How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
Private Client (2nd edition)
Under the Ordinance there are six types of trusts for Israeli income tax purposes. Classification of a trust is generally determined by the residency of the beneficiaries. The six types of trusts are (Israeli Income Tax Ordinance):
- Israeli residents trust. This trust is subject to tax on its income as an Israeli tax resident and is subject to full reporting and tax in Israel on its worldwide income. An Israeli residents' trust must satisfy one of the following:
- at the time of its formation, it has at least one settlor and at least one beneficiary who are Israeli residents and during the relevant tax year has either one settlor or one beneficiary who is an Israeli resident;
- a trust where all the settlors have passed away and has at least one Israeli resident beneficiary;
- is not classified otherwise.
- a distribution of income (but not principal) to an Israeli resident beneficiary will be taxed in Israel at a flat rate of 30%;
- the taxation of the trust’s portion of income, which is attributable to the Israeli beneficiary at a tax rate of 25%, on an annual basis after provision of foreign tax credits.
- all the settlors and beneficiaries are foreign residents;
- all its settlors are foreign residents and all of its beneficiaries are foreign residents or public interest beneficiaries, and the trust never had any Israeli resident beneficiaries since its establishment; or
- all of its settlors passed away and all of its beneficiaries are foreign residents, and the trust never had any Israeli resident beneficiaries since its establishment.
Trusts are not legal entities for Israeli income tax purposes. The trustee is the one who liable for tax on the trust's income, unless the beneficiary or the settlors elected to be the taxable party in respect to the trust's income. The trustee must open a tax file and report and pay taxes in respect of the trust's taxable income. The determination as to whether a trust's income is subject to reporting and tax in Israel is made based on the classification of the trust for Israeli income tax purposes.
The residency of the trustee does not affect the taxation of the trustee in respect of the trust's income.
Family companies like partnerships are not subject to tax on their income. Rather, the income in allocated to the interest holders (in the case of partnerships) or to the representative taxpayer (in the case of family companies). The relevant interest holders will be subject to tax under the rates described above, on the income allocated.
In high level terms, a private limited company will be subject to corporation tax at a rate of 12.5% on profits. Directors of the company will be subject to income tax, USC and PRSI on their salary (which taxes will be paid via the PAYE system). Shareholders, who receive dividends from the company may be subject to DWT.
In relation to Irish resident trusts, settlors will usually only suffer a tax charge in respect of bare trusts settled for the benefit of minor children. As noted in Question 22, settlors will be subject to tax in respect of offshore trusts under the Irish anti-tax avoidance legislation. Trustees will usually be subject to income tax and CGT in respect of the income and gains arising within the trust, unless the trust is a bare trust. The applicable rate of income tax for Irish resident trustees is 20%. Trustees will also be subject to discretionary trust tax in the case of discretionary trusts. Beneficiaries will be subject to CAT on capital appointments from the trust, and will be subject to income tax on income benefits received. Where the capital value received includes accumulated income (which has not previously been converted into capital by exercise of the trustees’ power), they will be subject to income tax in the first instance and CAT on the net benefit received.
A limited partnership will be treated as transparent for tax purposes, and the partners will be subject to income tax and capital gains tax on the profits and gains arising within the partnership in proportion to their interest in the partnership.
A civil/family partnership is a tax transparent entity. Income and capital gains will be taxed directly in the hands of its partners as if the underlying assets were held directly by them.
Domestic trusts are generally either ‘grantor trusts’ or ‘non-grantor trusts.’ Grantor trusts are trusts that are disregarded for income tax purposes, so that all items of income, gain, expense and loss are attributable to the grantor thereof and not to the trust. To be a grantor trust, the trust must contain certain IRS-approved provisions. Grantor trust status may confer beneficial treatment upon a trust in that all gains in the trust are taxed to the grantor and not to the trust, thereby allowing the trust to grow tax-free while it remains a grantor trust. There are ways in which grantor trust status may be turned off, so that future earnings are taxed to the trust. Grantor trust status ends upon the death of the grantor. Non-grantor trusts are taxed on their income and gains. Distributions from a non-grantor trust to a beneficiary generally carry out distributable net income (DNI) to the beneficiary. Because trust tax brackets are more compressed than those for individuals, carrying out DNI to a beneficiary may result in a lower tax than if the income were taxed at the trust level.
