The current government is urging reforms, notably of the French tax system. This is triggering reactions and protest movements but can offer opportunities to refresh the tax system.

Tax considerations for French and non-French resident individuals

Individual residents in France are subject to income tax on their worldwide income, wealth tax and gift/inheritance tax on their worldwide assets, subject to tax treaties. Non-residents of France are subject to the same taxes on their French source income and French assets, as qualified under internal rules and tax treaty provisions. The French tax system provides multiple income tax, wealth tax and gift/inheritance tax exemptions as regards business assets, works of art and family assets transferred between spouses, civil partners and among family members.

Income tax

Dividends and interest received by residents and non-residents from French corporations are subject to a flat tax of 12.8%. French taxpayers are subject to social contribution taxes (referred to below as the “social tax”) that operate as a personal income tax; social contribution taxes, added together, are levied at the flat rate of 17.2%. Specific personal income tax rates apply (75%) when so-called “non-co-operative jurisdictions and territories” (états et territoires non coopératifs) are involved.

Residents of France are subject to personal income tax according to a progressive brackets system with a marginal rate of 45% above EUR 169,000 on their worldwide income (wages, bonus, professional fees, rental income, etc.) plus social tax. 

An additional tax is due: 

• at the rate of 3% between EUR 250,000 and EUR 500,000 and 4% above EUR 500,000 for a taxpayer who is single; or
• at a rate of 3% between EUR 500,000 and EUR 1 million and 4% above EUR 1 million for married couples and members of a PACS (civil pact between different or same sex couples).

Specific rules apply to income generated within life-insurance vehicles as well as income withdrawn by the policy owner during the life of the policy.

Capital gains realised by tax residents of France on the sale of securities are subject to a levy of 12.8% or to the progressive brackets system, plus social tax. Non-residents of France are fully exempt on the condition that they have not held, during the five years preceding the sale, directly or indirectly, alone or with certain close relatives, more than 25% of the share capital of the relevant French entity. Some tax treaties can provide different rules for qualifying “substantial” or controlling participation in a French entity.

Capital gains realised on the sale of French real estate are taxed at a rate of 19% when the vendor resides in an EU member state, 33.3% otherwise and 75% when non-co-operative jurisdictions and territories are involved. Social contributions of 7.5% are due in addition to capital gains tax, plus a surtax of between 2% and 6% depending of the amount of the gain.

Gift taxes and Inheritance taxes 

Between parents and direct descendants, the tax is computed in accordance with a brackets system. The marginal rate is 45% above EUR 1.8 million subject to a basis reduction of EUR 100,000 (available every 15 years).

There is no inheritance tax between spouses or members of a PACS. Lifetime gifts between such couples are subject to tax at the marginal rate of 45% above EUR 1.805 million subject to a basis reduction of EUR 80,000.

Other rules apply to siblings (45% above EUR 24,000) and non-relatives (60%).

Wealth tax

Wealth tax is payable every year on the basis of a person’s total real estate value. Wealth tax was heavily reformed as from 2018.

The applicable wealth tax rates are progressive. For instance, it amounts to 0.5% of net wealth between EUR 800,000 and EUR 1.3 million and 1.5% above EUR 10 million. 

As regards a tax resident of France, the taxable basis is made up of the individual’s worldwide properties, less local taxes and the wealth tax itself. Non-residents are liable to wealth tax only as to their French-situs properties. Non-residents are not subject to wealth tax on their financial investments in France (for example bank accounts, receivables from French-based persons, assets held in a French life insurance vehicle and controlling or non-controlling participation in the share capital of companies).

Wealth tax is subject to certain limitations other than those mentioned above, such as a 30% rebate on the individual's residence.

On regulatory matters, beyond the modernisation of a number of bilateral treaties, France has entered into a number of tax information exchange agreements, which, subject to some specifications, are in line with Article 26 of the OECD Model, notably with Andorra, the British Virgin Islands, Belize, Gibraltar, Guernsey, Liechtenstein, Jersey and Uruguay.

In parallel, rules similar to the US Foreign Account Tax Compliance Act, are in force in the EU territory and codified in France, submitting financial institutions to annual or occasional reporting obligations to the EU tax authorities regarding individuals owning, directly or indirectly, bank accounts or financial investments. French internal rules also provide strict controls and substantial penalties for hidden bank accounts.

