New tax regime for trusts (other than irrevocable charitable or pension trusts): A French resident trustee pays income tax on income derived from trust assets. If the trustee is a French non-resident, only French source income is subject to French tax. Beneficiaries are subject to income tax on distributions of income but not of principal. Under the US-France tax treaty, there is generally no double taxation so when a US trust distributes US source income to a French resident, a tax credit equal to the French tax is allowed against US tax. Despite the treaty, careful tax planning is necessary if a beneficiary lives in France.

The French gift tax is not imposed when the trust is created or when assets are transferred to the trust. Beginning July 31, 2011, either a gift tax is due when the trust assets are transferred to the beneficiaries, or the inheritance tax is due when the settlor dies, whichever occurs first. The tax rate depends on the family relationship between the settlor and the beneficiaries, generally at 45% for direct descendants and 60% for others. The gift or inheritance tax is paid by the beneficiary. If the beneficiary resides in France, such taxes are assessed on worldwide assets; if the beneficiary resides outside of France, on French-situs assets only.

The settlor is subject to the wealth tax described above on all assets held in his or her trusts. If the settlor died before January 1, 2012, the French resident beneficiaries are considered “deemed settlors” and are subject to wealth tax on all of the trust assets. If the settlor fails to pay the wealth tax, beginning January 1, 2012, a new tax called “prelevement” will apply. The prelevement is payable by the trustee at a rate of 0.50% per year.

 The Budget Ministry put an end to the tax shield (Bouclier Fiscal) which purpose was to cap the direct tax to 50% of income. Therefore, French residents will now be under the same tax system as non residents since no one will benefit any longer from such shield. 

Further, the conditions under which the wealth tax reform will take place have been disclosed. The tax rate will decrease, but will not be entirely suppressed. The tax threshold will now be of €1,300,000 instead of €800,000 and there will be two tax brackets: 0.25% between €1,300,000 and €3,000,000 and 0.5% above €3,000,000. The tax rate has therefore largely diminished while, in the mean time, its threshold has considerably increased. However, its tax basis is much wider as the tax will be applicable from the first Euro, and not from the threshold as it was the case until now.

François Baroin has announced that he wishes this tax reform to be applicable as of 2011. For this reason, the Budget Ministry wants to shift the dates of submission of the tax returns to September 30th, 2011, instead of the usual June 15th deadline in order to pay such tax.