1- Letters from the French Tax Authorities' Trust Register Department
As 31 December 2025 marks the end of the statutory limitation for 2021, there has been a flurry of letters emanating from the trust register section of the French Tax Authorities’ (“FTA”) non-resident tax office.
Although these letters vary case by case, we summarise below some recurring patterns of the ones considered thus far:
Where trusts acquired French financial assets leading to a temporary French reporting obligations, the guidelines specify that event reports for the disposal of these assets are not necessary. It is difficult to envisage trustees having to systematically report purchases & disposals of French stocks, shares or bonds held in discretionary portfolios.
Nevertheless, the risk of €20,000 penalty means that, in practice, this will become necessary if the FTA insist on a termination report just to close the case at their end.
Unfortunately, some trustees have received such letters in respect of trust which have since terminated.
We cannot stress the importance of replying to the FTA within the 30-day timeframe, from date of receipt. Falling to do so could expose the trust to the €20,000 penalty per omission, for which all the trust parties are jointly and severally liable.
It is not possible to confirm whether these FTA letters are used for a tidy up exercise or just an attempt at finding extra funds through the penalties for any incomplete or missing reports still within the four-year statutory limitation period.
2 - The Scope of “Sui Generis” Levy: Possible Expansion through French Wealth Tax amendments
Broadening the French wealth tax scope has been on the cards for some time and has now been voted in as part of the 2026 French tax budget. What follows is still conditional to the Budget’s full enactment.
From 2018, wealth tax is limited to real estate, whether held directly or indirectly (therefore including any assets held via a trust). The wealth tax trigger limit has remained at €1.3m since 2012, by reference to the taxable assets’ market value as of 1st January.
From 1st January 2026, French wealth tax would no longer be a tax on immovable assets (Impôt sur la Fortune immobilière), but a tax on “unproductive” assets (“Impôt sur la Fortune Improductive”), targeting the following :
1. All real estate assets except for:
a. one main or sole/unique residence; the latter designates a property owned by the taxpayers, even if not occupied by them. This exemption would be capped at to €1M.
b. Some rental properties under strict conditions: The rents must be state-regulated, the property must be the tenant’s main home, be leased for a year minimum to non-family members and meet energy performance standards.
2. Sums, annuities, life assurance policies invested in Euros, cash and similar financial investments.
The tax would be set at 1% calculated on the above assets’ market value, over and above €2,000,000.
This new wealth tax scope is relevant to trusts with French resident settlors or “deemed settlors”. As a reminder, the term “deemed settlors” refers to trust beneficiaries where the original settlors have passed. The French tax system treats these beneficiaries as the new settlors and owners of the trust assets for tax purposes.
French residents are liable to wealth tax in respect of their worldwide assets. There is a temporary five-year exemption for newcomers for the assets they own outside France. Non-residents of France are currently only liable in respect of any French real estate.
The wealth tax liability for any trust party may be linked to a potential annual trust charge labelled “sui generis”, applicable if that person fails to include, where relevant, their “share” of the trust assets to their wealth tax return.
The responsibility falls on the trustee to find out if the sui generis is due and if so, to pay the charge when submitting the annual trust report due by 15th June. The rate of the sui generis charge was stated as the highest rate for wealth tax, being 1.5% so far.
We will need to wait to see if the French budget is voted in and how the above fully impact on trust situations. Trusts holding assets situated in France as described above, or worldwide assets for trusts with French resident parties, may need to review the situation to determine the potential impact of this new measure.
3 - Ruling - Trust Taxation under and FTC Article 123 Bis & Article 120 (9)
As a brief reminder, French Tax Code (“FTC”) Article 123 bis allows the FTA to tax the profits of low tax jurisdiction entities which mainly hold financial assets, in the hands of any French taxpayers who hold at least 10% therein. Please refer to our December 2021 Bulletin for further details on this anti-tax avoidance measure.
FTC Article 120 (9) on the other hand taxes “products” of a trust when distributed.
Paragraph 4 of FTC Article 123 bis prevents double taxation of profits already taxed as deemed distributed and later distributed. However, if the distributions exceed the total deemed distributed profits taxed to date, the excess remains taxable.
The Paris Administrative Court of Appeal reviewed the circumstances of a Guernsey trust whose original settlor passed away in 2012. The funds he had settled into the trust in 2011, originated from an older trust he had previously set up and subsequently terminated.
The trust’s beneficiaries and deemed settlors, had paid income tax under FTC Article 123 bis on their reported share of deemed distributed profits for tax years 2018 and 2019 (and earlier years).
To allow them to pay the ensuing liabilities, they received trust distributions in 2019 which were duly reported and taxed as investment income as per FTC Article 120 (9).
In a first ruling on 15 December 2023, the Paris Administrative Court refunded the liabilities on the 2018 & 2019 deemed distributed profit as per Article 123 bis. Indeed, the Court accepted the trust’s irrevocable and discretionary nature which allowed it to claim the safeguard against Article 123 bis taxation.
Nevertheless, it rejected the cancellation of the income tax liability applied to the 2019 distributed trust income. The taxpayers therefore lodged an appeal with the Paris Administrative Court of Appeal to obtain the refund of that liability, claiming that this had resulted in double taxation. Indeed, the total undistributed profit shares taxed in respect of tax years prior to 2019, was greater than the taxed distributed income in respect of 2019.
This was rejected on the grounds that, given the discretionary and irrevocable nature of the trust, Article 123 bis taxation should not have been applied in the first place. During the Appeal, the FTA attempted to reinstate the Article 123 bis liabilities for 2018 and 2019, claiming that the trust was not irrevocable or discretionary.
Nevertheless, the Court of Appeal upheld the Paris Administrative Court’s initial ruling which had concluded that the trust was indeed irrevocable and discretionary.
The Court rejected the FTA ‘s argument that the termination of the previous trust by the settlor indicated that the trust was revocable. Given the settlor’s demise, he could not terminate the trust. The Court also concluded that the beneficiaries could not request the trust’s termination, thus confirming its irrevocability.
When it comes to the trust’s discretionary nature, the Court accepted that the trustee’s obligation to award the settlor’s widow a regular pension and their decision to grant a loan to another beneficiary, did not compromise their discretionary powers. It also accepted the trustee’s exclusive powers to make distributions without the beneficiaries being able to request these.
The Court set aside the existence of the settlor’s guidance notes and a protector which appeared to have very limited powers, as factors which compromised the trustee’s discretionary powers. Finally, it conceded that the trustee’s apportionments of undistributed trust profits did not suggest the claimants had any control over the trust’s assets.
The above rulings offer some positive insight when it comes to evidencing a trust’s genuine discretionary and irrevocable nature necessary to claim the safeguard against FTC Article 123 bis.
Nevertheless, these legal proceedings relate to tax years prior to the tightening of Article 123 bis in the presence of discretionary settlements. Indeed, since 2022, there is a systematic presumption that any relevant discretionary trusts’ parties hold the requisite 10% right which trigger the look-through taxation.
4 - French Report may be due by Trustees to Accompany Payments of French Death Duties
The French draft bill for the fight against fiscal & social security frauds filed alongside the 2026 French Budget contains a proposition to introduce a specific tax form to report French death duties payable by the trust following the settlor or deemed settlor’s demise.
Where assets remain in trust on a discretionary basis (i.e. unallocated to designated beneficiaries), the trustee must pay specific French death duties. These are set at 45% if all the beneficiaries are the settlor’s descendants or 60% otherwise. The tax payment will be due with the event report and “death duty payment form.
Should you have any queries in relation to your French tax affairs please email French.tax@bdo.gg