Foreign trusts and foundations: French tax qualification, inheritance duties and income taxation of distributions
A French tax resident discovers, upon the opening of a parent's estate, that the family wealth includes assets held within a foreign foundation or a trust established decades earlier in a jurisdiction whose legal framework is entirely unfamiliar. The notary handling the succession advises that these assets must be declared in France, that inheritance duties will apply and that future distributions will be subject to specific income tax rules. Far from being hypothetical, this scenario arises with increasing frequency in international tax practices as wealth structures set up in the 1980s and 1990s undergo generational transfers.
The French tax qualification of foreign trusts and foundations stands as one of the most complex and rapidly evolving areas in international personal taxation. Confronted with legal structures unknown to the civil law tradition (the common law trust, the Liechtenstein Stiftung, the Panamanian private interest foundation) the French legislature adopted in 2011 a deliberately broad definition through Article 792-0 bis of the French General Tax Code (Code général des impôts, "CGI"), the scope of which has continued to expand under the combined influence of case law and administrative guidance. The interplay between gratuitous transfer duties payable upon the settlor's death and the income taxation of distributions to beneficiaries raises considerable practical difficulties, made all the more acute by recent shifts in case law ; particularly regarding the burden of proof.
Our analysis proceeds in three stages. We first examine how French tax law characterises foreign trusts and foundations through the lens of Article 792-0 bis CGI, tracing the legislative genesis and judicial developments of this qualification (I). We then analyse the inheritance consequences of this characterisation, in particular the "deemed settlor" mechanism (bénéficiaire réputé constituant) and the inclusion of trust assets in the taxable estate (II). Finally, we address the income tax regime applicable to distributions received by French-resident beneficiaries, through the delicate interplay between Articles 120-9° and 123 bis CGI, and set out practical recommendations for heirs and their advisors (III).
I. Foreign trusts and foundations: a French tax qualification built in layers
A. Structures foreign to the French civil law tradition: overview and qualification challenges
The common law trust: the archetype of patrimonial dissociation. The trust, a foundational institution of common law systems, rests on a mechanism unknown to French civil law: the division of ownership between legal ownership held by the trustee who administers the assets, and equitable interest belonging to the beneficiaries. This dissociation is not equivalent to the French concept of démembrement, which divides property between usufruct and bare ownership, as expressly noted by the French tax authorities (BOFiP, BOI-DJC-TRUST, 30 March 2022). A trust may be revocable or irrevocable, discretionary or with determined beneficiaries, created inter vivos or upon death. Its flexibility makes it the preferred instrument for wealth planning and succession in common law jurisdictions (the United Kingdom, the United States, the Channel Islands, Hong Kong, Singapore) where it serves purposes ranging from asset protection to intergenerational wealth transfer.
The Liechtenstein Stiftung and its continental variants. The Liechtenstein foundation, or Stiftung, is a private law legal entity created by a founding act in which the settlor (Stifter) irrevocably transfers assets to an entity endowed with legal personality. The foundation's administration is entrusted to a Foundation Council (Stiftungsrat), vested with broad powers over management and distributions, while a protector (Protector or Curator) may be appointed to ensure compliance with the settlor's wishes. Although endowed with legal personality (unlike a trust) the Liechtenstein Stiftung shares striking functional similarities with trusts: separation between the settlor's personal estate and the structure's assets, discretionary distribution powers, and a vocation for intergenerational wealth transmission. Comparable structures exist in Panama (the private interest foundation, established by Law No. 25 of 1995, directly modelled on the Liechtenstein framework), Austria (Privatstiftung) and the Netherlands (Stichting Particulier Fonds), each with its own legal specificities but a comparable economic function.
The qualification challenge in French tax law. For the French legislature, the fundamental difficulty lies in the absence of any correspondence between these foreign structures and the categories of French civil law. Neither trusts nor foreign foundations have an exact equivalent in the Code civil. Yet French taxation traditionally relies on civil law qualifications: ownership, usufruct, bare ownership, succession, gift. Faced with structures that organise precisely the dissociation between legal and beneficial ownership, French tax law had to construct a sui generis framework, of which Article 792-0 bis CGI constitutes the cornerstone. The stakes are considerable: without an operative tax qualification, wealth held in trusts and foundations would escape French inheritance duties, the real estate wealth tax (impôt sur la fortune immobilière, "IFI") and French income tax : an outcome that neither the legislature nor the tax authorities could accept.
