Overseas Chambers of Peter Harris

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Jersey, JE2 7ZW

35. The 2020 French Trustee declaration 2081 Trust2: do you need to declare?

May 5th 2020

The 2020 French Trustee declaration 2081 Trust2.

Trustees and French resident settlors or beneficiaries of trusts with French connections should read this carefully and seek advice. It may be possible not to declare, but care needs to be taken to ensure that there is no breach of compliance rules and best practice.

I am not dealing with the full impact of the French trust fiscal régime or the declaration here, simply one aspectrealing to trusts with no Frech connection other than French situs assets in the form of shares or financial instruments, quoted or unquoted.

Those seeking advice on how to best draft the declaration according to their trust's configuration should contact me directly. There are ways through the ridiculously artificial deeming provisions which the French have invented, for example when a beneficiary moves to France. I can help there.

This posting concerns trusts with no French connection other than French movable assets, it only addresses these issues as many trustees have chosen to invest in high quality shares or bonds issued by French companies, whether quoted on a French stock exchange or elsewhere. That choice has been made simply because they have had no French residents connected with the trust.

The relevant pargraphs of article 369A Annexe II CGI dfines the content of the annual declaration as follows :

« 6° Si l'un au moins des constituants, bénéficiaires réputés constituants ou bénéficiaires a son domicile fiscal en France, l'inventaire détaillé des biens, droits et produits capitalisés situés en France ou hors de France et placés dans le trust ainsi que leur valeur vénale au 1er janvier de l'année ;
« 7° Si aucun des constituants, bénéficiaires réputés constituants ou bénéficiaires n'a son domicile fiscal en France, l'inventaire détaillé des biens, droits et produits capitalisés situés en France et placés dans le trust, ainsi que leur valeur vénale au 1er janvier de l'année....

There is a clear distinction drawn between trusts with individual French connections and those with no other connections than shares and assets. There is a specific requirement at 7° that where no individual has a French connection, an annual  declaration, still has tp be filed listing the French situs assets held by the administrateur (trustee) on 1st January of the year in question.

Depending upon their department, French civil servants are either extremely sensitive or totally insensitive as to whether the trust declaration and penalty régime dissuades or prevents foreign non-French investors from investing in French quoted shares and bonds through trusts.

Whilst the ISF (wealth tax) on immovable assets and movable investments such as shares and other securities has been repealed and replaced by the IFI (wealth tax on immovable property), the French administration decided to reintroduce the annual reporting requirements for trusts with French connections whether or not these hold immovable assets because they had lost annual information on holdings of French and foreign movables, and therefore were unable to track the deemed ownership of assets subject to gift or succession duty. Technically French situs movables held in trust for non-residents could be subject to gift or succession duty.

The political note to that was that this was intended to enable the French administration to keep track of movable investments held by trusts with French connections for gift and succession duty purposes. They had lost their means of checking French residents' movable wealth held in trust on the repeal of ISF as from January 2018.  No 2181 Trust2 declarations were required in 2018.  They were reintroduced in 2019.

Most advisers, including myself, concluded that this meant that a trust with any French situs movable asset needed to file an annual pro forma declaration, even when the trust had no French resident settlor or beneficiary. Following a discussion with a French colleague, we decided that that might not be as absolute a compliance requirement as we initially thought. However, §7° article 369A Annexe II CGI states that the obligation remains.

The annual trust declaration 2181 Trust2 including such information is to be filed by 15th June this year. The eyewatering default penalty of €20,000 has, for reasons which escape most people as to proportionality, been confirmed as constitutional by the French Conseil Constitutionnel who appear to believe that all trusts including the English, are richer that Croesus.

The French administration have not yet issued a BOFIP explaining which assets are affected and whether the declaratory obligation is subject to any limitations, such as whether or not there are French resident constituants (settlors) or beneficiaries of the trust. The initial ISF commentary on "situs" of assets has been withdrawn.

The only doctrinal comment that they have made which dates back to 2012 is more limited than the provision in the Tax Code and is open to interpretation: it might allow certain types of trust arrangement with non-resident beneficiaries to maintain their positions on French companies without needing to make an annual declaration.  There is no tax involved, as the ISF has been repealed and the IFI does not apply unless the share is in an immovable property holding company. The only possible tax issue is gift or estate duty (DMTG) which only arise on certain events. That begs the question as to what transfers could give rise to a DMTG.

That is where the issue becomes difficult as the French deeming provisions treat all beneficiaries as receiving a benefit on the death of a settlor irrespective of the actual terms of the trust as they become the next in Napoleonic fiscal line. If the whole beneficial class is non-resident, the DMTG can only fix upon a French situs asset.  The definition of a French situs asset includes French shares and bonds and may also affix itself on such shares and securities listed, traded and payable outside France.

The French administration do not make it easy for their companies seeking foreign capital.

The question for any trustee with French situs assets in the form of shares, bonds and other type of movable asset is whether they are required to make a declaration or not under the current declarative requirements, patricularly where these are dematerialised and traded on an exchange outside France

That may depend in itself upon whether the constituant (settlor)  was French resident whether at the time that the trust was constituted or afterwards, whether there is a French resident deemed settlor, or whether or not there are French beneficiaries. At present the safe advice is to say that a 2181 Trust2 declaration should be filed when there is a French situs asset at 1st January, 2020.

Hence the attraction of a n underlying company holding a portfolio of such assets.

The issues are complex and each trust is different.

This of course does not address the Event declaration 2181 Trust1 (déclaration événementielle) addressed at 369 Annex CGI which has to be to be filed on a gift within the trust or on the death of a constituant (settlor) or a bénéficiaire réputée constituant (deemed settlor) which triggers a deemed disposal of the trust assets. Trustees with French assets of any description, irrespective of the tax residence of the settlor or beneficiary need to take specific advice here to determine whether and how to make any declaration that may be necessary.

Whilst it is tempting to say that the 2181 Trust2 is only relevant where there is a French resident individual connected to a trust, and that, in any event, a 2181 Trust1 "event" declaration has to be filed on any deemed transfer by gift within thevtrust or the asset taken out of the trust or on the death of the settlor, the French deeming provision is so out of sync with the actual economy of a standard trust situation that trustees may feel it unwise to take any risks and file.

Contact Peter Harris for details on whether or not a declaration should be filed. (+44 (0)1534 625879)

Please note that there are penalties of €20.000 per default which can be levied against French resident beneficiaries as well as the Trustee, and against French assets.

Having worked in France for over 20 years, it is clear that the French have decided not to overburden their minds with actualy understanding the trust as a concept of property law, and have redesignated it as a contractual relationship with quasi corporate status.  Certain provisions of the CGI assume that a trustee can produce a balance sheet and a profit and loss account, which is a complete falsehood and require that a "trust" prepare its accounts as it it were a company subject to the French impôt sur les sociétés.

You still have Senateur Marini protesting that that is correct.