Generally, private foundations are required annually to pay out an amount equal to at least 5% of their assets for charitable purposes, which includes, for grant-making foundations, grants to public charities. In addition, private grant-making foundations must pay an excise tax of 2% of net investment income; that tax may be reduced by 1% if the annual payment for charitable purposes is increased by at least 1%.
Single member LLCs are not required to file US income tax returns; their income is taxed to their member. Multimember FLPs and LLCs are required to file US income tax returns and are subject to US income tax on their earnings; generally their income is passed out to their partners or members.For tax years beginning after December 31, 2017, certain non-corporate taxpayers, including multimember FLPs and LLCs, may deduct up to 20% of their "qualified business income" (generally, domestic business income from a "qualified trade or business") subject to certain limitations in calculating their taxable income.
The general principle is that trusts are transparent for tax purposes and taxation on the income of the trust is assessed on the beneficiaries. Section 12 of the International Trusts Law as amended provides for a uniform tax regime applicable to all persons on the basis of a tax residency test. In the case of a beneficiary who is resident in Cyprus the worldwide income and profits of the trust are subject to Cyprus tax. In the case of a non-resident beneficiary only income and profits earned from sources within Cyprus are subject to Cyprus tax.
Any beneficiaries who elect to become Cyprus tax residents will be subject to taxation on their worldwide income, like any other Cyprus tax resident. Non-resident beneficiaries will be subject to Cyprus taxation only on any Cyprus-source income.
For trusts that have only resident beneficiaries or only non-resident beneficiaries, the application of these principles is very straightforward. Where a trust has both resident and non-resident beneficiaries, the tax authorities will determine the tax treatment by reference to the scope of rights that the respective beneficiaries have in the trust, as set out in the trust instrument.
Austrian resident private foundations are generally separate taxable entities for purposes of Austrian tax law. As mentioned, gifts and contributions made to an Austrian private foundation are subject to a foundation entry tax (unless specific exemptions apply). Further, income earned by the private foundation is generally subject to Austrian corporate income tax amounting to 25%. In addition to that, tax exemptions may apply in particular to dividends distributed to the Austrian private foundations subject to specific criteria. Further, in light of in particular specific investment income as well as capital gains from the sale of real estate an interim taxation applies amounting to 25% which may be credited against Austrian withholding tax levied on distributions effected by the Austrian private foundation. Moreover, it is worth mentioning that Austrian private foundations qualify for a deferral of tax liability in light of capital gains realized on the sale of shares if a qualified re-investment in specific shares occurs.
Distributions effected by a private foundation to a beneficiary are generally subject to 27.5% Austrian withholding tax unless tax treaty exemptions apply.
Private benefit foundations are liable to corporate income tax on any income from trade or business. However, corporate tax is not due on any income derived from gifts provided to the foundation for the accomplishment of its goals.
Gifts by and in favour of private benefit foundations are subject to gift tax. Property passing onto such a foundation as a result of a testamentary disposition is levied with inheritance tax (see question 5 above).
There are no special tax rules for settlors, founders, trustees, directors and beneficiaries of private benefit foundations. Hence, the general tax rules apply.
- Trusts settled in Monaco under Law 214
The settlement of trusts and/or the transfer of a foreign trust to Monaco under Law n°214 triggers stamp duties in Monaco. Article 7 of Law n°214 states that a deed of trust resulting from the creation or the transfer of foreign trusts to Monaco is subject to a stamp duty of 1,3% if there is only one beneficiary, 1,5% if there are two beneficiaries, 1,7% if there are more than two beneficiaries.
Alternatively, at the party’s request, an annual tax of 0.20% of the value of the trust assets may be paid.
If the assets settled into trust are shares of Monegasque companies, stamp duties ranging from 0.05% to 0.45% depending on the number of beneficiaries are due on the value of the shares.
Finally, since there is no capital gains nor income tax in Monaco, the beneficiaries domiciled in Monaco (except for French citizens) will not be liable for any tax.
Under Law 1.381 of 29 June 2011, trusts holding real property rights on immovable assets located in Monaco are subject to transfer tax in Monaco (see question 8 above).
