Article 1736 IV bis of the French Tax Code (FTC) imposes
very high penalties for trustees who fail to comply with filing
requirements imposed by French tax legislation applicable to
trusts. Similar penalties exist for French tax residents who fail
to disclose their foreign bank accounts, albeit at lower rates -
the fine is 5% if the funds exceed €50,000. In a decision
dated 22 July 2016, the Constitutional Court ("Conseil
Constitutionnel") has cancelled the 5% penalty in relation to
failure to disclose foreign bank accounts.
Penalties in respect of trusts
The penalties under Article 1736 IV bis of the FTC, for trustees
who have failed to comply with the filing requirements for trusts,
include a fine of either €20,000 or 12.5% of the total value
of the assets held in trust, whichever is higher.
These fines apply in respect of declarations that should have
been lodged on or after 8 December 2013. For declarations due
before this date, the fine is 5% of the total value of the trust
This penalty applies to all the assets held in trust and arises
each time a failure occurs.
Generally, in respect of tax penalties, French tax legislation
provides for varying levels of penalty depending on the behaviour
of the taxpayers. In this case, however, the law makes no such
distinction. Arguably it should, for instance, distinguish between
penalties applicable for complete non-disclosure and penalties
applicable for late or incorrect disclosure.
Currently, trusts that have never been disclosed to the French
tax authorities are in quite a tricky situation. In a worst case
scenario, the level of penalties that trustees are facing could, in
theory, exceed 50% of the total trust assets, even in a situation
where the trust would not otherwise be liable to French tax.
Clearly, in some cases, this may give rise to a potential
disincentive to disclosure. Accordingly, the Constitutional
Court's decision is potentially good news for trustees in this
The Constitutional Court's decision
The penalty for non-disclosure of foreign bank accounts is
imposed in a similar manner to the penalty applicable for failure
to disclose a trust. A percentage applies on the non-disclosed
assets, but at a lower rate. As discussed above, the rate is 5% in
respect of foreign bank accounts whose value exceeds €50,000
on 1 January of the tax year; otherwise the penalty amounts to
€1,500 or €10,000.
In its decision dated 22 July 2016 the Constitutional Court
ruled that this penalty is unconstitutional because it is not
proportionate to the goal of the tax legislation which enacted it.
These penalties were implemented in the context of fighting tax
fraud. Here the penalty applies simply because there has been a
failure in a disclosure obligation, even if no tax fraud can be
identified in respect of the non-disclosed accounts. Tax fraud is a
criminal offence under French law. Outside the context of tax
fraud, a penalty of 5% applied to the non-disclosed funds is too
high, and is against the constitutional principle of
proportionality of penalties.
The same reasoning could easily be applied to the penalty for
non-disclosure of trusts.
Unless the non-disclosure of the trust and the trust assets can
be characterised as fraudulent, it would seem that the application
of a 12.5% penalty on all assets of the trust) should also be
regarded as too high and not proportionate. Even on assets which
would otherwise not be subject to French tax.
We should expect a similar decision from the Constitutional
Court in respect of trusts. Such a decision would definitely give
some relief to trustees (who currently face very high penalties)
and encourage further disclosure in the future. In any case, we
would always recommend voluntary disclosure to avoid any
allegations of fraud in particular cases and to keep penalties to a
minimum where possible.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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