Trusts in France: is your trust French connected?

Did you know that trusts having a connection with France must file tax returns in France? The purpose of these tax returns is to provide the French tax authorities with some information regarding the trust. If you do not know whether a trust is deemed as having a connection with France and whether tax returns must be filed in France, you should seek advice from your French tax advisor.

When is a trust deemed to be connected with France?

According to article 1649 AB of the French tax code, a trust is deemed to have a connection with France when either:

  1. The settlor of the trust is a tax resident of France
  2. One of the beneficiaries of the trust is a tax resident of France
  3. The trustee is a tax resident of France.
  4. In some cases, when the trust holds assets deemed to be located in France

Since the entry into force in France on February 12, 2020, of the new Decree n°2020-115, a trust can now also be deemed to have a connection with France when the trustee, established or residing outside the European Union, acquires real estate in France or enters into a business relationship in this country.

You should not hesitate to contact your French tax advisor to determine whether or not a trust can be considered as having a connection with France.

What are the tax returns that must be filed in France for trusts having a French connection?

Trustees of trusts having a connection with France are subject to two types of reporting obligations in France. First of all, an annual trust return (form no. 2181-Trust2) has to be filed each year before June 15th (September 30th for 2020).

Secondly, each “modification” of the trust has to be reported to the French tax authorities within 30 days of its occurrence through the filing of an event-based trust return (form no 2181-Trust1).

The term “modification” has to be understood broadly. For example, a change in the beneficiaries of the trust has to be reported. This can also be the case when a distribution is made to a beneficiary of the trust. You can seek help from your French tax advisor to have these returns fulfilled and filed with the French tax authorities.

What information must be reported to the French tax authorities?

For annual trust returns (form no. 2181-Trust2), the French tax authorities request that the following information be reported:

  1. Nature and market value of the assets placed in the trust on January 1st
  2. Information regarding the trust (governing law, duration, revocable or irrevocable, etc.)
  3. Information regarding the settlor(s), the beneficiaries, the trustee(s) and protector(s) of the trust.

If one of the settlors or beneficiaries have their tax residence in France, the worldwide assets have to be reported, regardless of their nature. If, however, none of the settlors or beneficiaries have their tax residence in France, only French assets or assets deemed as such under article 750 ter of the French tax code have to be reported.

For event-based trust returns (form no. 2181-Trust1), the following information must be reported to the French tax authorities:

  1. The nature and date of the “modification” or “event”
  2. Nature and market value of the assets placed in the trust the day the event or modification occurred
  3. Information regarding the trust (governing law, duration, revocable or irrevocable, etc.)
  4. Information regarding the settlor(s), the beneficiaries, the trustee(s) and protector(s) of the trust

What happens if no return is filed?

Failure to file an annual or event-based trust return can trigger the application of a penalty amounting to € 20,000 (per missing return) by the French tax authorities, or an 80% surcharge applying to all French taxes that may be due in respect of the trust assets.

For example, let’s imagine that for 2019, an annual trust return and an event-based trust return should have been filed in respect of a given trust. If these returns were not filed, the French tax authorities could request the payment of penalties for an overall amount of € 40,000.

Is there something else to keep in mind?

The 3% annual tax

Trusts indirectly holding French real estate through an entity may be within the scope of the 3% annual tax assessed on the market value on January 1st of the French real estate properties or rights directly or indirectly held. In such a case, a 3% annual tax return (form no. 2746-SD) has to be filed before May 15th, and the following information have to be provided:

  1. The details regarding the entity holding the French real estate
  2. The market value on January 1st of the French real estate properties or rights

The French wealth tax on real estate held directly or indirectly

Settlors (or beneficiaries deemed settlors under French tax law) who may be subject to the French wealth tax on real estate property or rights in respect of the French real estate properties or rights indirectly held by a trust. If no wealth tax return is filed in France in respect of these assets by the settlor of the trust, a 1.5% specific levy may apply on the market value on January 1st of the French real estate properties or rights indirectly held by the trust.

Do not hesitate to contact our team for any questions you may have in respect of the above. Our team will be pleased to assist you.