How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
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.
20.1 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 21 or 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 currently subject to progressive income tax rates (up to 45%) and social contributions (at the rate of 15.5%) within the hands of beneficiaries who are resident in France.
As from January 1, 2018, it is likely that, irrespective of the nature of the income generated by the trust property (dividends, interest, capital gains…) distributions of trust income to French resident beneficiaries will be subject to income tax and social contributions at a flat rate of 30% (including income tax at the flat rate of 12.80% and social contributions at the rate of 17.20%).
Application of the CFC rules to trusts
Article 123 bis of the French tax code provides in substance for 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 were contrary to the principle of citizen’s equality before taxation.
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 prevent against the application of the French CFC rules provided by article 123 bis of the French tax code.
20.2 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), currently, must therefore include in their ISF tax return 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 ISF obligations of reporting and payment (when the tax is due) a sui generis tax applies at the flat rate of 1,50 % regardless of the value of the assets (as opposed to the wealth tax there is no threshold). The 1,50 % 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.
As from January 1, 2018, it is likely that ISF will be replaced by IFI a tax on immovable property (see § 4.2.). Movable assets (including financial assets and pieces of art) held in trust, will then not be subject to wealth tax any longer. Only French real estate properties directly or indirectly own by the trust will remain subject to IFI in the hand of the settlors and deemed settlors of trusts. The sui generis tax will remain due assuming French real estate properties were not reported by the settlors or deemed settlor for IFI purposes.
20.3. 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 word 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.
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).
Trusts have been taxable in Israel since 2006. Under the Israeli tax law trusts there are different types of trusts, as follow:
Israeli Residents Trust:
An Israeli Resident Trust is defined as a trust in which either (a) in the year it was formed it had at least one Israeli resident settlor and one Israeli resident beneficiary and in the tax year at least one beneficiary is an Israeli resident; or (b) all its settlors died and it has at least one Israeli beneficiary. In addition trusts that do not fall into one of the other existing categories are treated as Israeli resident trusts.
Taxation: An Israeli Resident Trust is subject to tax and reporting on its entire worldwide income. The transfer of assets to an Israeli Resident Trust for no consideration is generally not considered a tax event in Israel. Distributions from an Israeli Resident Trust are viewed as having been transferred from the settlor directly to the beneficiaries. Distributions for no consideration will be treated as was gifted to the beneficiaries by the settlor. If the beneficiary is an Israeli resident then the distribution should be tax exempt, since gifts between Israeli residents are generally tax free. If the distribution is a non-cash gift to a foreign resident, it is generally treated as a taxable deemed sale at the fair market value of the asset.
Israeli beneficiary trust
An Israeli Beneficiary Trust is a trust which:
(i) all of it settlers were non-Israeli residents who continued to be foreign residents from the day on which the trust was established until the relevant tax year; and
(ii) has at least one Israeli beneficiary. In addition, if all Israeli resident beneficiaries are close relatives of the living settlor(s) and the required notification is given to the ITA, the trust is classified as a relatives trust.
Taxation: If an Israeli Beneficiary Trust does not comply with the above conditions, it will be considered to be an Israeli Resident Trust and subject to tax on its worldwide income.
If the trust complies with the above conditions and classified as a relatives trust, it will be taxed at a rate of 30% on the income proportion of the distributions to Israeli beneficiaries. The trustee may elect to be taxed at a rate of 25% on its current income and gains with respect to the portion of the income attributable to Israeli beneficiaries. The election is irrevocable.
Foreign Resident Trust
A Foreign Resident Trust is defined as a trust in which:
(a) all the settlors are either non-Israeli residents or are deceased; and
(b) all its beneficiaries are non-Israeli residents or Public Interest Beneficiaries.
Taxation: A Foreign Resident Trust is treated as a foreign resident for tax purposes and therefore subject to tax and reporting obligations only to the extent that it recognised Israeli sourced income.
Foreign Beneficiary Trust
This is an irrevocable trust that is not an Israeli resident trust, where the beneficiaries are all identifiable foreign residents and at least one settlor is, or was at the date of death, an Israeli tax resident.
Taxation: A Foreign Beneficiary Trust is treated as a foreign resident for tax purposes and therefore subject to tax and reporting obligations only to the extent that it realises Israeli sourced income. However, if the trust is not obligated to reporting in Israel, the trustee must submit a declaration to the ITA each year confirming its status as such.
A Testamentary Trust is defined as a trust that meets the following two conditions:
(a) The trust was settled under a last will and testament;
(b) All of the settlors were testators who were Israeli residents at the time of their death.
If all the beneficiaries of a Testamentary Trust are non-Israeli residents, the trust will become a Foreign Resident Testamentary Trust.
A Foreign Resident Testamentary Trust is considered a foreign tax resident in Israel and subject to tax and reporting only to the extent that it realises Israeli sourced income. If there is even one Israeli beneficiary in the trust, it will become an Israeli Resident Testamentary Trust and remain subject to tax and reporting on all of its worldwide income.
From a tax perspective, the inheritor is classified as the individual holding usufruct rights on the property upon which the “inheritance trust” was established, while the trustee as the individual holding bare ownership rights upon that same property.
As such, any income generated by leasing the property upon which the “inheritance trust” is established will be taxed as income from leases [analyzed in question 2 above] in the inheritor’s name.
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.
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.
British Virgin Islands
See the answer to question 19 above in relation to BVI trust duty. Trust instruments which establish merely bare trusts or trusts for exclusively charitable purposes are exempt from such duty.
As indicated above there is no inheritance, capital gains or estate tax in the BVI and income tax is zero-rated.
Businesses operating in the BVI are subject to payroll tax: see the answer to question 9 above.
There are furthermore wide exemptions from tax in section 90 of the Trustee Act: these include exemptions from stamp duty, but they will only apply if the trust’s assets, or its underlying assets, do not include BVI land and if the trustees do not (in their capacity as trustees rather than in their personal i.e. professional capacity) do not carry on a business or trade in the jurisdiction.
All structures within Dubai are tax neutral.
It is possible to establish New Zealand resident trusts which are exempt from New Zealand taxation. The key to the taxation of New Zealand resident trusts is the residence of the settlor rather than the residence of the trustees (unlike many other countries). Under a foreign trust, there is no income tax provided it is not New Zealand sourced.
Foreign-sourced amounts derived by a trustee, where there is no resident settlor, are generally not taxed in New Zealand (provided registration requirements are complied with by the resident trustee). Foreign-sourced amounts distributed to non-resident beneficiaries are also not subject to tax in New Zealand unless they are included in a taxable distribution made by a non-complying trust.
New Zealand LPs are transparent for tax purposes, the IRD will attribute the partnership’s activities to the underlying partners in proportion to their partnership interests. Provided the partnership does not carry on a business in New Zealand, the non-resident limited partner is not taxed in New Zealand, and the income of the partnership is attributable to the limited partner, then the partnership itself will not pay tax in New Zealand.
- 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.