French Connected Trusts Reporting: The Importance of Keeping one Step Ahead of the Taxman

With the 2021 changes to the anti-tax avoidance Article 123 bis and, for most French connected trusts, the French tax risks when a trust party passes away, it is important to carry out regular French tax reviews. A pro-active approach in monitoring a Trust’s exposure to the French tax system allows trustees to keep up to date with the latest changes and identify any new areas of risk or opportunity for future planning.

The 2024 French tax reporting season will soon be upon us, and this extends to Trusts with French connecting factors. Given trustees’ ever-expanding reporting obligations, sometimes in multiple jurisdictions, we look at the triggers which bring trusts within scope of the French tax and reporting regime.

Currently, French tax reporting affects trusts with:

at least one French resident party, including protectors, or
those that hold at least one French asset. Both direct and indirect holding of French real estate triggers the reporting. However, French financial assets held through a non-French underlying entity or collective investment scheme is not in scope; however, if the underlying entity holds these assets as a nominee, i.e., on behalf of the trust or where it predominantly holds French financial assets, then the situation may not be so clear-cut, and reporting may still be necessary. A trust which holds a French situs asset is reportable even if all its parties are non-French residents.
Non-EU-trusts must report within one month of acquiring an interest in French real estate or commencing a commercial relationship with a French resident individual or entity.

Trusts and/or companies which hold French real estate (whether directly or indirectly) must also report by 16 May each year to claim an exemption or face a 3% annual charge calculated on the property’s market value.
The annual trust reporting is also necessary to claim exemption from the 1.5% sui generis charge, which is levied on the value of the trust’s real estate assets and is designed to penalise the non-disclosure of these assets for wealth tax purposes. In the absence of annual reports, the French tax administration may apply the sui generis charge, even if the relevant trust party’s wealth, including any trust asset, falls below the €1.3m taxable threshold.

The penalty for omission or incomplete trust reports, in respect of which all trust parties are jointly and severally liable, currently stands at €20,000 with a four-year statutory limitation. Nevertheless, the limitation is ten years when it comes to any tax liabilities pertaining to a trust asset or distribution. It is therefore essential to carry out regular health checks to identify any areas of risk and any planning opportunities to remove the trust from the French tax system or mitigate exposure to French taxes.
Health checks should include:

The review of past reports to ensure these are complete and accurate and that, where information is not available to the trustee, this has been properly explained.
Identify any missing reports to mitigate the penalty risk.
Estimate any outstanding tax liabilities which may be triggered on the trust’s assets or distributions so as to remediate spontaneously thus increasing the chances of mitigating penalties.
Review cases which remain exposed to the French tax reporting system and obtain updated advice on any French tax trigger events.
Consider the impact of anti-tax avoidance article 123 bis on French tax resident parties, especially since the 2021 amendments (see our November 2021 French tax bulletin) which have broadened its scope.
Consider the French tax implications which may be triggered by the death of a trust party, distributions etc, and identify any positive reporting obligations ahead of any such events.
A confirmation of all the parties’ tax residence status (even contingent) to identify any changes and those who may have taken up French residence.
Review the trust’s CRS reporting and how this affects the trust’s parties.
Identify situations where the reporting is no longer due to avoid any unnecessary filing.
Ensuring that the income or capital nature of any distribution can be properly evidenced.
Where possible, check how French tax resident parties report their interest in the trust to their local French tax office to pre-empt any tax audit which may arise upon any French authorities’ cross-referencing reviews.

This list is of course not exhaustive but reflects the importance of being proactive rather than reactive in an ever-evolving taxation environment.

This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. It cannot be relied upon to cover specific situations without obtaining professional advice.

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