French tax treatment of foreign trusts: Council of State affirms fiscal opacity

Recent developments in French case law have reaffirmed the opacity with which foreign trusts are treated under French tax legislation. An April 2023 opinion from the Council of State (no. 406825) concerning a U.S. trust, and a May 2022 ruling by the Toulouse Court of Appeal (no. 21TL00893) involving an Australian trust, both illustrate the French authorities' firm stance on the taxation of trust income received by residents of France.

Fiscal Opacity as a Legal Principle

Although the concept of a trust encompasses a wide range of legal realities internationally, French tax law has adopted a unified definition and treatment. Since the 2011 amendment to the French Tax Code, Article 792-0 bis defines a trust for all tax purposes as a legal arrangement established under foreign law for the benefit of one or more beneficiaries, managed by a trustee.

Crucially, Article 120, 9° of the Code treats all income distributed by a trust as investment income (revenus de capitaux mobiliers), regardless of the nature of the underlying assets. Accordingly, such income is taxed in the hands of the French resident beneficiary as income distributed by a foreign entity, and not based on its original nature (e.g. dividends, interest, or capital gains) or its source jurisdiction.

The Council of State: Domestic Law Prevails

In its April 2023 opinion, the Council of State was asked whether the France–U.S. tax treaty prevents France from taxing income flowing through a revocable U.S. trust, especially in cases where, under U.S. tax law, the settlor-beneficiary is treated as directly receiving the income.

The Council ruled that the treaty does not override the application of French domestic tax rules, reaffirming the principle of subsidiarity: unless expressly stated otherwise, tax treaties allocate taxing rights between countries but do not alter the domestic classification of income. Thus, under French law, a U.S. trust is treated as fiscally opaque, and income distributed to a French resident is taxable in France as investment income, irrespective of its treatment under U.S. law.

The Toulouse Court: A Cautious Application of the Treaty

In a separate case, the Toulouse Court of Appeal addressed whether a French resident beneficiary of an Australian trust could claim a foreign tax credit for tax paid in Australia on dividends received through the trust.

The court upheld the French taxation of the income under Article 120, 9° CGI but denied the credit. Interestingly, the decision applied Article 10 of the France–Australia treaty (on dividends), suggesting that the court either considered the income to have retained its dividend character or implicitly acknowledged the possibility of transparency. However, the judgment carefully avoided ruling on the trust’s classification and ultimately denied the credit on technical grounds, focusing on who actually bore the tax in Australia.

Implications for International Clients

For clients with foreign trusts, especially those resident in France, these rulings have significant implications:

• French tax law imposes a blanket opacity on foreign trusts, taxing distributions as if made by a separate legal entity.

• Income loses its original nature and source unless otherwise protected by a specific treaty provision.

• Tax treaties may offer limited relief, depending on whether they address the treatment of trusts or allocate taxing rights based on the residence of the trust or the beneficiary.

• Double taxation remains a real risk, particularly where the trust is transparent abroad but opaque in France.

At Bespoke – Tailored Tax Solutions, Thomas Dubanchet advises clients on the French tax implications of foreign trusts, with a focus on U.S., UK, and common law jurisdictions. Whether you are a settlor, trustee, or beneficiary, we help you assess your exposure, align your reporting obligations, and structure your arrangements to reduce friction and uncertainty across borders.

If you are considering relocating to France or holding international assets through a trust, contact us to ensure your structure is compliant, efficient, and well understood by the French tax authorities.