The EU Council has revised several times the 2018/822 MDR Directive (DAC6) imposing reporting obligations to intermediaries and taxpayers. Recently, the impending European directive DAC 8, on the taxation of digital assets, will require exchanges and crypto-related service providers to report their customers' transactions to European authorities

Recent decisions rendered by the European Court of Justice in November/December 2022 state that these rules cannot impose on lawyers to disclose confidential information and documents to the tax authorities and that the UBO registry cannot be public.

The French administrative Supreme Court has recently ruled that the spontaneous communication by a taxpayer during an audit of a document covered by professional secrecy can be interpreted as a tacit agreement to the lifting of the professional secrecy (Conseil d’Etat 9 December 2021, no. 446366).

Different Courts have authority and competence on the French territory, but no specific local case law system exists. Court decisions are therefore rendered for the whole state.

Families and entrepreneurs tend to use French legal vehicles, shareholders agreements and dismembered ownership rights in order to mitigate taxes due at the occasion of assets transfers to the next generation but in retaining partly or fully the control of the family wealth and/or business assets.

Flexibility and dematerialization have developed considerably during and since the pandemic and became the rule in terms of work organization and relations with clients and administrations. This has notably changed the process for signing legal acts, whether notarized or not, relations with the Administrations as well as the judges and the Court proceedings. 

France has a civil law system which provides forced heirship rules and limits testamentary freedom. If French succession law applies, then the issue of the deceased and, in the absence of descendants, certain close relatives enjoy special protection so that they receive a minimum portion of the succession. This depends on the number of children. When a child dies, the same rules apply to the descendants.

In an international context, Regulation (EU) No 650/2012 of the European Parliament and of the Council of 4 July 2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European certificate of succession has applied since 17 August 2015, and offers testators the option of adopting the law of their nationality, which therefore allows the right to circumvent French succession law and therefore heirship rules.

Article 913 of the French civil code, amended in 2021 provides, however, a new rule which circumvents the EU Succession Regulation in offering a claim to heirs (being French⁄EU citizens or residents) who are disinherited in application of a foreign legislation. That new rule needs to be implemented by the practitioners and will certainly be challenged in Court.

As regards Trusts, France signed the 1985 Hague Convention on Trusts and their Recognition in 1991 but never formally ratified it. Nonetheless, France has bound itself to recognise the essential validity of foreign trusts that were the subject of the Convention.

In a fiscal context, for decades, French internal law has referred directly to trusts and similar vehicles. In addition, the revised Finance law for 2011 introduced transparency rules for wealth tax and inheritance⁄gift tax, as well as imposing substantial disclosure obligations on trustees.

Trusts will be deemed transparent for gift and inheritance tax purposes. If the beneficiaries are identified individually, the relevant standard gift (inheritance) tax rate will apply. If they cannot be so identified but are all in the line of descent, the tax rate will be 45%. Otherwise, the tax will be levied at a rate of 60%. 

France also has in place a substantial number of bilateral treaties for the avoidance of double taxation, notably with the United States, Canada and the United Kingdom, which often contain references to matters affecting trusts.

France is not a federal state, its legislation applies over the national territory.

With the law of May 17, 2013, on marriage for all, France has become the 9th European country and the 14th country in the world to authorize same-sex marriage. This law opened up new rights for marriage, adoption and succession, in the name of the principles of equality and the sharing of freedoms.

The evolution of families have been again recently considered by the French Parliament which gave, thanks to the law on bioethics published in the Official Journal on August 3, 2021, access to medically assisted procreation (MAP) for couples of women and single women, right of access to the origins of children born from a PMA, conservation of gametes without medical reason, research on embryos and stem cells.

Adoption law was the subject of a major reform on February 21, 2022 (Law no. 2022-219, 21 Feb. 2022), the new law being applicable from February 23, 2022. As an extension of this reform, an ordinance of October 5, 2022, re-codified the title of the Civil Code devoted to adoption, which will come into force on January 1, 2023. It is quite common for a child to be adopted by the spouse of one of its parents, but this option was only open to the spouse of the parent of the child. The law of February 21, 2022 now opens this option to the PACS partner and the cohabitant, both for simple adoption and for full adoption.

Different Courts have authority and competence on the French territory, but no specific local case law system exists. Court decisions are therefore rendered for the whole state.

