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French Budget targets trusts

15 December 2021

A recently added article to the 2022 French Budget extends the scope of anti-tax avoidance rules to some trust situations.

The Assemblée Nationale recently added an Article to the 2022 French Budget. It aims at securing the application of anti-tax avoidance Article 123 (French tax code), in the context of certain French-connected trusts established in low-tax jurisdictions and which mainly hold financial assets.

The new measure will affect French tax resident settlors and beneficiaries, treated in France as “deemed settlors” where the original settlor has passed. It introduces an automatic presumption that the required 10% stake in the investment holding settlement is attained in order to tax its income and gains on a look-through basis.

The article specifies that “a trust’s irrevocable and discretionary nature cannot solely be relied upon” in attempts to quash the taxation. As a safeguard, taxpayers who can demonstrate that the investment structuring is not principally tax-motivated may successfully avoid article 123 bis taxation. However, this potential safeguard against look through taxation only applies in the context of entities registered in a territory which has an agreement with France to fight against tax fraud and evasion and a specific agreement for assistance in tax recovery.

Where the entity is situated in a blacklisted territory the taxable income cannot be below a set minimum return, which was fixed at 1.18% for 2020.

The new provision applies from 1 January 2022 and the taxable income is deemed distributed on the first day of the month following the entities’ financial year-end. For those with a 31 December year-end the distribution will be deemed made on 1 January 2022 and reportable in 2023 as part of the taxpayer’s 2022 income. Each case must be considered on its own merit to measure the full impact of Article 123 bis’ broadened scope.

Virginie Deflassieux, Director of French Tax at BDO in Guernsey, said that the changes mark a different approach from the French tax authorities following past unsuccessful attempts to apply this taxation in the context of trusts.

“The burden of proof has shifted to the taxpayer,” said Virginie. “These new measures clearly now target irrevocable and discretionary trusts, broadening the scope of previous legislation, and we expect in some cases may lead to litigation so we need to watch this space.

“Practitioners will need to review their structures accordingly to understand how this affects their French tax resident clients as this change does give the legislation a new set of teeth to bite into offshore trusts’ profits.”