B. Article 792-0 bis CGI: a broad definition, from the 2011 Act to contemporary case law
Legislative genesis: the legal vacuum exposed by the Wildenstein affair. Before the entry into force of Law No. 2011-900 of 29 July 2011, no provision of French tax law defined the trust or expressly provided for its tax treatment. This gap was dramatically highlighted by the Wildenstein affair: the Paris criminal court, in a decision of 12 January 2017, held that the absence of any legal text requiring, prior to 2011, the disclosure of trust-held assets in succession declarations precluded any finding of tax fraud. The court acquitted the heirs, concluding that, despite a manifest intent of patrimonial and fiscal evasion, the principle of legality of offences and penalties barred conviction. This decision, upheld on appeal on 29 June 2018 (Paris Court of Appeal), served as the catalyst for legislative reform, demonstrating the imperative need for an explicit statutory framework.
The Article 792-0 bis framework: a functional and deliberately broad definition. Article 792-0 bis CGI defines a trust as the set of legal relationships created under the law of a State other than France by a person acting as settlor (constituant), by inter vivos or mortis causa act, for the purpose of placing assets or rights under the control of an administrator (administrateur), for the benefit of one or more beneficiaries or for the achievement of a determined objective. This definition is remarkable for its functional character: it does not target a particular legal form but a mechanism ; the placement of assets under a third party's control for the benefit of beneficiaries. This drafting choice enables the provision to encompass, beyond common law trusts stricto sensu, foreign foundations, fiducies and any foreign structure fulfilling this function, regardless of its legal form or jurisdiction of formation.
Judicial application to foundations: confirmation of a functional assimilation. Case law has confirmed this broad reading. The Paris Administrative Court of Appeal held that a Liechtenstein foundation (the "Fondation Matteo") met the definition of a trust within the meaning of Article 792-0 bis, I-1 CGI, since the constitutive elements of the statutory definition were satisfied: transfer of assets by a settlor, control by an administrator (the Foundation Council), existence of designated or designable beneficiaries. This case law is transposable to all foreign foundations displaying these functional characteristics, whether a Liechtenstein Stiftung, a Panamanian foundation or an Austrian Privatstiftung. The foundation's legal personality (which formally distinguishes it from a trust) is not an obstacle to qualification: it is the economic function and governance structure that determine the application of the tax regime, not the legal form adopted under foreign law.
Reporting obligations: a reinforced transparency regime. Alongside the tax qualification, the legislature established specific reporting obligations. The trust administrator (trustee) and the settlor or deemed settlor are required to file an event declaration (form 2181-TRUST1) within one month of the trust's formation, modification or termination with the non-residents' tax office, and an annual declaration (form 2181-TRUST2) stating the fair market value as at 1 January of the assets, rights and capitalised income comprising the trust, to be filed by 15 June each year. Failure to file is penalised by a fine of EUR 20,000 per missing declaration (CGI, Art. 1736, IV bis), reflecting the legislature's determination to ensure full transparency of trust-type structures vis-à-vis the French tax authorities.
II. Death of the settlor and inheritance duties: the "deemed settlor" mechanism
A. Inclusion of trust assets in the taxable estate: Articles 750 ter and 752 CGI
The territorial scope of gratuitous transfer duties. Article 750 ter CGI sets the territorial rules applicable to gratuitous transfer duties. Where the deceased was domiciled in France for tax purposes on the date of death, all of their assets (whether situated in France or abroad) are subject to French inheritance duties. Where the deceased was not domiciled in France but the heir is, and has been so for at least six of the ten years preceding the year in which they receive the assets, those assets are likewise subject to French duties regardless of their location. This mechanism ensures that the French tax residence of the heir is sufficient, under certain conditions, to ground France's taxing jurisdiction over the estate assets, including those held in a trust or foundation abroad.
