3. Tax System: General Concepts
A. Income Tax And Capital Gains Tax
Individual residents in France are taxed on their worldwide
income, while non-resident individuals are only taxed on their
French-source income. In 2011, rates varied from 0 per cent to a
maximum of 41 per cent (plus 12.3 per cent for social contributions
in respect of French tax residents). Individuals are also taxed on
certain capital gains (e.g. gains arising from the sale of
buildings and land or the sale of shares).
B. Gift And Inheritance Tax
Tax is not imposed on the donor or on the estate of the
deceased, but on each beneficiary, based on what that beneficiary
receives. Tax is due on worldwide assets when either the deceased
or the beneficiary is domiciled in France, but only on French
assets when both the deceased and the beneficiary are domiciled
outside France. The rate of taxation is dictated by the degree of
relationship to the deceased. A child is taxed at rates ranging
from 5 per cent to 45 per cent, collateral relations are taxed at
rates ranging from 35 per cent to 45 per cent, while for unrelated
beneficiaries the rate is 60 per cent. Surviving spouses and civil
partners are fully exempt from inheritance tax (but not from gift
tax).
C. Wealth Tax
This tax is payable by all physical persons whose net assets are
EUR1.3 million or more on 1 January 2011. For a French resident,
worldwide assets are taken into consideration. A non-resident,
however, is subject only to wealth tax on French assets. Such
assets include, among others, real property situated in France,
shares in property investment companies, debts owed by debtors
established in France and personal property situated in France.
Financial investments by non-residents are, however, expressly
exempt from wealth tax. In addition, debts relating to the estate
subject to wealth tax are allowed as deductions in determining the
tax base. The rate of wealth tax varies from 0.55 per cent to 1.8
per cent depending on the net taxable value of the assets. From 1
January 2012, assets worth between EUR1.3 million and EUR2,999,999
will be taxed at 0.25 per cent and assets with a value exceeding or
equal to 3 million will be taxed at 0.5 per cent.
D. Taxation Of Trusts
I. Income Tax And Capital Gains Tax
When property is transferred to a trust, the income derived from
it ceases to be that of the settlor and instead becomes that of the
trustee. Assuming the trustee is not a French resident, any
French-source income received is subject to French tax according to
the rules applying to non-resident individuals or companies. As a
general rule, French resident beneficiaries are subject only to
income tax when they receive an income distribution.
The question arises as to whether French resident beneficiaries
are subject to the anti-avoidance (CFC) provisions of article 123
bis of the French Tax Code (FTC). Under these provisions, French
residents are subject to income tax on income derived from
financial assets held through an intermediary structure set up in
low-tax countries, even if the income is not distributed to them.
The ambit of article 123 bis of the FTC is extremely wide, as the
structures covered include legal entities, fiducies and comparable
institutions or organisations. For the provision to apply, it
suffices that there be a direct or indirect holding of at least 10
per cent in the structure concerned. Where the foreign structure is
set up or established in a state or territory that does not have a
tax treaty with France, the taxable income of the individual is a
notional income. The majority of practitioners believe that
beneficiaries of an irrevocable discretionary trust, who have no
rights in the assets held in trust, do not come within the ambit of
article 123 bis of the FTC.
Ii. Inheritance And Gift Tax
The new regime introduced by the Amended Finance Law 2011
officially confirms that the transfer of assets to a trust is not
subject to gift tax or inheritance tax, but that these are payable
on distribution of the trust assets to the beneficiaries. As from
31 July 2011, these taxes apply at the time of the transfer of
trust assets to the beneficiaries or, if earlier, on the death of
the settlor. The beneficiaries are liable for the payment of tax,
which is assessed on the value of the trust assets at the time. The
tax rate is determined in accordance with the relationship between
the settlor and the beneficiary as though the trust were
transparent (assuming that the relationship can be
substantiated).
If, however, it is not possible to ascertain the shares of the
beneficiaries in the trust fund upon the death of the settlor, the
trustee and the beneficiaries are jointly liable for the payment of
tax. A 45 per cent rate applies if the class of beneficiaries only
contains descendants of the settlor, while a 60 per cent rate
otherwise applies. In any event, the 60 per cent rate applies if
the trust is governed by the law of an uncooperative jurisdiction
or if the trust was settled by a French resident after 11 May 2011.
The other provisions apply to any settlement or capital
distribution occurring after 31 July 2011.
Iii. Wealth Tax
The new law provides that assets held in any kind of trust,
including an irrevocable discretionary trust, are taxable on the
settlor (or on the beneficiaries following the death of the
settlor) for French wealth tax purposes if the settlor/beneficiary
is a French resident or the trust fund contains taxable French
assets. However, the assets held by a trust whose beneficiaries are
all qualified charitable organisations under article 795 of the FTC
are not subject to wealth tax.
A specific wealth tax for trusts is also being introduced at a
rate of 0.5 per cent. Indeed, a catch-all provision specifies that
the trustee is liable for this tax jointly with the settlor and the
beneficiaries, either if the trust assets are not included in the
settlor's or the beneficiaries' estates for wealth tax purposes, or
if the trust has not been disclosed to the tax authorities (where
the taxpayer was not liable to wealth tax). As a departure from
this principle, trusts whose beneficiaries are all qualified
charitable organisations and trusts settled by French residents
specifically for retirement purposes are not subject to this tax.
This provision will come into force in January 2012.
Iv. Reporting Requirements
If the settlor or one of the beneficiaries is resident in France
or if the trust fund contains French assets, the trustee must
disclose to the tax authorities the formation of the trust, any
variation of its terms and its termination, as well as the market
value of the trust assets each year.
Failure to comply with the reporting requirements will give rise
to a heavy penalty equal to 5 per cent of the value of the trust
fund.