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France drops asset-related penalty for undeclared offshore accounts

Thursday, 18 August, 2016

The French tax administration will no longer impose the heavy penalties specified for undeclared foreign bank accounts, following a ruling of the Conseil Constitutionnel.

Article 1736 IV-2 of the French Tax Code, enacted in November 2013, sets the amount of the fine at 5 per cent of the foreign account balance. This was challenged by a French taxpayer as disproportionate to the offence, and on 22 July the Conseil Constitutionnel agreed with the taxpayer and overruled it as unconstitutional (Decision no.2016-554).

As a result, the French tax authorities have announced they will no longer apply the proportional fine for failure to disclose foreign bank accounts.

The judgment leaves unresolved the question of trusts. Trusts with any French connection must also be declared to the authorities, and a penalty of 12.5 per cent of the assets (or at least EUR20,000) is imposed for non-disclosure. It would seem that the implication of the Conseil Constitutionnel's 22 July decision is that that penalty must also be unconstitutional. However, two experts at law firm Herbert Smith Freehills, Eglantine Lioret and Valérie Farez, have explained that because the decision did not directly refer to trusts, the tax authorities have declined to rescind it for the time being: '[W]ithout a decision of the Conseil Constitutionnel declaring the unconstitutionality of the 12.5 per cent penalty in the case of non-compliance with reporting obligations relating to trusts, the French tax administration refuses to draw conclusions from the Conseil Constitutionnel's decision of 22 July 2016 with regards to trusts for the time being'.

They say the decision is, however, 'a positive sign' for any taxpayer who may  decide to refer this issue to the Conseil Constitutionnel in the future.

In the meantime, non-compliant trusts can still take advantage of the tax voluntary regularisation procedure, which limits proportional penalties to 3.75 per cent for passive taxpayers or 7.5 per cent for active taxpayers, instead of the standard 12.5 per cent.