The problem, according to Spectrum IFA Group’s Graham Keysell, who looks after expatriate British clients in Brittany and Paris, is that the French tax authorities have yet to produce guidelines detailing how such interests should be declared.
At the time of writing, he says, the only form mentioning the new requirement appears to be the annual Wealth Tax return. Because the total value of the assets could be included in calculating an individual’s liability to the Wealth Tax – depending on his or her relationship to the trust, failure to include it on the return could lead to an additional 40% tax penalty, as well as the fine of 5% of the value of the trust, or 10,000 euros, whichever is the greater, Keysell says he understands.
“It is a chaotic situation,” he added. “The law is undoubtedly in place, and everyone knows it, but if you walk into a French tax office and ask for guidance, they have no idea what you’re talking about.”
A potential problem for many trustees and administrators, he adds, is that all disclosures must be accompanied by a valuation of a trust’s assets as they stood on 1 Jan 2012, a requirement that will need to be fulfilled annually for the life of the trust. There are no guidelines as to how these valuations need to be made, but it could be that the authorities may be able to insist on a professional valuation, he points out.
Frederic Mege, who is the Monaco-based head of French tax at Lawrence Graham, the London-based international law firm, says tax accountants and others may get a break with the deadline, at least. He says he has been told that the 15 June deadline for filing information concerning trusts with French tax-resident settlors is expected to be postponed until 31 August, while the deadline for trusts with non-French tax resident settlors will also be 31 August this year – as well as in future years.
This will be the only year that the deadline for filing such information for those trusts that have French tax-resident settlers will not be 15 June, Mege says he was told. He says he was informed of the two-and-a-half month extension early this week by a tax official in Paris.
Mal de tête
The source of all these mal de tête, 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 any French settlors.
Reporting is also required even if all the parties to the trust reside outside of France, if the trust holds a French “situs” asset, such as real estate, or shares in a real estate company.
As if the reporting obligations weren’t enough, advisers and tax specialists note that a little-noticed side effect of the need to include the value of a trust to which one is a beneficiary could, as Keysell puts it, “push some innocent beneficiaries into the Wealth Tax bracket”, where they would not be otherwise.
For example, a beneficiary without much income who is one of a number of children included as beneficiaries of a trust taken out by a parent, which includes a property worth more than €1m, could potentially find himself taxed as a wealthy individual, Keysell points out.
It is even not clear whether UK self invested personal pensions might fall into the new trust law net, as these are effectively trusts, although Keysell is cautiously optimistic that they will not be.
Still, he says he has not been able to get written clarification on the matter yet, despite attempting to do so.
Exclusion for French investments
Caroline Cohen, a London-based tax specialist qualified both in the UK and France, notes that there is an exception to the filing requirements, as they are understood to exist, “when the trustees hold exclusively French financial investments”.
In such a case, “the trustees do not need to fulfil the reporting obligations [set out in the new Loi de Finances Rectificative] unless the settler or a beneficiary becomes French tax resident.
“This is good news for trustees that have invested in France only in financial assets,” says Cohen, of the French Law Practice, which specialises in cross-border tax and legal matters.
Prudential technical manager Gerry Brown says this particular area is exceedingly complex, and therefore not easy to address in specific terms. But he is certain that the new rules are likely to affect many people.
"There must be many France-resident UK expats who have set up trusts before leaving the UK, or who are France-resident beneficiaries of family trusts established by parents or grandparents,” he notes.
“It is unlikely that these trusts will hold only French assets, so [for them], a reporting requirement will arise."
In the absence of guidance, Keysell says that if nothing is clarified by 15 June, those who know they are likely to be affected by the new tax law could do worse than to "simply write to the tax office declaring the existence of trust assets", as this is certain to cover them.
"I’ve just spoken to a couple who went to their tax office with a letter explaining that they wished to declare their interest in a trust," he says.
"They included a figure as to the value [as it stood] on 1st Jan 2012, and stated that they could provide statements/documentary evidence to prove this if asked. The tax office stamped a copy of the letter to show that they had indeed provided this."