- Single and Multi-family offices:
Single family offices, as civil SAM, are generally not subject to business profit tax.
Multi-family offices are generally subject to company taxes and VAT.
Finally, since there is no direct tax in Monaco, directors and shareholders domiciled in Monaco are not liable for any income or capital gains tax on their remuneration, they are only liable to Monegasque social contributions if applicable.
From an income tax perspective, (foreign law) trusts (resident or not) can be subject to three different regimes. They can be (i) separate taxable persons subject to corporate income tax; (ii) subject to a transparency regime whereby the income of the trust is computed at the level of the trust but then imputed to the beneficiary (if the beneficiary has a right to the trust income); or (iii) wholly disregarded (this is the case for e.g. revocable trusts). From an inheritance and gift tax perspective, according to the tax authorities’ view, the addition of assets to the trust fund is a taxable event. Tax rates and exempt amounts are computed on the basis of the family relationship between the settlor and the beneficiaries.
Italian non-commercial partnerships are subject to a transparency regime, which allows to preserve certain beneficial features of individual taxation (e.g. flat rates on most income and gains from financial assets and no taxation of capital gains on real property after a 5-year holding period).
Bermuda does not impose any taxes on income, profits, dividends, gifts or capital gains earned, received or derived by trusts.
There is no stamp duty payable in Bermuda on the initial trust deed or on the conveyance or transfer of non-Bermuda property into the trust. Non-Bermuda property basically refers to all assets except Bermuda currency denominated assets and Bermuda land. The shares of a Bermuda incorporated exempted company are considered to be non-Bermuda property, and are excluded from stamp duty.
Stamp duty is payable if Bermuda property (e.g. real estate located in Bermuda) is transferred into trust. The maximum rate is 15% for values over BM$1 million.
21.1 The tax treatment of settlors (§19.2), trustees (§19.2) and beneficiaries (§19.2) of a trust (§19.2) (other than a bare trust (§19.3)) depends in the first place on whether they are UK-resident (§1.5-1.7; §21.5) and, in the case of settlors and beneficiaries, whether they are domiciled (§1.9), deemed domiciled (§1.10) or deemed domiciled for inheritance tax purposes (§5.9) in the UK. Property held on a bare trust is treated for tax purposes as belonging to the beneficiaries, and the rules described below do not apply to bare trusts.
21.2 In general, the non UK assets of a trust, provided the trust was funded by a settlor (§19.2) who (at the time of the funding) was neither domiciled (§1.9) nor deemed domiciled for inheritance tax purposes (§5.9) in the UK, fall outside the scope of inheritance tax (§5), and this continues to be the case even if the settlor later becomes domiciled or deemed domiciled for inheritance tax purposes in the UK (unless he is a formerly domiciled resident (§5.9)). For this purpose, non UK assets representing the value of UK residential property are generally treated as UK assets.
21.3 On the other hand, a trust (§19.2) which holds UK assets (or non UK assets representing the value of UK residential property), or which was funded by a settlor (§19.2) who (at the time of the funding) was domiciled (§1.9) or deemed domiciled for inheritance tax purposes (§5.9) in the UK or who is a formerly domiciled resident, is generally subject to inheritance tax (§5) charges every 10 years and when assets are distributed to beneficiaries (§19.2) otherwise than as income. However, if such a trust is a life interest trust (§19.3) created before 22 March 2006, or a life interest trust created under a Will or for a disabled person, the property of the trust might not be subject to these charges every 10 years and on distributions, and might instead be treated for the purposes of inheritance tax as included in the estate (§5.3) of the beneficiary entitled to the life interest.
21.4 The overall UK income tax (§2.1) and capital gains tax (§2.6) treatment of a trust (§19.2) depends very significantly on whether the trustees (§19.2) are UK-resident. The trustees as a body are treated as UK-resident if, for example, they are individuals who are all UK-resident (§1.5-1.7) or where the only trustee is a company which is resident in the UK for UK tax purposes. The trustees as a body will be treated as non-UK resident if, for example, they are individuals none of whom is UK resident or where the only trustee is a company which is not resident in the UK for UK tax purposes. If at least one trustee is UK-resident and at least one is not, then generally the trustees as a body are treated as UK-resident only if the settlor was UK-resident or domiciled (§1.9) or deemed domiciled (§1.10) in the UK when he made the trust. For the purposes of the above rules, a trustee which is a company is treated as UK-resident if it is acting as trustee in the course of a business which it carries on in the UK through a branch, agency or permanent establishment there.