The ownership presumption under Article 752 CGI. Article 752 CGI provides that assets or rights held in a trust within the meaning of Article 792-0 bis are presumed, until proven otherwise, to form part of the deceased's estate for the purposes of calculating and paying inheritance duties. This simple but powerful presumption reverses the burden of proof: it falls to the heir contesting the inclusion of these assets in the estate to demonstrate that they do not belong to the taxable estate. In practice, this proof is extremely difficult to adduce, as it requires demonstrating that the deceased had lost all effective connection with the trust-held assets: a demonstration that the very structure of the trust or foundation, with its mechanisms of indirect control (protector, letters of wishes, reserved powers), most often renders impossible.
The inheritance duty base: net fair market value and capitalised income. Article 792-0 bis CGI specifies that the transfer of assets or rights placed in the trust, together with capitalised income, is subject to gratuitous transfer duties on the net fair market value of the relevant assets, rights or income at the date of transfer, according to the degree of kinship between the settlor and the beneficiary. This wording is significant: it encompasses not only the assets originally transferred to the trust by the settlor, but also the income generated by those assets and capitalised within the structure over the years. Inheritance duties are calculated according to the progressive scale applicable to the kinship between the settlor (or deemed settlor) and the actual beneficiaries; in the direct line, a scale reaching 45% above EUR 1,805,677 after applying the EUR 100,000 per-child allowance (CGI, Art. 777, Table I and Art. 779, I).
B. The "deemed settlor" fiction: successive transfers and the chain of taxation
The statutory presumption mechanism. Article 792-0 bis CGI introduces a device of considerable practical significance: where the initial settlor of the trust has died, the beneficiary who succeeds them is, for the purposes of the entire trust tax regime, "deemed to be a settlor of the trust" (bénéficiaire réputé constituant). This legal fiction allows the French tax authorities to capture successive patrimonial transfers within the trust, generation after generation. In practical terms, when a settlor dies and their children become beneficiaries of the trust, those children are treated for tax purposes as settlors for the application of inheritance duties, IFI and reporting obligations. This mechanism prevents the trust from becoming an instrument of perpetual succession tax avoidance, where the death of the original settlor would extinguish all French tax obligations.
Conditions of application and scope of the presumption. The deemed settlor status applies in two distinct situations. First, it targets beneficiaries of a trust whose initial settlor died before the date of entry into force of the Law of 29 July 2011, in respect of the assets, rights and capitalised income placed in the trust. Second, it covers beneficiaries in respect of assets, rights and capitalised income that have been subject to gratuitous transfer duties under Article 792-0 bis and their capitalised income. Inheritance duties are levied by adding the value of the assets, rights and income concerned to the value of the other assets included in the succession declaration, for the application of the progressive tariff and the calculation of allowances (CGI, Art. 779). Duties must be paid by the notary handling the estate within the ordinary time limits and under the ordinary conditions.
The constitutional dimension: the Conseil constitutionnel's reservation. The deemed settlor mechanism was subjected to constitutional review in decision No. 2017-679 QPC of 15 December 2017. The Conseil constitutionnel upheld the principle of subjecting the settlor of a trust to wealth tax, while issuing an essential interpretive reservation: the contested provisions could not, without infringing the requirement to take account of the taxpayer's ability to pay, prevent the settlor or deemed settlor from proving that the assets, rights and income in question confer no ability to pay upon them, arising in particular from the direct or indirect advantages they derive from such assets, rights or income. The Conseil further specified that such proof cannot result solely from the irrevocable character of the trust and the discretionary power of its administrator. This constitutional reservation opens a significant avenue: it allows the deemed settlor to challenge the assessment by demonstrating the absence of any effective ability to pay, which in practice requires proving that they derive no advantage, even indirect, from the trust-held assets.
