How France Taxes Trusts – A Guide for US & UK Expatriates
This comprehensive guide provides an in-depth look into the taxation of trusts in France, with a specific focus on how it applies to US and UK expatriates. It covers key concepts, obligations, tax implications, and practical tips to navigate the French tax system effectively.
1. Introduction: Understanding Trusts in the French Legal System
In the French legal context, a trust is not a native legal concept but is recognized and regulated under international agreements and French tax law. The French authorities view trusts primarily in terms of their fiscal implications, focusing on their potential for tax evasion and wealth management.
Trusts are defined broadly under Article 792-0 bis of the French General Tax Code (CGI) as “the set of legal relationships created under the law of a State other than France by a person (the settlor) to place assets or rights under the control of an administrator in the interest of one or more beneficiaries or for a specific objective”.
2. Key Tax Obligations for Trusts in France
2.1 Declarative Obligations
Event-Driven Reporting:
- Triggered by creation, modification, or termination of the trust.
- Applies if the settlor or a beneficiary is fiscally domiciled in France, the trust has French assets, or the trustee is French or conducting business in France.
- Declaration must be made using Form No. 2181 TRUST 1 within one month.
Annual Reporting:
- Trustees must report the value of trust assets as of January 1st each year.
- Includes French assets regardless of settlor/beneficiary residence, and global assets if any party is tax resident in France.
- Declaration made via Form No. 2181 TRUST 2 by June 15 each year.
3. Taxation of Trust Assets in France
3.1 Wealth Tax (IFI):
- Applies to real estate held directly or indirectly through trusts.
- Declared by trustees and attributed to the settlor for tax purposes.
3.2 Inheritance and Gift Tax (DMTG):
- Trust-based asset transfers are taxed similarly to gifts or inheritance.
- Based on fair market value and relationship between settlor and beneficiary.
- Irrevocable trusts are taxed upon settlor’s death.
- Flat 60% tax rate applies for trusts in non-cooperative jurisdictions.
4. Income Taxation of Trust Distributions
4.1 General Income Tax Rules:
- Distributions to French residents are taxed as financial income.
- Subject to the 30% flat tax (PFU).
- The source of income is irrelevant; all trust distributions are treated uniformly.
5. Specific Rules for US & UK Expatriates
5.1 US-French Taxation:
- US-France Treaty generally allows France to tax trust income received by French residents.
- Certain trusts (e.g., retirement or non-profit) may benefit from reduced US withholding rates.
5.2 UK-French Taxation:
- Anti-abuse provisions allow France to tax gains from French assets via trusts within 6 years after emigration.
- Income routed through opaque structures may be taxed in France depending on transparency.
6. Penalties for Non-Compliance
- €20,000 fine per undeclared trust or omission.
- 80% penalty on tax due for abusive use of trusts.
7. Practical Tips for US & UK Expatriates
- Engage a Tax Advisor: Essential for navigating complex rules.
- Stay Updated: Laws evolve; stay compliant.
- Maintain Accurate Records: Support declarations and avoid fines.
- Leverage Tax Treaties: Optimize outcomes under applicable treaties.
8. Conclusion
France's taxation of trusts is complex but manageable with proper planning and compliance. US and UK expatriates should familiarize themselves with both declarative and tax obligations to optimize their tax position while avoiding penalties.
For further assistance, consult a qualified tax advisor or legal expert specializing in French international tax law.