21.5 If the trustees (§19.2) and the settlor (§19.2) are UK-resident (§1.5-1.7; §21.4) and the settlor or his spouse or civil partner can benefit from the trust in any circumstance whatsoever, then income arising to the trustees is generally charged to income tax (§2.1) on the settlor. Even where the settlor or his spouse or civil partner cannot benefit, the income arising to the trustees will still be charged to income tax on the settlor if a minor child of the settlor actually benefits from income (including accumulated income) of the trust, or the trustees make (or repay) a loan to the settlor or his spouse or civil partner.
21.6 In addition, where the trustees (§19.2) are UK-resident (§21.4), they are generally subject to income tax (§2.1) and capital gains tax (§2.6) in a broadly similar way to individuals but sometimes at higher effective rates, with the trustees' precise income tax treatment depending in part on whether the trust is a life interest trust (§19.3). There are rules to prevent double taxation where the settlor (§19.2) also suffers income tax on the trustees' income under the rule described in §21.5. Similarly, where a UK-resident beneficiary (§19.2) receives from UK-resident trustees a distribution which is chargeable to income tax in the hands of the beneficiary, credit may be available to that beneficiary for income tax which has been paid by the trustees.
21.7 Where the trustees (§19.2) are non-UK resident (§21.4) and do not realise UK source income or dispose of certain kinds of UK assets (such as UK residential property), charges to income tax (§2.1) and capital gains tax (§2.6) do not generally fall on the trustees themselves, but may in certain circumstances fall on the settlor (§19.2) or beneficiaries (§19.2) instead.
21.8 For example, if a settlor is UK resident and is domiciled (§1.9) or deemed domiciled (§1.10) in the UK, chargeable gains (§2.7) arising (or deemed to arise (§21.11; §21.12)) to the non UK resident trustees are generally charged on the settlor. Similarly, if a settlor is UK resident and is domiciled or deemed domiciled in the UK, income arising to the non-UK resident trustees (or to a non UK company owned or ultimately owned by such trustees) and from which the settlor (or his spouse or civil partner) can benefit directly or indirectly is generally charged on the settlor. There exists transitional protection from the above charges for a UK resident settlor who was neither domiciled nor deemed domiciled in the UK when he made the trust (or any addition to the trust) and has subsequently become deemed domiciled (but not actually domiciled) in the UK, but this protection is not available to a settlor who is a formerly domiciled resident (§5.9), and the protection is irreversibly lost if, for example, the settlor adds further property to the trust at a time when he is deemed domiciled in the UK.
21.9 Where chargeable gains or income are not taxed on the settlor under the rules described in §21.8 above (for example, because the settlor is non-UK resident or dead, or is neither domiciled nor deemed domiciled in the UK, or enjoys the transitional protection described in §21.8 above), the chargeable gains or income can be charged on UK resident beneficiaries who receive (or, in some cases, have received in the past) benefits from the trust. Such beneficiaries, if neither domiciled nor deemed domiciled in the UK, may in some cases obtain protection from these charges by claiming the remittance basis (§10) if the benefits are not remitted to the UK (§10.3). Anti-avoidance rules may apply, for example, where non-UK resident trustees (§19.2) make distributions to non-UK resident (§1.5-1.7) individuals who, later, make onward gifts (directly or indirectly) to UK resident individuals within specified time limits. The main effect of the application of these anti-avoidance rules is to impose income tax and capital gains tax on the onward gifts as if they were distributions made directly by the non-UK resident trustees to the ultimate UK resident donees.
21.10 Protection from some of the income tax charges described at paragraphs §21.8 and §21.9 above may be claimed in certain circumstances where the arrangements were genuinely commercial and did not have a tax-avoidance purpose.