Practical difficulties of the chain of taxation. The implementation of the deemed settlor mechanism raises considerable practical difficulties for heirs. Where the original settlor established the trust or foundation several decades earlier, in a foreign jurisdiction, with a Foundation Council that may have only fragmentary knowledge of French tax rules, obtaining the information necessary to calculate the inheritance duties can prove arduous. It is necessary to reconstruct the fair market value of the assets at the date of death, distinguish original assets from capitalised income, secure the cooperation of the trustee or Foundation Council, and navigate the confidentiality rules of the foreign jurisdiction, all within the six-month deadline from the date of death for filing the succession declaration (CGI, Art. 641). The trustee's inertia, the complexity of valuing certain assets (unlisted participations, international real estate) and the divergences between the rules of foreign law and the requirements of the French tax authorities are all obstacles that necessitate specialised legal guidance from the very opening of the estate.
III. Income taxation of distributions to French-resident beneficiaries: a two-tier regime
A. Article 120-9° CGI: trust distributions as investment income
The principle: flat-rate taxation of distributed income. Article 120-9° CGI provides that income distributed by a trust, as defined by Article 792-0 bis, constitutes foreign-source investment income (revenus de capitaux mobiliers) taxable to French income tax in the hands of the French-resident beneficiary. This characterisation applies regardless of the nature of the underlying assets held by the trust (securities, real estate, cash) and of the legal characteristics of the structure (revocable or irrevocable, discretionary or with determined beneficiaries). The beneficiary is taxed as if receiving foreign securities income paid by the trustee, at the flat tax rate (prélèvement forfaitaire unique, "PFU") of 30% (12.8% income tax plus 17.2% social charges), unless they opt globally for the progressive income tax scale; without the benefit, in that case, of the 40% dividend allowance.
The fundamental distinction between income and capital. The regime under Article 120-9° CGI targets only the "income" (produits) distributed by the trust, to the exclusion of capital repayments. Case law has clearly established this principle: only sums corresponding to the fruits generated by the trust's capital (interest, dividends, realised gains, rental income) may be characterised as taxable income within the meaning of Article 120-9°, while transfers relating to the capital itself fall outside this characterisation and are governed instead by the gratuitous transfer duties regime. This distinction, straightforward in principle, is formidable in practice: it requires identifying, within each distribution, the portion corresponding to income and the portion corresponding to capital: an exercise that demands detailed trust accounting and rigorous traceability of financial flows.
The evolution of the burden of proof: a significant shift against the taxpayer. The burden of proof regarding the characterisation of distributions has undergone a major, and, in our view, insufficiently anticipated, jurisprudential shift. Initially, the Paris Administrative Court of Appeal, in a judgment of 21 April 2023 (No. 20PA02868, 5th Chamber), held that the burden of proof lay with the tax authorities: it was for the administration to adduce evidence that distributions constituted taxable income, while the taxpayer could for their part provide any evidence establishing the non-taxable character of the sums received. However, the same Court, in a judgment of 11 October 2024 (No. 22PA03139, 9th Chamber), reversed course by placing the burden of proof squarely on the taxpayer: it falls to the beneficiary claiming to have received distributions that do not constitute taxable income to establish, in particular from the trust's accounts, the existence of transactions affecting the trust's capital that fall outside the scope of income tax. In the absence of such evidence, the taxpayer is to be regarded as having received taxable income. This reversal, accomplished within eighteen months by two chambers of the same Court, illustrates the jurisprudential instability in this area and considerably strengthens the position of the tax authorities.
B. Article 123 bis CGI: forced transparency, privileged tax regime and constitutional limits
The "look-through" taxation mechanism. Article 123 bis CGI is an anti-avoidance provision that applies to individuals domiciled in France who hold, directly or indirectly, at least 10% of the financial rights or voting rights in an entity established outside France and subject to a privileged tax regime, where the entity's assets are primarily composed of securities, receivables, deposits or current accounts. In such cases, the entity's positive income or profits are deemed to constitute investment income taxable in the hands of the individual each year, in proportion to their share of rights, even in the absence of any actual distribution. The trust or foundation is then treated as transparent: the beneficiary is taxed as if the structure did not exist, on the income actually realised by the trust during the fiscal year, without awaiting distribution. For trusts, Article 123 bis presumes that the 10% ownership condition is satisfied by the settlor or deemed settlor, with proof to the contrary not being capable of resulting solely from the irrevocable nature of the trust and the discretionary management power of its administrator.
