, French Gratuitous Transfer Taxes might be at stake.
Today, failure to meet the French reporting obligation can trigger a penalty of EUR 20,000 per return or, if higher, 80% of the French taxes of the French tax deriving from the trust’s assets when the failure to meet the reporting obligations helped hiding a taxable event. In that last case, criminal charges could even be at stake.