ETUDES FISCALES INTERNATIONALES

Disclosing obligationsof foreign trusts  in France  

French tax authorities have in Décember issued a ruling (rescrit) n° 2011-37 which comments the reporting obligations set forth in Article 1649 AB of the French Tax Code (hereafter “FTC”).

Translation of the French Administration's circular concerning
declaratory obligations for Trusts of 23rd December, 2011

This ruling reduces the scope of the reporting obligations by excluding two categories of trusts.

On the other hand, the tax administration  has adopted an unexpected position by introducing two separate reporting obligations, including one which applies as from July 31st, 2011.

1. Trusts which are not subject to the reporting obligations

The following trusts (if they are established in a jurisdiction which has signed a treaty with France to prevent tax evasion and fraud) are outside of the scope of the reporting obligations set forth in Article 1649 AB of the FTC:

- Trusts established to manage retirement plans set up by a company or a group of companies ; and

- Trusts established by a company or a group of companies for its own account, the settlor of which is not an individual (or an entity contributing in the trust the assets of an individual).

2. Reporting obligation under § 1 of Article 1649 AB of the FTC

The ruling indicates that the trustee will need to report:

- The terms of the trusts in existence on July 31st, 2011 ;

- The formation of a trust after July 31st, 2011 ;

- Any modification or termination of a trust taking place after July 31st, 2011.

As you can see, for this reporting obligation, the reference date is not January 1st 2012 (as expected) but July 31st, 2011, which is the date on which the new French legislation on trusts was adopted.

In accordance with Article 1649 AB of the FTC, these obligations shall apply only if:

- The settlor is a French resident (as defined in Article 4B of the FTC) ;

- At least one of the beneficiaries is a French resident (as defined in Article 4B of the FTC) ; OR

- At least one of the assets placed in the trust is a French asset as defined in Article 750 ter of the FTC (i.e. French real estate properties, shares of French companies, receivables on a French person…).

Exception for trusts, the settlor and beneficiaries of which are not French tax residents, which hold French financial investments:

Trustees are only required to report trusts in which the French financial investments (see definition below) have been placed upon the formation or a modification of the trust. Although the wording of the ruling is not fully clear on this point, this should mean that the trustees which have invested in French financial investments during the life of the trust do not need to report the trust, except if the settlor or one of the beneficiaries relocates to France. The ruling specifies that this exception regarding French financial investments does not apply for French gift and estate tax.

3. Reporting obligation under § 2 of Article 1649 AB of the FTC

The trustee will also be required to file a return on a yearly basis disclosing the value of the assets and rights placed in a trust on January 1st.

This yearly reporting obligation applies when the settlor or one of the beneficiaries is a French tax resident or when at least one of the assets of the trust is situated in France. When nor the settlor neither the beneficiaries are French tax residents, the reporting applies only with respect to the assets situated in France except for French financial investments (as defined in Article 885 L of the FTC).

Are considered French financial investments, the investments in France made by individuals and the proceeds of which are taxed as passive financial income (i.e. dividend and interests). The assets covered by this definition include: receivables on a French 3/3

company, shares issued by a French company, bonds issued by a French legal entity, life insurances policies subscribed with a French insurance company.

Are not considered financial investments:

- Substantial participations (are deemed substantial participations shareholdings representing at least 10% of the rights in a company);

- shares in a company the assets of which consist mainly of French real estate properties; and

- shares in a company owning French immovable properties and the capital of which is held for 50% or more (directly or indirectly) by the non-resident taxpayer.

Therefore, the assets listed above, which are not considered as financial investments, must be reported by the trustee even if the settlor and the beneficiaries are all residing outside of France.