Foreign trusts and French inheritance tax

Why the Tax You Already Paid Won't Reduce Your Bill

When an American family inherits assets held in a foreign trust and later becomes resident in France, a natural assumption takes hold: the inheritance tax already paid must count for something when the trust is wound up. A ruling of the Versailles Administrative Court of Appeal, dated 26 March 2026, confirms that it does not. The inheritance tax you paid cannot be used to reduce the income tax due on the trust's liquidation surplus.

The decision is narrow on its facts but clear in its principle, and it matters for any family holding a trust on either side of a move to France.

What happened

A French resident inherited, on her father's death, a share of assets held in a trust based in Bermuda. The family filed an amended estate tax return in 2014. After a desk audit, the French tax authority issued additional income tax and social levy assessments for that year.

The dispute centred on a single calculation. The taxpayers argued that the inheritance tax they had paid should be added to the acquisition value of the trust assets, which would have lowered the taxable liquidation surplus, and therefore the tax due. The first-instance tribunal rejected that argument in 2023. The Court of Appeal upheld the rejection on 26 March 2026.

Why the inheritance tax is not deductible

French law allows a deduction only for expenses incurred to acquire or preserve income. That is the rule in Article 13 of the French tax code, and it is the hinge of the whole decision.

Inheritance tax does not meet that test. When an heir pays it, she is not spending money to produce income. She is taking possession of capital that enters her private estate. The expenditure attaches to the capital, not to any income stream, so it falls outside what the law permits to be deducted.

The taxpayers raised a second argument: that published administrative guidance allowed inheritance tax to be added to the acquisition price. The Court disagreed, holding that the guidance offered no reading of the law different from the one it had just applied.

What this means for your family

Two practical lessons follow, and both are worth acting on before a problem arises rather than after.

Do not treat inheritance tax as a deductible charge when computing a foreign trust's liquidation surplus on a French return. It is not one. Including it exposes the family to reassessment, with penalties and interest on top.

Consider the timing of the liquidation itself. Where a trust is likely to be dissolved in the foreseeable future, winding it up before French tax residence is established can keep the entire surplus outside the reach of French income tax. Once residence is in place, that surplus becomes taxable in France in full, and the option to plan around it is gone.

A word on planning

Trust liquidations that straddle a move to France are among the situations where the order of events decides the tax outcome. The same trust, wound up six months earlier or six months later, can produce very different results. The decision of 26 March 2026 is a reminder that the French authorities read the rules strictly, and that assumptions carried over from a U.S. context do not always survive the move.

If your family holds a trust and France is on the horizon, this is a question to settle before the move. We advise American families on exactly these questions.