In more detail
At the request of the French Minister of the Economy, the French Administrative Supreme Court was asked to decide on whether, under the provisions of the French-US double tax treaty, income distributed by a non-discretionary revocable trust established in the United States should be considered to be directly derived by the US citizens who are French tax residents and who are settlor, trustees and beneficiaries of such trust.
In other words, the question asked was whether those trusts should be considered tax transparent under French law, in line with the tax treatment applicable in the United States.
The French Administrative Supreme Court first refers to French domestic law, pointing out that under the provisions of Article 120, 9o of the French Tax Code (FTC), income distributed by a trust within the meaning of Article 792-0 bis of the FTC is considered as income from securities issued outside France.
The French Administrative Supreme Court then refers to Article 4§3 of the French-US double tax treaty, which provides that, for its application, "an item of income, profit or gain derived through an entity that is fiscally transparent under the laws of either Contracting State, and that is formed or organized […] in either Contracting State […] shall be considered to be derived by a resident of a Contracting State to the extent that the item is treated for purposes of the taxation law of such Contracting State as the income, profit or gain of a resident".
The French Administrative Supreme Court points out that the purpose of tax treaties is to allocate taxation between the contracting States and that, in principle and unless otherwise specified, they cannot modify domestic rules of local law. The Court underlines that the aforementioned Article of the tax treaty does not call into question or prevent the tax treatment of trust income under French domestic law since the French-US double tax treaty refers to the tax law of the beneficiaries' State of residence to determine whether the trust should be considered tax transparent. The Court states that the French-US double tax treaty does not preclude the application of the provisions of Article 120, 9o of the FTC to income paid by a trust established in the United States to a US citizen who is a French tax resident.
In addition, the French Administrative Supreme Court notes that trusts cannot be assimilated into partnerships within the meaning of the French administrative guidelines1.
With this opinion, the French Administrative Supreme Court rules out the transparency of revocable and non-discretionary trusts for the application of French law without entering into a detailed analysis of the various sub-types of trusts and the possible distinctions to be made. As a result, income that is not distributed by the trust is not subject to income tax, while distributed income will be taxed as investment income at a 30% "flat tax" rate (and 34% as the case may be). Unfortunately, by rendering its opinion on the absence of transparency of the trust, the French Administrative Supreme Court avoided answering the question of the tax credit which may apply in France, leaving US citizens who are French taxpayers taxed in the United States in a possible situation of double taxation.
1 BOI-INT-CVB-USA-10-20.
