French tax legislation applicable to trusts came into force on 31 July 2011. A decree regarding trustees’ filing requirements was issued on 14 September 2012 and, on 16 October 2012, the French tax authorities issued their tax guidelines. Despite this guidance, there are still many uncertainties and unanswered questions around the application of this law in practice. The legislation imposes strict reporting obligations directly on the trustees. Under article 1649 AB al 1 of the French Tax Code (FTC), trustees have to comply with the disclosure obligations if, on 1 January of the relevant tax year, they administer a trust that has any of the following French connections:
- the settlor and/or at least one of the beneficiaries of the trust is French tax-resident; or
- an asset held in the trust is a French sited asset, even if the settlor and/or the beneficiaries are not French tax-resident; or
- the trust is administered by a French tax-resident administrator or trustee (although this should be rare in practice).
The trustees of a trust with French connections must comply with two different and separate filing obligations: a declaration of the existence of and any modifications to a trust; and an annual declaration of the assets held in trust. The responsibility for complying with these two obligations lies with the trustees. Trustees who fail to comply with these filing requirements may be subject to significant penalties, as set out below.
DECLARATION OF EXISTENCE AND MODIFICATIONS OF A TRUST
The purpose of this declaration is to make the French tax authorities aware of the existence of the trust and any modifications made to it.
The obligation to make the declaration arises if a trust has a French connection on 1 January of the relevant tax year.
For 2011, the first year the law applied, the relevant date was 31 July 2011. Disclosure of trusts in existence on 31 July 2011 (i.e. with French connections on that date) was due by 31 December 2012.
Once the declaration of existence has been filed, there is no need to make another declaration for subsequent years unless a modification is made to the disclosed trust. In such a case, the declaration must be made within 30 days following the modification. The term ‘modifications of the trust’ is drafted widely enough to include any modifications or changes affecting the terms of the trust, the settlor or deemed settlor, the beneficiaries or trustees, or the trust assets.
When a trust becomes French connected for the first time during the course of a tax year (e.g. when a beneficiary
becomes French tax-resident or the trustees acquire a French-sited asset), the law is currently unclear as to the date by which the trustees must file the first declaration of existence of the trust.
On the one hand, the legislation provides that the disclosure must be made within 30 days following the event. On the other, the obligation to make a declaration arises if a trust has a French connection on 1 January of the relevant tax year. We have had verbal confirmation from the French tax authorities that, in such circumstances, the trustees should wait until the following January to ascertain whether the trust is still French-connected on that date. If so, the declaration must be made within 30 days after 1 January (i.e. by 31 January).
Trustees of a trust that has no French connections apart from French financial assets (e.g. French securities) do not have to disclose the existence of the trust unless the French financial assets were transferred to the trust on its constitution or on a subsequent modification of the trust.
FRENCH TAX LEGISLATION
INFORMATION TO BE DISCLOSED
The declaration must be made in French using a specific form (Form 2181 TRUST 1). The trustees must provide detailed information in relation to the trust – in particular, full details of the settlor or deemed settlor and all the beneficiaries (whether or not they are French tax-resident). They must also disclose the terms of the trust, defined by the terms of the trust deed and any supplementary documents governing its administration, including whether it is revocable or irrevocable, discretionary or non-discretionary, and the rules governing the rights to the trust property and its income.
The forms provided by the French tax authorities are somewhat unsatisfactory, as they do not allow specific disclosure
to be made depending on the particular circumstances of the trust. Ideally, it should be possible to amend the forms when the situation requires. For example, the French tax legislation should make a distinction between principal and potential beneficiaries. The forms and the law do not distinguish between the various interests that beneficiaries might have in a trust. However, this is an important distinction due to the potential tax consequences for beneficiaries if they are regarded as deemed settlors after the death of the settlor. We take the view that only beneficiaries who benefit or are likely to benefit from the trust in the future should be regarded as deemed settlors and thus be disclosed as such to the French tax authorities.
THE DECLARATION OF ASSETS HELD IN TRUST
A declaration of assets held in trust must be filed by the trustees if a trust has French connections (as defined above) on 1 January of the relevant tax year. Filing this declaration will also avoid the application of the 1.5 per cent flat rate that might be due from the trustees for non-compliance by the settlor or the deemed settlor with the wealth tax filing requirements and liabilities.
The filing deadline is 15 June of the tax year in respect of trusts with French tax-resident settlors or deemed settlors, and 31 August otherwise. In respect of 2012, which was the year when the first declaration of assets held in trust had to be filed, the deadline was 30 September 2012. The place of residence of the settlor or deemed settlor must be determined on 1 January of the tax year.
INFORMATION TO BE DISCLOSED
The declaration must be made in French using a specific form (Form 2181 TRUST 2).
The trustees must disclose a detailed inventory of the following trust assets and capitalised income:
- all the trust assets, both French and foreign, and their market value as at 1 January, if at least one of the settlors or deemed settlors and/or at least one of the beneficiaries of the trust is French tax-resident; or
- French-sited assets only and their market value as at 1 January if none of the settlors or deemed settlors and the beneficiaries are French tax-resident.
FAILURE TO DISCLOSE
Article 1736 IV bis of the FTC imposes a very high penalty for trustees who fail to comply with both fi ling requirements (a fine of either EUR20,000 or 12.5 per cent of the total value of the assets held in trust, whichever is higher).
These fines apply in respect of declarations that should have been lodged as of 8 December 2013 or later. For declarations due before this date, the fine is 5 per cent of the total value of the assets.
This penalty applies on the total assets held in trust and each time a failure occurs. The French tax authorities can levy a penalty for non-disclosure up to 31 December of the fourth year following the tax year during which the declaration was due to be lodged.
As is often the case in respect of tax penalties, French tax legislation generally provides varying levels of penalty depending on the behaviour of the taxpayers. In this case, however, the law makes no such distinction. Arguably, it should, for instance, distinguish between penalties applicable for complete non-disclosure and penalties applicable for late or incorrect disclosure.
It is up to the French tax authorities to decide whether or not to apply a penalty. Indeed, depending on the circumstances, the French tax authorities can waive a penalty. In my view, they should adopt this approach when applying this legislation, and certainly in cases of voluntary disclosure. This is particularly relevant for trusts that have never been disclosed and now face substantial penalties.
The question of penalties will almost certainly trigger a number of issues. We should expect future case law on the question of whether any penalty applied is proportionate to the failure of the trustee who has not filed, or incorrectly filed, a trust declaration.