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‘French mini-FATCA’ fears as France goes after trusts

From Europe Jan 9 2012 BY: Helen Burggraf , Contributing Editor , International Adviser

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Tax experts who have been studying France’s new tax regime for wealthy individuals are likening its treatment of trusts to elements of America’s much-criticised FATCA regulations.

Just as the Foreign Account Tax Compliance Act obliges non-US financial institutions to furnish the Internal Revenue Service with details concerning assets held in overseas accounts by Americans, they say, the new Loi de Finances Rectificative pour 2011 contains measures that oblige trusts and their trustees to report on the trust’s French assets, their French beneficiaries, and/or French settlors.

Reporting is also required even if all the parties to the trust reside outside of France, if the trust holds any form of French asset, such as loans, real estate, stocks and shares.

Also like FATCA, the new law seeks to involve trusts which have French settlors and/or beneficiaries, and/or which contain French assets, in seeing that any tax monies owed are collected.

Both FATCA and the new French tax regime share a common objective of boosting the tax take from wealthy individuals.

Yet another similarity between the new French tax rules and FATCA is that few realised the implications for financial institutions of the new rules before they were approved by the French Parliament in July 2011. Indeed, many tax experts and trust managers are understood to be just waking up to them.

A similar pattern occurred after FATCA was passed, as it was buried in a domestic jobs bill known as the HIRE Act when President Obama signed it into law in March 2010.

“Here in Guernsey, we have been having a lot of dealings with trusts and company administration businesses, which have been sifting through their whole client portfolios to identify as quickly as possible those trusts with French resident settlors, beneficiaries and French assets,”  Virginie Deflassieux, associate director of French tax at PKF (Channel Islands), told International Adviser late last month.

“The text of the law is not really very precise, so we are awaiting publication of a décrêt [implementing decree] to provide us with more information on the trustees’ obligations.”

Gerry Brown, technical manager of Prudential, says the French law could be seen as a possible “thin end of a FATCA wedge”.

A curious aspect of the new French rules on trusts, he adds, is that “the concept of a trust is alien to the French legal and tax code, [yet] the French tax authorities seem to have had little difficulty in recognising them if it enables them to pick up some tax from ‘foreigners’”.

PwC prediction

The similarities between the new French tax laws and FATCA appear to confirm the predictions of London-based PwC tax director Debbie Payne, who told an audience of private equity industry officials in September that there was “a distinct possibility” that certain European countries would “soon seek to bring in their own domestic, FATCA-like regimes”.

Payne noted that there was “amazement coming out of some of the institutions in the States” that there was so much opposition to FATCA in Europe, because these US officials had thought that their European counterparts had been in agreement with them on the need to crack down on tax evasion, and for greater information-sharing among jurisdictions.

Rules will create database

Among other things, the new French rules for trusts introduce a reporting obligation on trustees where there are French resident settlors or beneficiaries, or in respect of French assets held by non-French residents through a trust. Failure to comply with this new reporting obligation will trigger a penalty of €10,000 ($12,700) or 5% of the worldwide trust assets, whichever is the greatest.

But beyond this, it will create a comprehensive database for French tax authorities of who is holding what, and where, tax experts point out.

In addition, in the case where the trust assets have not been taxed in the settlor’s wealth, a special tax of 0.5% (sui generis wealth tax) would have to be paid by the trustees (even if the taxpayer is the settlor). This would apply whether the settlor or any of the beneficiaries are residents of France, or if the trustees hold a French asset or right, such as shares in a real estate company.

The trustees would be responsible for the filing and payment of this 0.5% specific tax. Settlors and beneficiaries will be jointly liable with the trustees for the payment.

This 0.5% withholding tax will not, however, be due if the assets have been reported by the settlor (and subject to the wealth tax), and the disclosure obligations have been complied with.

Forcing assets out of trusts

As Deflassieux sees it, the legislation “basically forces a trust’s assets back into the personal wealth of French resident individuals, from a tax perspective”, which effectively removes one of the main reasons many people set trusts up in the first place.

Life insurance policies taken out by individuals who were non-French resident at the time of subscription are also being brought into France’s tax net, with a 20% levy now being applied to beneficiary payments paid to French residents on the policyholder’s death, or those paid to beneficiaries who had been French residents for six years at any time in the ten years preceding the policyholder’s death.

Meantime, France appears to be seeking to borrow yet another page from America’s FATCA book, with plans to extend the scope of back assessments on undeclared foreign assets.

Just as the US has recently taken to enforcing long-existing but often overlooked rules requiring Americans to report to the IRS on all of their foreign bank accounts (FBARs), France is proposing to extend to ten years, from the current three years, the period of time undeclared foreign assets, when discovered by French authorities, could be assessed for back tax and penalties.

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