In France, civil law does not recognise trusts, a foreign concept mainly used in Commonwealth countries. The French tax authorities have always been suspicious of trusts because of the significant differences between the rules applicable to Anglo-Saxon trusts and those created under French civil law, but also because of the image of trusts as vehicles for fraud and international tax evasion involving large assets.
This may be why, on 11 October 2024, the Paris Administrative Court of Appeal handed down a particularly firm ruling on the value of the evidence used to determine the tax treatment of sums received from a foreign trust.
When the beneficiary of a trust is a French tax resident who receives payments from the trustee, the tax treatment in France of these sums depends in principle on their origin:
In this case, a French tax resident who was the beneficiary of a trust did not initially declare as income the amounts received from the trust, taking the view that they were “capital distributions” as mentioned on the bank documents and not distributions of income, and that the trust's loss-making situation made these sums non-taxable (not denied by the Canadian tax administration within the framework of international administrative assistance).
The French court dismissed these arguments, pointing out that the Canadian authorities had not carried out any audit of the trust's accounts during the years in question and that consequently, the production of the trust's accounts was not sufficient to prove that the amounts paid were not taxable.
This case should draw the attention of French tax residents who are beneficiaries of foreign trusts to the importance of compiling proof of the origin of any sums distributed by the trust.
It is also important to note that in France, one of the main concerns related to trusts is the trustee’s compliance obligations.
Indeed, the trustee of a trust of which the settlor or at least one of the beneficiaries is resident for tax purposes in France (as of January 1) or that includes an asset or right located in France, or if the trustee is resident for tax purposes in France, as well as the trustee who is established or resident outside the European Union when acquiring real estate or entering into a business relationship in France, is bound by a number of reporting obligations:
A surcharge of 80% applies to all tax reminders resulting from the failure to declare assets placed in undeclared trusts, to the exclusion of any other surcharge or fixed fine. The settlor and the beneficiaries subject to the levy are jointly and severally liable with the trustee for payment of this fine.
A special recovery period of up to 10 years back applies to requirements linked to trusts.
For more information on this topic, please consult your regular BDO contact or the author of this article.
Cyril Klajer
BDO in France
This may be why, on 11 October 2024, the Paris Administrative Court of Appeal handed down a particularly firm ruling on the value of the evidence used to determine the tax treatment of sums received from a foreign trust.
French Tax Rules on Trusts
When the beneficiary of a trust is a French tax resident who receives payments from the trustee, the tax treatment in France of these sums depends in principle on their origin:
- If the beneficiary recovers funds placed in trust by themselves in their capacity as settlor, the latter are not taxable, unless the trustee has deducted them from the trust's capitalised income.
- If the beneficiary is not the settlor, these principles should be combined with the rules on gift tax, so that only the fraction of the amounts received that exceeds those in respect of which they have already been subject to the gift tax will be taxable as distributed income.
Facts of the Case
In this case, a French tax resident who was the beneficiary of a trust did not initially declare as income the amounts received from the trust, taking the view that they were “capital distributions” as mentioned on the bank documents and not distributions of income, and that the trust's loss-making situation made these sums non-taxable (not denied by the Canadian tax administration within the framework of international administrative assistance).The French court dismissed these arguments, pointing out that the Canadian authorities had not carried out any audit of the trust's accounts during the years in question and that consequently, the production of the trust's accounts was not sufficient to prove that the amounts paid were not taxable.
BDO Insights
This case should draw the attention of French tax residents who are beneficiaries of foreign trusts to the importance of compiling proof of the origin of any sums distributed by the trust.It is also important to note that in France, one of the main concerns related to trusts is the trustee’s compliance obligations.
Indeed, the trustee of a trust of which the settlor or at least one of the beneficiaries is resident for tax purposes in France (as of January 1) or that includes an asset or right located in France, or if the trustee is resident for tax purposes in France, as well as the trustee who is established or resident outside the European Union when acquiring real estate or entering into a business relationship in France, is bound by a number of reporting obligations:
- An "event-based" declaration relating to the creation, modification, or termination of the trust or its terms. This declaration must be submitted within one month of the event. The modification of the trust means any change in its terms, mode of operation, settlor, deemed settlor, beneficiary, administrator, any death of one of them, any new entry into the trust or any exit from the trust of property or rights, any transmission or allocation of property, rights, or proceeds of the trust and, more generally, any change in law or in fact likely to affect the economy or the operation of the trust concerned; and
- An annual declaration of the market value, as of January 1, of the assets and rights placed in the trust and their capitalised income. The annual return must be filed by the trustee no later than 15 June each year with the Non-Residents Tax center.
A surcharge of 80% applies to all tax reminders resulting from the failure to declare assets placed in undeclared trusts, to the exclusion of any other surcharge or fixed fine. The settlor and the beneficiaries subject to the levy are jointly and severally liable with the trustee for payment of this fine.
A special recovery period of up to 10 years back applies to requirements linked to trusts.
For more information on this topic, please consult your regular BDO contact or the author of this article.
Cyril Klajer
BDO in France