Coordination with Article 120-9°: the anti-double taxation mechanism. To prevent double taxation of the same income (first under Article 123 bis in the year the income is realised, then under Article 120-9° in the year of distribution) Article 123 bis(4°) CGI provides a coordination mechanism. Income distributed or paid to an individual already taxed under Article 123 bis does not constitute taxable income within the meaning of Article 120 CGI, except for the fraction exceeding the income previously taxed under Article 123 bis. Only the excess, if any, is subject to income tax upon actual distribution. This coordination mechanism, impeccable in its theoretical logic, is complex in practice as it requires rigorous accounting of income already taxed under Article 123 bis and their correspondence with subsequent distributions.
Constitutional limits and exclusion conditions. The application of Article 123 bis is subject to restrictive conditions that the Conseil constitutionnel has helped to clarify. In decision No. 2016-614 QPC of 1 March 2017, the Conseil partially struck down the provision by extending the scope of the safeguard clause to entities established outside the European Union: the taxpayer may escape the application of Article 123 bis if they demonstrate that the entity's foreign location has neither the purpose nor the effect of enabling, for the purpose of tax fraud or evasion, the localisation of income abroad. This safeguard clause is of particular importance for heirs who did not choose the structure of which they become beneficiaries: they inherit a situation they did not create, which should facilitate the demonstration of the absence of tax motivation. Furthermore, Article 123 bis only applies where the entity is subject to a privileged tax regime, meaning that the entity's effective tax burden in its jurisdiction of establishment is more than 40% lower than the French corporate tax that would result from the application of standard rules. This criterion excludes trusts and foundations established in jurisdictions that have substantially increased their taxation in recent years.
C. Practical recommendations: documentation, flow qualification and anticipation of reclassification risks
Building a complete evidential file from the opening of the estate. The Paris Administrative Court of Appeal's jurisprudential shift of October 2024 has fundamentally altered the evidential balance to the detriment of the taxpayer. We consider that heirs and beneficiaries of foreign trusts or foundations must now compile, from the opening of the estate or the first distribution, a complete evidential file justifying the nature of each sum distributed. This file should include the trust or foundation's accounts from its formation (or, at a minimum, from the entry into force of the 2011 Act), the trust's bank statements, details of investments made and income generated by the assets, minutes of distribution decisions by the Foundation Council or trustee, and any document enabling the distinction between capital and income to be traced. The absence of such evidence exposes the beneficiary to taxation of the entirety of distributions as investment income, without any possibility of demonstrating that a portion corresponds to capital repayment.
Pre-qualifying the tax treatment of flows before any distribution. Our analysis leads us to recommend that beneficiaries of foreign trusts and foundations undertake a preliminary tax qualification of each contemplated distribution, in coordination with their French advisors and the trust administrator. This qualification should distinguish, in a documented and verifiable manner, the portion of the distribution corresponding to income (taxable at the PFU or progressive scale under Article 120-9° CGI), the portion corresponding to capital repayment (governed, where applicable, by the gratuitous transfer duties regime), and the portion corresponding to capitalised income already subject to inheritance duties upon the settlor's death. The objective is to avoid the risk of double taxation (the same sum being taxed both under inheritance duties and income tax) while securing the beneficiary's position in the event of a tax audit. This qualification requires close collaboration between the notary handling the estate, the heir's French tax advisor and the foreign trustee or Foundation Council.
Assessing the applicability of Article 123 bis and documenting the safeguard clause. For beneficiaries of trusts or foundations established in reduced-tax jurisdictions, it is essential to assess in advance the applicability of Article 123 bis CGI and, where appropriate, to build the evidential file necessary to benefit from the constitutional safeguard clause. This demonstration rests on objective elements: the date of formation of the structure (prior to the beneficiary's French residence), the absence of the beneficiary's choice in the structure's location (inheriting a pre-existing arrangement), and the existence of non-tax justifications for the location (geographical proximity to assets, family tradition, quality of local law governance). The case law of the Paris Administrative Court of Appeal, in particular its decisions of 24 June 2020 (No. 19PA00458) and 16 April 2025 (No. 23PA05124), requires that the beneficiary exercise effective control or hold financial rights in the trust for Article 123 bis to apply, which constitutes an additional argument for beneficiaries of discretionary trusts over which they exercise no power of control.
