How the French Reporting Requirements and Tax May Affect U.S. Trusts

U.S. beneficiaries of domestic trusts are typically subject to U.S. taxation. If a U.S. trust has a settlor or beneficiary that is domiciliary of France, the settlor and/or beneficiary could be liable for France’s gratuitous transfer tax. France does not have a law that recognizes the establishment of trusts in that country. However, France does recognize international trusts. Since France recognizes international trusts, individuals that are residents of both the United States and France often establish trusts in the United States. This article discusses the potential French tax consequences of establishing a U.S. trust that has beneficiaries residing in France. This article also discusses how the U.S.-France Estate and Gift Tax Treaty can potentially minimize these tax consequences.

Potential French Reporting Requirements of U.S. Trusts

In 2011, France introduced special reporting obligations applicable to non-French trusts. The special reporting obligations are applicable where a trust has a connection with France. This will be the case when the settlor, trustee, or the trust’s beneficiaries are French residents, or when the trust owns French assets. Under French law, an individual is considered to be domiciled or a resident of France if at least one of the four criteria listed below is met.

1. The habitual abode of the person or family is in France.

2. France is the principal place of sojourn (more than 183 days in a calendar year).

3. Professional activities are carried out in France.

or

4. France is the center of economic interests.

If a U.S. trust has any of the following: 1) at least one settlor or beneficiary with a French domiciliary; or 2) holds French assets other than securities listed on a national stock exchange, the U.S. trust may have a reporting requirement with the French tax authorities. The report typically must be filed within one month of the creation, modification, or termination of the trust. The trust must also file a report with the French tax authorities annually. Failure to timely file a report with the French tax authorities will trigger a flat 20,000 Euro penalty.

The French Gratuitous Tax

France has enacted a tax on gratuitous transfers by reason of gift or inheritance. The tax is generally payable by the recipient, who is also responsible for filing a return. Tax rates are based on the type of relationship between the direct descendants, spouses and domestic partners are taxed at lower rates (at graduated rates from 5 percent to 45 percent, depending on the net taxable value) than transfers to brothers and sisters (at 35 percent or 45 percent), to other family members up to the fourth degree of relationship (at 55 percent) and to more remote family members and non-relatives (at 60 percent).

All worldwide assets are generally fully subject to the French gratuitous transfer tax as long as: 1) the worldwide assets are generally fully subject to the French gratuitous transfer tax, or 2) the inheritor, donee or legatee has his fiscal domicile in France and has had his fiscal domicile in France for at least six of the 10 years preceding the year of the transfer.

If a French domiciliary establishes a U.S. trust and the U.S. trust makes a transfer during the settlor’s lifetime, the assets of the trust could be subject to the French gratuitous tax. The French gratuitous tax may potentially be eliminated or mitigated under Article 8 of the U.S.-France Estate and Gift Tax Treaty if the donor, deceased, or settlor is also a resident of the United States.

Conclusion

There are many Americans living in France. If you are an American that is living in France and you set up a U.S. trust for estate planning or other purposes, you should consult with a qualified international tax attorney to determine the trust’s cross-border reporting and tax obligations.

Anthony Diosdi is an international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.

He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.