21.11 Trustees (§19.2) are generally deemed for the purposes of capital gains tax (§2.6) to make a disposal (§2.8) at market value of any asset which is distributed to a beneficiary (§19.2) (or to which a beneficiary becomes absolutely entitled), in which case the beneficiary takes the asset with a base cost equal to that value. However, where the distribution of the asset attracts a charge to inheritance tax under the rules described in §21.3, it may be possible to elect for the beneficiary to take the asset at the trustees' base cost, so that capital gains tax is deferred.
21.12 In some circumstances a capital gain arising to a non-UK resident company is attributed to trustees (§19.2) or UK-resident (§1.5-1.7) individuals who are shareholders or creditors of the company, subject to reliefs for commercial arrangements.
21.13 A partnership is generally treated as transparent for UK tax purposes so that, broadly, the partners are taxed on the profits of the partnership in proportion to their rights to share in those profits.
21.14 A family investment company (§19.1) which is incorporated under the laws of the UK or is centrally managed and controlled in the UK is generally exposed to corporation tax at 19% on its worldwide profits, subject to a range of potential reliefs, including relief under a double tax treaty.
21.15 Directors of a company, and individuals (known as "shadow directors") with significant influence over such directors, generally suffer income tax (§2.1) as if they were employees on the remuneration and other benefits that they receive from the company.
- Domestic trusts:
In Colombia only those companies duly authorized by the Colombian financial authority (Superintendencia Financiera de Colombia) may offer trust services and act as trustees (i.e. compañías fiduciarias). Such entities are subject to SFC supervision and regulation.
Colombian tax law treats local trusts as flow-through entities for tax purposes. Thus, trusts must determine their profits annually and the beneficiaries have to include such profits in their own income tax returns for that same year and pay the relevant taxes.
The title to the assets that an individual contributes to the trust fund must pass to the trust fund (exceptions apply – for example, for the guarantee trust) or otherwise such assets would have to be declared by the individual as part of her/his equity and thus be subject to net worth taxes.
Additionally, if the individual receives fiduciary rights over the trust fund because of said contribution, he or she would be obliged to report such rights for Colombian income tax purposes.
Whenever the settlor or any of the beneficiaries receive income from the trust, they must pay the relevant taxes in Colombia. Income tax regulations establish that the results of any activities of the trust and all equity increases must be included in the income tax return of the beneficiaries.
- Foreign structures:
There are no civil or commercial regulations regarding the establishment of foreign trusts, private foundations and life insurance policies. However, these are recognized by Colombian tax law and tax authorities.
Colombian tax residents are subject to income tax based on their worldwide source income. Therefore any distributions made by a foreign trust/foundation would be subject to income tax in Colombia at a 10% rate. As from FY 2019, life insurance indemnities are taxed as capital gains, only on the amount that exceeds 12.500 Tax Value Units (approx. USD 136.000).
If a trust/foundation is revocable and controlled by the settlor, then it would be considered as a CFC under Colombian law. Hence, net profits derived from passive income obtained by the trust/foundation shall be recognized immediately in proportion equivalent to the participation in the foundation/trust's capital or profits, and not upon receipt of profits. Which means, no tax deferral would be applicable in this case.
Colombian tax residents shall report on their income tax returns the passive income realized by the trust/foundation, considering the nature and characteristics of said income, as if it was received directly by them.
Assets held by a trust/foundation (which is revocable and directed) are understood to be directly held by the settlor and shall be reported in their Colombian income tax returns, as well as their foreign assets return (Form 160) as part of their own equity. If the characteristics of the trust/foundation are different, the reporting obligation could be of the settlor. This analysis should be carried case by case.
If the underlying assets of an irrevocable and discretionary trust/foundation cannot be attributed to the beneficiaries, the latter must be reported by the settlor. This, without any consideration of the trust/foundation's irrevocable and discretionary character.
As stated above, there is no inheritance, capital gains, estate tax or income tax in the Cayman Islands. This applies to the above structures and their settlors, founders, trustees, directors and beneficiaries.
Non-charitable foundations with German residence are subject to German corporate tax (about 15,8% including the solidarity surcharge). However, a participation exemption may apply for shareholdings in corporations. Transfers of the founders to the foundation may trigger gift tax (however, business property relief may apply). A distribution of income to beneficiaries will be taxed just like a dividend; withholding tax will apply. There is no special tax regime for family companies or partnerships. The taxation of the entity and its shareholders/partners will depend on various factors, including the legal form of the entity and the assets held in the individual case.
