←All client casesClient case

Being the beneficiary of a foreign trust while resident in France

We advised a French tax resident who was the beneficiary of a family trust set up abroad several years earlier.

By Cassandre Nogues, tax lawyer·Published ·Updated

The situation

The trust held financial assets and could make distributions to them. Our client wished to understand their obligations in France and the tax treatment of the sums received.

Our support

  1. 01

    Understanding the trust and its links with France

    We analysed the trust deed and its amendments in order to identify:

    • the settlor, the trustee and the beneficiaries;
    • the powers of each;
    • the conditions under which distributions could be made;
    • the nature and location of the assets;
    • the events that had occurred since the trust was set up.

    This analysis was necessary to determine whether the structure met the French definition of a trust set out in article 792-0 bis of the CGI and to identify its links with France.

    Point of attention. The French characterisation of a trust depends on how it actually operates, not merely on its name abroad.
  2. 02

    Organising the reporting obligations

    We then determined the returns required in France under article 1649 AB of the CGI and supported the trustee in preparing them.

    Depending on the situation, these obligations may include, in particular:

    • a return on certain events affecting the trust;
    • an annual return of the value of the assets, rights and capitalised income placed in the trust.
    Simplified example: if the trust’s assets are valued at €5 million on 1 January, this value must be documented and reported where the annual obligation applies. This return does not, in itself, give rise to tax on that amount.

    We put in place with the trustee an annual process for collecting information, valuing the assets and preparing the returns.

  3. 03

    Determining the tax treatment of distributions

    We analysed the distributions received by the beneficiary in order to determine whether they corresponded to:

    • income or products generated by the trust;
    • previously capitalised products;
    • a return of capital or assets;
    • a transfer for no consideration.
    Point of attention. The distinction between income and capital must be precisely documented: it determines the applicable tax treatment.
    Simplified example: on a €500,000 distribution, characterising all or part of the sum as income or as capital can significantly change its tax treatment. The wording of the transfer is not enough to establish that characterisation.

    We defined the documents to be gathered for each payment: the trustee’s resolution, financial statements, capital history and bank supporting documents.

  4. 04

    Securing the position over time

    Finally, we built a standing file to secure future returns and to respond to any request from the tax authorities.

The result

The client obtained a clear view of their obligations in France and of the tax treatment of the distributions received.

The trust’s returns were organised with the trustee and an annual procedure was put in place to track valuations, events affecting the trust and the flows paid to the beneficiary.

This case was handled by the firm, in light of the law and case law in force at the time of the engagement, and in the light of circumstances specific to it. It is presented for illustration purposes only: it does not constitute advice and does not predetermine the treatment that might be adopted in another matter.