Holding French real estate through a trust

If you have the project of buying real estate with a trust, you should be ware of some details. The legal recognition of trusts in France is relatively recent since it was not until 2011 that trusts were officially recognized as legal instruments.

However, it is important to speak of “recognition” and not of institution, because the Law of July 29, 2011, called “Loi de Finance rectificative pour 2011”, only aimed at recognizing the existence of trusts under foreign law in order to frame them, and to better apprehend the possible tax impacts in France. However, this law does not allow the creation of a trust under French law, as the legal attributes of this instrument are contrary to the very foundations of property rights in France.

The rectifying finance law for 2011 has also clarified the tax and reporting obligations of trusts in France, in particular when a French real estate is held through a trust.

Buying real estate with trust : Taxation of real estate income

For the application of international tax treaties, it is advisable to reason by transparency. Thus, when a real estate property located in France generates rental income, this income is, in principle, taxable in the country in which this property is located. Thus, the rental income from a property located in France will be taxable in the hands of the beneficiaries, even if the property is held through a foreign trust.

Buying real estate with trust : Tax on real estate wealth

 Since the introduction of the amended finance law for 2011, trusts are treated in the same way, regardless of their nature:

• the settlor of the trust is always the only person liable for the tax on real estate wealth. The tax base is only the real estate held in France if he is a non-resident, and all the real estate held through the trust, in France and abroad, if the settlor is fiscally domiciled in France.
• upon the death of the settlor, the beneficiary “deemed settlor” potentially becomes liable for real estate wealth tax.

As a reminder, individuals are liable for real estate wealth tax when the net value of their real estate assets exceeds 1.3 million euros.

Annual tax on the market value of real estate owned in France (known as the 3% tax)

Its role is above all dissuasive because it aims mainly to collect data from individuals who are indirect owners of real estate located in France, and thus indirectly to force them to comply with their tax obligations in France, in particular with respect to wealth tax.

Trusts owning such property are therefore subject to the annual 3% tax on the market value of real estate located in France, with the exception of : 

• trusts located in a European Union country or in a country that has concluded a tax treaty with France for administrative assistance
• trusts whose real estate assets held in France have a market value of less than €100,000 or whose share of ownership is less than 5% of their market value;
• trusts which have undertaken to communicate to the tax authorities, upon request, certain information on the identity of the members of the trust, the consistency of the property, its value, etc…
•  trusts that file the annual declaration n°2746 (declaration on which the information specific to the members of the trust, the consistency of the property, its value, etc. is reported annually).

From a practical point of view, the declaration obligations can be fulfilled by the trustee or any member duly authorized by the trustee

The sui generis direct debit

Like the 3% tax on the market value, the sole purpose of this levy is to penalize the failure to declare the real estate assets placed in the trust for IFI purposes. Thus, real estate assets that have been correctly declared in the IFI declaration of the settlor or the beneficiary deemed to be the settlor are not included in the taxable amount of this levy.
The tax base of this levy is made up of all the real estate assets and real estate rights not regularly declared to the IFI. The tax rate corresponds to the highest bracket of the real estate wealth tax scale, i.e. 1.5%.
The declaration and payment of the sui generis direct debit are made when the annual “Trust2” declaration is filed.

Declaration obligations, Trust1 and Trust2 forms

France has introduced two specific declarations for trusts:
– a so-called “event-based” declaration called “Trust1”, allowing the tax authorities to be informed of any event relating to the creation, modification or termination of the trust deed
– an annual declaration containing a detailed inventory of the assets, rights and capitalized income making up the trust and their market value on January 1 of the tax year. This is the “Trust2 ” declaration.

These reporting obligations apply to trusts whose settlor or at least one of the beneficiaries is domiciled for tax purposes in France on January 1, or which include at least one asset in France.
The 2019 Finance Act has clarified the matter, in particular when none of the parties to the trust is fiscally domiciled in France. In this case, only the assets and rights located in France must be declared (excluding those located abroad). On the other hand, when one of the settlors, beneficiaries or trustee is domiciled in France for tax purposes, all the assets and rights placed in the trust must be declared.