The settlor of a trust is generally not subject to tax in relation to income of the trust. Trust income is, in the first instance, chargeable to tax in the hands of the trustee at 17%. In addition –
- For a non-resident beneficiary, tax assessed at the trustee level represents the final tax – the beneficiary would not be liable to tax in respect of his / her share of entitlement to the income of the trust.
- For a resident beneficiary, where Singapore revenue is satisfied that the beneficiary may be regarded as being 'entitled to' a share of trust income, the said share may be taxed in the hands of the beneficiary. In such circumstances, the beneficiary may benefit from any exemptions, concessions or foreign tax credits available to him / her under the income tax regime.
Further, trusts administered by Singapore trustees may benefit from tax incentives catered to foreign and local trusts – under the relevant tax incentive, trust income derived from designated investments are tax exempt.
Not applicable for Portuguese entities, as Portugal does not foresee trusts. As regards foreign trusts, distributions to the settlor are considered investment income and liquidation proceeds are considered capital gains. Liquidation proceeds to a trust’s beneficiary (insofar not being the settlor) is not subject to tax. Controlled Foreign Companies rules deeming attribution of profits may apply in certain structures.
Originally the only tax law referring to trusts was article 120-9° of the French tax code which provides that distributions of income made by trusts are assimilated to dividends from foreign sources. The Law of 29 July 2011 (Trust Tax Law) introduced a comprehensive wealth, gift and inheritance tax regime.
The tax regime of trusts currently applicable in France can be summarised as follows.
21.1 Income tax
- Income tax on the trustee
Trustees investing in France in their capacity as trustees of foreign trusts are taxable on income and capital gains as apparent owners of the trusts’ assets. The applicable regime depends on the quality of the trustees. Individual trustees owning directly French assets are taxable in France as explained in 2.2. Corporate trustees are subject to the tax treatment applicable to foreign corporations.
Finally, when the trustees (individual trustees or corporate trustees) use intermediate companies to own French located assets (see our comments in § 21), the French tax treatment depends on the tax regime applicable to the intermediate company.
As a consequence, assuming, for example, a pass through French company (“société civile immobilière “SCI”) is used by the trustee to own a French real estate, individual income tax rules would apply if the trustee is an individual trustee and corporate tax rules would apply if the trustee is a corporation.
Rental income received by a corporation (French or foreign) is subject to corporation tax at the rate of 33.33 % (progressively reduced to 25% from 2018 to 2022). Because the taxable basis for corporate tax is determined in depreciating the building, the taxation of rental income is, as a general rule, less expensive for corporation than for individuals despite the limitation of interest which only applies for corporation tax purposes.
Financial income received by foreign companies are subject to a withholding tax at the rate of 30%. Certain exemptions or reduction of rates apply depending on the country of residence of the companies.
Capital gains taxation is also different depending on the quality of the trustee (individual or corporation). Individual trustees are taxable as explained in §2.2. Corporate trustees are subject either to corporation tax at the current rate of 33.33% (progressively reduced to 25% from 2018 to 2022) or to withholding taxes depending on the nature of the capital gains realised and the country of residence of the trustee.
- Income tax on the beneficiaries
When the income generated by the trust is distributed by the trustees to French resident beneficiaries either at the trustees’ discretion or because the beneficiaries have a vested entitlement to the income, the latter are subject to French tax under the provisions of Article 120-9° of the French Tax Code.
Distributions of capital or accumulated income and gains upon the death of the original settlor are not subject to income tax but to inheritance tax (see below).
According to this article, distributions made by trusts are assimilated to dividends from foreign sources. Irrespective of the nature of the income generated by the trust property (dividends, interest, capital gains…), distributions of trust income to French resident beneficiaries are subject to income tax and social contributions at a flat rate of 30% (including income tax at the flat rate of 12.8% and social contributions at the rate of 17.2%). The beneficiary may however elect for the application of the progressive scale rates (up to 45%) and social contributions (at the rate of 17.2%).
- Application of the CFC rules to trusts
Article 123 bis of the French tax code provides in substance for the taxation, under specific conditions, of all undistributed income capitalized within “entities” established in low tax jurisdictions, in the hands of their beneficial owners who are French resident individuals.