Under the Civil Code, an individual interested in estate planning can ask for an heir's consent to waive irrevocably the right to challenge violations of their “reserved portion”, the advantage being, for instance, not to dilute the shareholding and the control of a family business. The heir(s) excluded from the family business could receive other family assets.

Using “gradual” and “residual” gifts or bequests is also a planning opportunity for asset protection, the lifetime gift or bequest being in this case subject to the conditions that the transferee on their death leaves the gift or bequest to a named third party or what remains of (residual gift or bequest).

The tax system applicable to gradual and residual gifts and bequests is also attractive.

Flexibility and dematerialization have developed considerably during and since the pandemic and became the rule in terms of work organization and relations with clients and administrations. This has notably changed the process for signing legal acts, whether notarized or not, relations with the Administrations as well as the judges and the Court proceedings. 

The 2022 Finance Law, applicable since 1 January 2022, establishes a presumption to facilitate the application of Article 123 bis of the Tax code to settlors of trusts. To facilitate the application to trusts of the provisions of this article, which allow the administration to tax in the name of a natural person domiciled in France the income received through the intermediary of a controlled entity located in a State with privileged taxation rules, the law presumes that the condition of holding at least 10% of the shares, financial rights or voting rights of the entity is satisfied when the taxpayer is a settlor or beneficiary deemed to be a settlor of a trust. 

It is further provided that the reversal of this presumption “cannot result solely from the irrevocable nature of the trust and the discretionary power of management of its administrator.”

France is not a federal state, its legislation applies over the national territory.

Aside from these significant European Court decisions, that impact all EU Member states, one of the most relevant national case laws for private clients refers to forced heirship and trust: the French Supreme Court ruled that a trust constituted in fraud of the rights of the heirs is unenforceable against the succession when the deceased had retained overall control until their death of the entities to which these funds had been transferred (Cass. 1e civ. 18-5-2022 no. 20-20.609 FS-D).

Different Courts have authority and competence on the French territory, but no specific local case law system exists. Court decisions are therefore rendered for the whole state.

Anticipating and preventing litigations among family members are relevant for French and international clients, notably at the occasion of the transfer to the next generations of substantial assets and businesses.

Particularly in the context of complex international disputes, lawyers must have experience in dispute resolution, arbitration or mediation/conciliation in order to propose efficient settlement options.

Flexibility and dematerialization have developed considerably during and since the pandemic and became the rule in terms of work organization and relations with clients and administrations. This has notably changed the process for signing legal acts, whether notarized or not, relations with the Administrations as well as the judges and the Court proceedings. 

1. How to protect a surviving spouse and transfer family assets without conflict or tax erosion?

We assist many couples, being married or not, French or international, to protect the surviving of the two as well as anticipate the transfer of their family assets to their descendants, collaterals or third parties and charitable institutions. In order to avoid conflict among members of the family and persons involved in any businesses (for instance), it is important to anticipate governance rules. This does not only concern business assets but also family and dynastic assets. Anticipation may indicate modifying the matrimonial property regime, preparing wills and proper succession planning. Transfer assets among generations may also imply contributing these assets to (family) legal entities, being French or not, with by-laws duly customized in consideration of the patriarch and/or matriarch wishes in terms of governance and benefit/use of the family assets. It is also important to anticipate tax implications, and we may organise and document transgenerational gifts and bequests, directly or through legal vehicles of these family transfers, enjoying favourable tax treatments in France and in other states where clients, heirs and legatees may reside.

2. Can non-French nationals or residents arrange for their Estate/Tax planning arranged elsewhere to be implemented in France? 

Working for non-French nationals or residents in order that their Estate ⁄ Tax planning crafted by practitioners of their state of residence is implemented in France, where they acquired or inherited assets, sometimes requires adjusting this Estate and Tax planning, so that it becomes efficient from a legal and tax viewpoint. The best approach is to work directly and in advance with all the estate practitioners engaged by the clients in the different states where they own assets or have an heir or legatee. 

3. How to anticipate charitable gifts?

Transnational gifts and bequests are frequent points discussed with clients. Assisting international families as well as Foundations, Museums, Hospitals and any legal entities registered in multiple jurisdictions for collecting funds indicates action to anticipate the legal qualification of the gift and bequest, secure the tax treatment from a national and international viewpoint, and also to provide documents and justifications, the beneficiary or the donor/testator being subject to civil or common law rules, as well as Sharia law.