Since 2011, various regulations have been enacted in France to regulate trusts and to prevent tax avoidance by individual taxpayers.

These regulations, often referred to as the "French mini-FATCA (Foreign Account Tax Compliance Act) for trusts," include various components. Most notably they are:

• A set of reporting obligations for trustees of trusts with a French nexus (i.e., French tax resident settlors, beneficiaries or trustees or assets or rights located in France). Each failure to comply is subject to a €20,000 euros penalty.
• A sui generis 1.5 % taxation assessed on the market value of all the assets and rights in the trust. This tax potentially applies in the case of non-compliance with the French net wealth tax (Impôt de Solidarité sur la Fortune or ISF) requirements and/or the above trust reporting obligations.
• A trust register accessible to qualified parties.

Some of the features of these regulations have been specifically designed to address the avoidance of the French net wealth tax, among other taxes due by individuals.

The ISF is an annual tax assessed on net worth and is due when a certain wealth threshold is met. It is assessed on the market value of French and foreign assets and rights (French tax residents) or only French assets and rights (non-French tax residents), as of 1 January each year.

The Finance Bill for 2018 repealed the ISF with effect as of 1 January 2018 and replaced it with a real property wealth tax (Impôt sur la Fortune Immobilière or IFI).

The IFI rates (between 0.5% and 1.5%) and threshold (€1.3 million) are similar to those of the ISF but its tax basis is as follows:

• All properties and real estate rights
• Units or shares of companies or organizations (established in France or abroad), for the portion of their value representing property or real estate rights

French tax residents are subject to the IFI on all qualifying assets located in France or abroad. Non-French tax residents are only subject to the IFI on properties and real estate rights located in France, as well as units or shares of companies or organizations (established in France or abroad), for the portion of their value corresponding to French properties and real estate rights. For non-French tax residents, the situation is therefore significantly modified, since all the units or shares of companies or organizations are in scope as long as a portion of the value can be allocated to French real estate.

Derogations and safe harbors apply under specific conditions to certain real estate assets and rights and to units and shares of qualifying entities in the case of holdings below a 10% or a 5% threshold.

As a result of the repeal of the ISF and enactment of the new IFI, the Finance Bill for 2018 includes some changes in the French mini-FATCA regulations. In summary, and subject to further guidance and clarifications:

• The definition of what constitutes a French nexus and the corresponding obligation to report remains unchanged.
• The event-based reporting obligation remains unchanged.
• The annual reporting obligation should be limited to the reporting of the market value as of 1 January of the current year of the assets which are in the scope of the IFI.

As a result, trustees may need to perform a detailed analysis of the assets in the trust (and in particular the units and shares of certain types of entities) to determine the information to be reported.

• The sui generis 1.5% tax, when applicable, is now assessed only on the assets which are in the scope of the IFI.

Some uncertainties relating to the scope of the annual reporting, derogations and safe harbors remain. Indeed, the scope of the trust reporting obligations may be re-considered taking into consideration the current trend of reporting tax obligations and transparency. Further guidance should be issued in the coming months.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

EY Société d'Avocats, Paris

• Vincent Natier
  vincent.natier@ey-avocats.com
• Florence Esmoingt
  florence.esmoingt@ey-avocats.com
• Filipe de Almeida
  filipe.de.almeida@ey-avocats.com

Ernst & Young LLP, Financial Services Desk, New York

• Sarah Belin-Zerbib
  sarah.belinzerbib@ey.com

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ATTACHMENT

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