The Constitutional Court ruled in a decision of 1st March 2017 that the difference in treatment depending on the jurisdiction where the “entity” is established was contrary to the principle of equality before public burdens.
As a result, French tax resident settlors and/or beneficiaries of non-EU trusts are now allowed to bring the proof that the trust was not created for tax avoidance purpose in order to avoid application of the CFC rules.
Similarly, assuming Article 123 bis of the French tax code should apply, French tax resident settlors and/or beneficiaries of trusts established in jurisdictions having no exchange of information agreement with France can now bring the proof that the trust’s real income is inferior to that determined by application of a theoretical rate of return.
As a conclusion, if properly created and managed, an irrevocable and discretionary trust prevents against the application of the French CFC rules provided by article 123 bis of the French tax code.
21.2 Wealth tax (ISF or IFI)
Up until December 31, 2011, according to case law, wealth tax (ISF at this time) was due neither by the settlor nor by the beneficiaries of a discretionary trust even when the trust held French assets. One of the main purpose of the Law was to close what the French tax authorities considered unsurprisingly to be a loophole.
As from January 1, 2012, assets or rights held in trusts (including irrevocable and discretionary trusts) as well as income or capital gains which are capitalized in said trusts are taxable in the hands of the original settlor or if he/she died in the hands of the beneficiaries thereafter deemed to be settlors irrespective of the nature of the trust.
The French resident settlors (or deemed settlors)must therefore include in their wealth tax return (ISF or IFI as from 1st January 2018) the worldwide assets of the trust as if they were their own assets, irrespective of the terms of the trust and its characterization as revocable or irrevocable, even if they are not beneficiaries and/or do not receive any distributions.
In case of failure by the settlor (or deemed settlor) to comply with the wealth tax (IFI/ISF) obligations of reporting and payment (when the tax is due) a sui generis tax applies at the flat rate of 1.5 % regardless of the value of the assets (as opposed to the wealth tax there is no threshold). The 1.5 % tax should be paid by the trustees before June 15 of the relevant tax year. If they do not pay the tax, the law provides that the beneficiaries are jointly liable to pay it.
21.3. Gift and inheritance tax regime applicable to trusts
The transfer of assets from the settlors to trusts is not treated as a taxable event for French gift tax purposes.
As from July 31, 2012, when a transfer of assets made through a trust is treated under civil law as a transfer on death (succession) or transfer inter vivos (donation), taxation occurs under the same regime which would apply in the absence of a trust. In other words, upon distribution of the assets (including accumulated income) of the trust, the beneficiaries should benefit from the standard tax-free allowances and tax rates corresponding to the family relationship between them and the settlor or deemed settlors (see § 5).
Even when no distribution occurs, the death of the settlor (or deemed settlors) is treated as a taxable event for inheritance tax purposes subject to the following rates:
- If at the date of the death the share of the assets which is due to a particular beneficiary is determined, this share is subject to inheritance tax according to the rates corresponding to the family relationship between the settlor (or deemed settlor) and the beneficiary. The trust’s assets have to be included in the inheritance tax return to be filed by the heirs.
- If at the date of the death a specific share of assets is globally due to the descendants of the settlor (and only to the descendants) these are subject to inheritance tax at the flat rate of 45 %.
- If at the date of the death a specific share of assets is globally due to the surviving spouse of the settlor, no inheritance tax is due.
- In all other cases, inheritance tax is due at the flat rate of 60 %. The rate of 60% also applies to trusts created by French resident settlors after May 11, 2011.
- Revocable trusts/foundations: income and wealth is attributed to the settlor and taxed at the settlor's level. No taxes are levied on endowments/distributions.
- Irrevocable fixed interest trusts/foundations: income and wealth is attributed to the beneficiaries and taxed at the beneficiaries' level. No taxes are levied on endowments/distributions.
- Irrevocable discretionary trusts/foundations: income and wealth cannot be attributed to settlor or beneficiaries.
Distributions to Liechtenstein tax residents are taxed with income tax at the individual tax rate. Donations are taxed at a rate of 10.5%. Trusts/foundations can opt-in for wealth tax and donations and distributions are consequently tax exempt.
