Trusts and France: the reporting obligations British expatriates need to understand

Many British nationals planning to move to France primarily focus on structuring their property purchase to be both legal and tax-efficient. However, one key aspect often gets overlooked: how existing trust arrangements interact with French tax law. Missing this can prove costly.

Since 29 July 2011, French tax law has required trustees of trusts with a connection to France to meet specific reporting obligations. The rules apply regardless of where the trust was established, and failure to comply can lead to substantial penalties.

The trust can be a cornerstone of estate and tax planning in common-law jurisdictions, but the concept has no equivalent in French civil law. Trusts are widely used in the UK for various purposes, from protecting family wealth across generations to safeguarding assets for vulnerable relatives. France has nonetheless developed a legislative framework to apprehend foreign trusts under French tax law. For British expatriates who are settlors, beneficiaries, or trustees of such structures, understanding these rules before relocating is crucial.

When does a trust have a connection with France?

A trust is deemed to have such a connection if any one of the following conditions is satisfied: the trustee is a French tax resident; at least one of the settlors or beneficiaries is a French tax resident; or the trust holds assets located in France, which can include shares in non-French entities that own French real estate. The rules were further extended in February 2020. A foreign trust is now also regarded as having a connection with France where its trustee, resident or established outside the European Union, acquires real property in France or enters into a business relationship in France as defined by the French Monetary and Financial Code.

These criteria are alternative, not cumulative. A single connecting factor is sufficient to trigger the full scope of French reporting requirements. In practice, this means that a trust established in Jersey or Guernsey with a sole beneficiary who has recently moved to France can fall within the scope of the reporting requirements, even if the trustee, the assets and the settlor remain entirely outside France. The breadth of these criteria often comes as a surprise to those unfamiliar with the French approach.

The reporting obligations

Trustees of trusts with a French connection must submit two types of tax returns. The first is an annual tax return, due by 15 June each year, whose principal purpose is to reports the market value of the trust’s assets as at 1 January of that year. This reporting requirement applies for as long as the connection with France persists.

The second is an event-based return, which must be submitted within 30 days of any qualifying event. Qualifying events include the constitution of the trust, a connection with France, distributions of capital or income, changes to the beneficiaries' identities, and any other material modification to the terms or administration of the trust.

The scope of what constitutes a “modification” is interpreted broadly. Most crucially, beneficiaries of a trust who are thinking about relocating to France should remember that an event-based return must be submitted within 30 days of transferring their tax residence to France, which typically coincides with the date of their move to this country.

The penalty regime

The penalties for non-compliance are significant. Each missed return can lead the French tax authorities to impose a fixed penalty of €20,000. Since both annual and event-based returns are required, and the obligation may span several years, the total risk can accumulate quickly. The limitation period for these penalties runs until 31 December of the fourth year following the reporting due date.

Furthermore, since 31 December 2016, a failure to meet the reporting requirements may also result in an additional 80% surcharge on any French tax liabilities related to the trust’s assets. While the €20,000 fixed penalty is generally payable by the trustee, the French tax authorities can, under certain conditions, seek payment of this penalty from the settlors or specific beneficiaries of the trust. Thus, a beneficiary who is not involved in managing the trust may still be liable for a significant financial penalty. Therefore, if you are a beneficiary or the settlor of a trust, you might consider asking for confirmation that these reporting requirements have been met, and if they have not, taking steps to ensure they are completed.

Practical considerations for British expatriates

Many British nationals who relocate to France are beneficiaries of family trusts set up in the UK or the Channel Islands, often created for inheritance planning or asset protection purposes. Often, it appears that the trustees of trusts, whether professional firms or family members in the UK, are unaware of the French reporting obligations that apply when a beneficiary or settlor becomes a French tax resident.

It is therefore advisable for anyone planning a move to France or who has recently relocated to review their trust arrangements with a specialist in French international tax law to determine whether annual or event-based returns should have been, or will need to be, filed. In many instances, the situation can be regularised by preparing and filing outstanding returns and engaging constructively with the French tax authorities. Taking early action is preferable, both to limit the accumulation of penalties and to demonstrate good faith.

A thorough review should also be carried out to evaluate the implications of being the settlor or a beneficiary of a trust for French income tax, wealth tax, and inheritance tax purposes.

As the automatic exchange of financial information between jurisdictions becomes more established and French tax authorities increasingly scrutinise cross-border trust structures, the associated risks of non-compliance are now higher than ever. Seeking professional advice at an early stage remains the most sensible approach.

Philippe Henky
phenk@squairlaw.com
www.myfrenchtaxes.com

This article was written and provided by My French Taxes.