Conclusion
The French tax regime applicable to foreign trusts and foundations constitutes a normative edifice of remarkable complexity, built in successive layers since 2011 and continually reshaped by case law. From the initial qualification under Article 792-0 bis CGI (which encompasses in a deliberately broad functional definition all foreign structures of patrimonial dissociation) to the inheritance consequences of the deemed settlor mechanism, through the subtle interplay between the taxation of distributed income (Article 120-9°) and the forced transparency of Article 123 bis, each stage of the fiscal journey of trust-held assets harbours pitfalls for French-resident beneficiaries.
We consider that the recent evolution of case law, particularly the Paris Administrative Court of Appeal's reversal on the burden of proof regarding the characterisation of distributions (CAA Paris, 11 October 2024, No. 22PA03139), marks a turning point unfavourable to taxpayers. The tax authorities' position is now strengthened: in the absence of detailed accounting evidence provided by the beneficiary, any distribution is presumed to constitute taxable income. This evidential reversal, combined with the ownership presumption under Article 752 CGI and the deemed settlor mechanism, creates a tax environment in which passivity or a lack of documentation exposes heirs to maximum taxation and double assessment.
Our recommendation is clear: heirs and beneficiaries of foreign trusts and foundations must, from the very opening of the estate, and ideally beforehand, undertake a comprehensive exercise of structuring, documenting and tax-qualifying flows with the assistance of a specialist international tax advisor. Anticipation is the best defence against the risks of reclassification, double taxation and penalties. The cost of specialised legal advice is insignificant compared with the financial consequences of a tax audit resulting in the reclassification of all distributions as taxable income or the application of inheritance duties at the maximum rate.
Frequently asked questions
Am I liable to French tax on assets held in a foreign trust or foundation that I inherit?
Yes, provided you are a French tax resident. Article 792-0 bis CGI assimilates foreign foundations and trusts into the same tax category. Assets held in such structures are presumed to form part of the deceased's estate under Article 752 CGI. The "deemed settlor" mechanism treats you, in the eyes of the French tax authorities, as the new settlor of the trust, triggering all associated reporting and tax obligations. Inheritance duties are calculated according to the progressive scale applicable to your degree of kinship with the deceased, reaching up to 45% in the direct line above EUR 1,805,677.
Are all distributions I receive from a trust subject to French income tax?
No, in principle only the "income" distributed by the trust, meaning income generated by the assets (interest, dividends, capital gains, rental income), is subject to income tax under Article 120-9° CGI. Capital repayments fall outside this charge. However, since the Paris Administrative Court of Appeal's decision of 11 October 2024, the burden of proof lies with the taxpayer: it is for you to demonstrate, from the trust's accounts, that the sums received correspond to capital rather than income. In the absence of supporting evidence, the entirety of the distribution will be treated as taxable income at the flat tax rate of 30%.
Does Article 123 bis CGI automatically apply to a foreign trust or foundation?
No. Article 123 bis applies only where the entity is subject to a privileged tax regime and the beneficiary holds or is deemed to hold at least 10% of the rights. Moreover, the Conseil constitutionnel has held that the taxpayer may escape this provision by demonstrating that the entity's foreign location has neither the purpose nor the effect of enabling tax evasion. Heirs who did not create the structure but inherit it are well placed to invoke this safeguard clause, since they did not choose the jurisdiction of formation. Furthermore, case law requires effective control by the beneficiary over the trust, which excludes many discretionary trusts over which the beneficiary exercises no power.
What are the reporting obligations in France when I am a beneficiary of a foreign trust?
The deemed settlor is required, jointly with the trust administrator, to file an event declaration (form 2181-TRUST1) within one month of any event affecting the trust (formation, modification, termination), as well as an annual declaration (form 2181-TRUST2) by 15 June each year, stating the fair market value of the assets as at 1 January. Failure to file is penalised by a fine of EUR 20,000 per missing declaration. These obligations are in addition to the succession declaration and the annual income tax return in respect of distributions received. We strongly recommend engaging a specialist advisor to ensure compliance with all these obligations.