Relocating to France from a common law country such as the United States or the United Kingdom involves more than cultural adjustment. It requires adapting to a fundamentally different legal philosophy—particularly when it comes to trusts.

In Anglo-Saxon legal systems, trusts are central tools for estate planning, asset protection, and tax structuring. In France, however, the concept of a trust sits uneasily within a civil law framework that traditionally does not recognize the division between legal and beneficial ownership in the same way. As a result, the French tax administration approaches foreign trusts with caution and, in many cases, skepticism.

This article explores how France taxes Anglo-Saxon trusts, focusing on income taxation, inheritance and gift duties, wealth tax exposure, reporting obligations, and the practical consequences for asset protection.

Taxation of Trust Income and Distributions

One of the most striking differences between common law and French tax treatment lies in the concept of transparency.

In the United States or the United Kingdom, many trusts are treated as fiscally transparent. Beneficiaries may be taxed on income as it arises, even if it has not yet been distributed. By contrast, French tax law generally treats foreign trusts as fiscally opaque.

In practical terms, this means that French-resident beneficiaries are not taxed on trust income as it accrues. Instead, taxation occurs only when an actual distribution is received. When a distribution is made, it is typically classified as investment or capital income and taxed at a flat rate of 31.4%, inclusive of social charges.

However, this deferral principle has a significant exception. Under Article 123 bis of the French Tax Code, when a trust is established in a jurisdiction benefiting from a privileged or low-tax regime, the French tax authorities may disregard the absence of distribution. In such cases, the French-resident settlor—or deemed settlor—can be taxed annually on the trust’s income as if it had been directly received, even if no funds were paid out. If the trust has no formal accounting year, income is deemed received on December 31 of each year.

This rule creates a serious trap for families with offshore trust structures. Income may be taxed annually in France despite remaining locked inside the trust.

Compounding this complexity, France’s highest administrative court has confirmed that domestic French law—not the U.S.-France tax treaty—determines whether trust income is taxable. Because French law views trusts as opaque, undistributed income is generally ignored for French tax purposes, even if it has already been taxed in the United States. This can lead to timing mismatches and potential double taxation: first in the U.S. on accrual, then in France upon distribution.

Periodic distributions classified as income (interest, dividends, or fruits) often fall outside treaty protection, again increasing the risk of double taxation. Upon the final liquidation of a trust, French law typically recharacterizes the event as a gratuitous transfer, subject to gift or inheritance tax.

Transfer, Inheritance, and Succession Duties: Article 792-0 bis

France takes an especially assertive approach to trusts when it comes to transfer and death duties.

Article 792-0 bis of the French Tax Code applies when there is a French connection—such as a French-resident settlor, a French-resident beneficiary, or French-located assets. Key triggering events include the creation or substantial modification of a trust, the death of the settlor, or structural changes affecting beneficial rights.

On the death of the settlor, inheritance tax may apply in two principal situations. First, if the settlor was a French tax resident at the time of death, all trust assets become taxable in France, regardless of the beneficiaries’ residence. Second, if a beneficiary has been French tax resident for at least six of the preceding ten years, the full value of trust assets may be subject to French inheritance tax—even if both the settlor and the assets are located abroad.

Where the transfer qualifies as a traditional gift or inheritance under French law, progressive tax rates apply. These range from 5% to 45% for transfers in direct line, 35% to 45% between siblings, and 55% for more distant relatives.

However, where no clear qualification is possible—particularly when assets remain within the trust following the settlor’s death—a flat rate of 60% may apply, regardless of family relationship. This punitive rate is triggered in situations such as trusts administered from non-cooperative jurisdictions or those established after May 11, 2011 by a French tax resident.

For dynastic or perpetual trusts, the exposure can be repeated across generations. Each beneficiary may be treated as a deemed settlor upon their own death, potentially triggering another round of transfer taxation.

Although limited exemptions exist—such as for surviving spouses or registered partners—the overall impact can be substantial for families relying on common law trusts for succession planning.

Wealth Tax (IFI): Transparency Returns

France’s Impôt sur la Fortune Immobilière (IFI), or real estate wealth tax, illustrates another divergence between form and substance.

While French law generally treats trusts as opaque for income tax purposes, that opaqueness disappears in the context of wealth taxation. For IFI, real estate held through a trust is effectively treated as transparent.

As of each January 1, the net market value of French and worldwide real estate interests held in trust must be included in the taxable base of the settlor—or, in certain circumstances, the beneficiaries. This inclusion significantly weakens the asset protection and privacy objectives often associated with trust ownership in their jurisdictions of origin.

Stringent Reporting Obligations

Perhaps the most demanding aspect of French trust taxation lies in its reporting regime.

Since reforms introduced in the early 2010s, trustees must file detailed disclosures whenever a trust is created, modified, or terminated, and must also file annual declarations for as long as a French nexus exists. These obligations are fulfilled through specific forms—2181-TRUST1 for reportable events and 2181-TRUST2 for annual asset valuations.

Penalties for non-compliance are severe. Fines can reach €20,000 per omission, with potential additional surcharges and, in some cases, joint liability for unpaid taxes.

This robust transparency regime reflects France’s determination to combat tax avoidance, but it also creates a heavy administrative burden for families with legacy trust structures.

Asset Protection Under Pressure

In common law jurisdictions, one of the principal attractions of trusts is asset protection through the separation of legal and beneficial ownership. French tax law significantly limits this benefit.

Since 2011, France has treated trusts as potential vehicles for opacity and avoidance. Its response has been comprehensive transparency, aggressive reporting requirements, and the application of heavy transfer duties—often without regard to distinctions such as revocable versus irrevocable or discretionary versus fixed-interest trusts.

While French civil law may recognize certain legal effects of a trust instrument, tax law operates independently. Fiscal autonomy means that U.S. or U.K. concepts of transparency or deferral do not control French tax treatment.

For Americans living in France—already subject to U.S. worldwide taxation—the result is pronounced complexity. Foreign tax credits, income timing mismatches, and double taxation exposure must be carefully managed.

Conclusion: Navigating a Complex Environment

France’s approach to Anglo-Saxon trusts is shaped by a civil law tradition that prioritizes transparency and fiscal control over flexibility and privacy. Although trusts are not ignored, they are subject to a detailed and sometimes punitive tax framework that can significantly undermine traditional asset protection and estate planning strategies.

For individuals and families relocating to France with existing U.S. or U.K. trust interests, expert advice is essential. The interplay between French domestic law, international tax treaties, inheritance rules, wealth taxation, and reporting obligations demands careful structuring and ongoing compliance.

Relocation to France offers extraordinary opportunities—but when trusts are involved, it also requires careful navigation of a highly technical and evolving tax landscape.

About the Advisor

This article was prepared by Julien Darras, a seasoned tax attorney with extensive expertise in French and international tax matters. Julien advises clients relocating to and from France, providing strategic solutions for cross-border transactions and ensuring full compliance with French tax obligations. Readers with questions regarding foreign trusts or other French tax issues are encouraged to contact Julien.