The trust is a singular institution, which could be defined as a set of legal relationships, based on trust (Trust in English meaning confidence).
This institution has caused some difficulties for French law, indeed there is no similar institution under French law, as it is a purely Anglo-Saxon creation. Although we often equate Trust with “fiducie” under French law, it would seem that the term “legal entity” is more correct, since the principles laid down by law on the “fiducie” cannot be applicable to the Trust (e.g. absence of dismemberment of ownership).
Obviously for a particular institution, a particular regime was necessary, but before explaining some singularities related to the taxation of Trusts, it is necessary to understand how it works.
A trust is an incredible tool to optimise your wealth management (for example, a father puts a portfolio of securities in a trust he has created, he names his children as beneficiaries, but since they are young, he does not want them to have direct access to this portfolio or its income, and charges administrators to manage the trust for him in order to make distributions at key moments). A trust is obviously not just used to ensure your good patrimonial management, but it can also be used to plan your succession, establish security, etc.
The mechanism of a Trust is the following: we have a Settlor (constituent) who by a deed will entrust a property (movable or immovable, tangible or intangible) to a third party named the Trustee (administrator) so that it deals with the management of said property(ies). The Trustee therefore has an essential role as it must ensure the conservation of these assets. This Trust must safeguard these assets until they are handed over to the beneficiary(ies).
There are different types of beneficiaries:
- Those who receive income from the Trustee, obviously this is conditioned by the deed constituting the Trust (all depends on the will of the Settlor).
- Those who will get the property(ies) placed in the Trust at the end of it.
Since the Trustees have a vital role and may not act in the interests of the beneficiaries or fail to respect the wishes of the settlor, it is possible to appoint one or more Protector(s), third party(ies) to oversee the management carried out by the Trustees.
There are a multitude of Trusts: Discretionary, revocable, irrevocable, etc. If you would like additional information on these, we recommend you to ask the members of the firm ATTORNEY-COUNSEL.
We remind you that a Trust must comply with certain declaratory obligations with respect to declarations of existence, modification, termination or the annual declaration concerning the Trust. We therefore refer you to the article concerning declarations 2181. If French real estate is placed in a Trust, it will be subject to declaration No. 2746 on the value of real estate; this tax is annual and is equal to 3% of the market value of the buildings held, or real rights to these properties, and there are many possibilities for exoneration from this tax.
Property held through a Trust may also be the subject of a property wealth tax (impôt sur la fortune immobilière – IFI) declaration. With regard to the persons who must make this declaration and the property to be declared in the IFI declaration, we refer you to our article concerning said property wealth tax.
Regarding the tax regime of Trusts in France, when a property is placed in a Trust, it should be known that France may be interested in three different cases (subject to tax treaties in force):
- The settlor is a French tax resident regardless of the location of the property;
- The beneficiary is a French tax resident regardless of the location of the property (provided that he/she has been for at least six of the ten years preceding the one in which he/she receives the property);
- Property placed in a Trust which is located in France.
It is important to note that when a property is placed in a Trust and a French tax resident within the meaning of Article 4 B of the General Tax Code (CGI) receives income from this Trust, he/she will be taxed on this in the “RCM” category (revenue from movable capital) based on the sums received, regardless of the origin of said revenue, these being taxed in France as provided for in paragraph 9 of Article 120 of the CGI. Note: Depending on the location of the Trust, there may be cases of double taxation, and once again it will be necessary to refer to the tax convention applicable, where appropriate.
In the event that a Trust is dissolved, or if the Trust terminates (termination of the Trust by the death of the settlor, or by a specified term), taxation specific to such an event will be applicable.
As a reminder: when a property is put into a Trust free of charge, jurisprudence assimilates this to a donation (this statement should be qualified according to the type of Trust set up) thus, at the time of the contribution of the property to the Trust we will have a “DMTG” situation (“droits de mutation à titre gratuit” – free of transfer duties), said duties not being payable directly, but will then be due following an event (e.g. death of the settlor, or termination of the trust).
As a result, all gratuitous transfers made through a trust (from/through the trust, and not when contributing the property to the trust) will be subject to the DMTG situation (free of transfer duties), whether or not these be qualified as a gift or inheritance under common law tax rules. The general rules of territoriality and presumption of ownership applicable to free transfer duties (DMGT) will be adjusted accordingly, as recalled in the administrative tax doctrine.
The assets transferred, including the capitalised income of the assets placed in the trust, will be taxed at their net market value on the date of the transfer. (BOI-ENR-DMTG-30-20121016 § 20).
Logically, since it is normally common law that should apply subject to certain developments, we must refer to Article 750 b of the CGI.
Of course the free transfer tax applies subject to international tax treaties, it will be necessary to study the tax convention applicable to the case studied.
Regarding the tax rule, several possible schemes are applicable, depending on the type of transfer made (donation, transfer by death, etc.) but also the status of the beneficiary of this transfer. This part being complex and specific to each case, the firm ATTORNEY-COUNSEL proposes that we study for you the methods of transferring property to a Trust that are best suited to your personal situation.