- trustees are not taxed as the tax law follows an economic approach.
As a starting point, it is important to mention that as indicated before, for Mexican legal purposes, the Fideicomiso is a contract that lacks legal personality, so it is never considered as a taxpayer. Instead, Mexican law attributes the tax burden to either the beneficiary or the trustor, as the case may be, and even in some specific cases assigns different obligations to the fiduciary institutions.
In order to know who the taxpayer in each fideicomiso is and in what cases the fiduciary institution has different obligations, it is important to distinguish whether the fideicomiso carries out or not business activities.
- Fideicomiso with business activities
It is considered that a fideicomiso carries out business activities whenever it carries out commercial, industrial, agricultural, livestock, fishing or forestry activities.
In accordance with Article 13 of the Law, when business activities are carried out through a Fideicomiso, the fiduciary institution shall determine in the terms of the legal entities, the result or the tax loss of said activities in each tax year and shall perform on behalf of the set of beneficiaries the obligations indicated in the Law, including the one of making the advance payments.
However, there is a regulated exception in our legal order, since a fideicomiso that carries out business activities can be exempted from the previous obligations provided that at least ninety percent of the total income obtained through the fideicomiso, during the tax year in question, comes from passive income.
In the case of fideicomisos that carry out business activities, the tax is attributed to the beneficiaries, except in cases where there is no beneficiary, or they cannot be identified, in which case it will be understood that the business activities carried out through the fideicomiso are performed by the trustor.
In these cases, the beneficiaries (or the trustor, if applicable) must accumulate to their other income for the year, the part of the tax result derived from the business activities carried out through the fideicomiso that corresponds to them, and they can credit in that proportion the amount of the advance payments made by the fiduciary institution.
- Fideicomiso without business activities
If the fideicomiso does not carry out business activities, it is considered as a transparent structure for tax purposes, and the fiduciary institution has no obligation other than calculate the percentage of participation that each of the settlors or beneficiaries (depending on whatever it is a revocable or irrevocable fideicomiso, as explained below) have in both the profits and the losses (or, if applicable, deductions) of the fideicomiso, for the purpose of each individual accruing said income in accordance to their corresponding schedular regime and calculate its general tax base for the year.
For purposes of knowing who the taxpayer in this type of trust is, it is important to determine if it is a revocable or irrevocable trust, since from this will depend to whom the generated income is attributed.
For tax purposes, the fideicomiso will be revocable when the trustor reserves the right to reacquire ownership of the assets that were contributed to the fideicomiso (right of reversion).
For its part, the fideicomiso will be irrevocable when the trustor does not have the right to reacquire ownership of the assets that were contributed to the fideicomiso.
The above distinction is of great importance, since it will condition that the constitution of a fideicomiso is considered as an assumption of alienation in favor of the beneficiary (there will be alienation if the trust is irrevocable, either from the moment of its constitution or when the trustor loses the right of reversion) and will determine to whom the tax burden of the fideicomiso will be attributed.
If the fideicomiso is revocable, it is considered that the income generated through it is received by the trustor, for which reason he is the one liable to pay the tax. Otherwise, if the fideicomiso is irrevocable, it is considered that the income is received by the beneficiary, so the tax burden is transferred.
As an example of this, Article 117 of the Law establishes that in the fideicomiso operations for which the temporary use or enjoyment of real estate is granted, the income is considered to be the income of the trustor even if the beneficiary is a different person, except in the cases of irrevocable trusts, in which case the income is considered to be income of the beneficiary from the moment the trustor loses the right to reacquire the real estate.
The limited liability company in Brazil is subject to a wide range of indirect and direct taxes which are of great complexity. A family business will likely to be entitled to pay taxes on the income derived from its assets, such as rents, interest and capital gains on the disposal of such assets. On the other hand, profit and dividend distribution are not subject to taxation. Payments to directors will be taxed by the social security and personal income taxes.
As mentioned, there is no specific rule in Brazil to regulate trusts, foundations and other succession vehicles. As a consequence, Brazilian residents acting as settlors, founders, trustees, directors of foreign structures, although are not subject to taxation in Brazil at a first moment, might have to fulfil filling obligation with the Brazilian Central Bank [see Q&A 23].