A letter from the tax authorities asks where the funds in an undeclared account opened abroad come from; or a taxpayer discovers that they should have declared an account and wonders about regularisation. In both cases, the stakes may be significant.
This article presents the obligations, the information request procedure, the possible penalties, how a response is generally prepared and the current framework for regularisation. Each situation deserves to be analysed with a lawyer, preferably as soon as the letter is received.
In brief
- A French tax resident in principle declares every year the accounts opened, held, used or closed abroad, including those they use under a power of attorney.
- For an undeclared account, the tax authorities may ask about the origin and method of acquisition of the assets (article L. 23 C of the French Tax Procedure Code); the taxpayer in principle has sixty days to respond.
- Without a sufficient response, the assets may be taxed as wealth received free of charge, at a rate of 60% (article 755 of the French General Tax Code).
- Possible penalties include a fine of €1,500 or €10,000 per account and per year, an 80% surcharge on the tax reassessed and, in the most serious cases, criminal prosecution.
- Since 2018, there has been no special regularisation procedure: regularisation in principle follows the ordinary rules, and whether it is appropriate deserves to be analysed with a lawyer.
Contents
Which accounts must be declared?
Persons who are tax-domiciled in France in principle declare every year, with their income tax return, the accounts opened, held, used or closed abroad (article 1649 A of the French General Tax Code), on form no. 3916-3916-bis. The obligation in principle covers the account holder, but also the person who used it, for example under a power of attorney, during the year. It also covers, as a general rule, life insurance contracts taken out abroad and digital asset accounts (see which foreign accounts to declare).
What the tax authorities’ request covers
Where an account or contract held abroad was not declared in one of the previous ten years, the tax authorities may ask the taxpayer for any information or evidence on the origin and method of acquisition of the assets held in it (article L. 23 C of the French Tax Procedure Code). The taxpayer in principle has sixty days to respond; if the response is insufficient, a formal notice may give them a further thirty days.
Failing justification, the assets may be deemed to be wealth acquired free of charge and subject to gift and inheritance duties at the highest rate, i.e. 60%, on their highest known value during the previous ten years (article 755 of the French General Tax Code). Useful documents are generally the following:
- the account statements for the whole period concerned;
- the deeds establishing the origin of the funds: inheritance, gift, sale of an asset, savings from income already taxed, etc.;
- bank certificates, in particular on the absence of later deposits;
- a written, chronological account of the origin of the assets and of the movements on the account.
Possible penalties
Several penalties may apply depending on the situation (see also the fines for failing to declare a foreign account):
| Penalty | Reference | Amount or scope |
|---|---|---|
| Fine per undeclared account | Article 1736, IV-2 of the French General Tax Code | €1,500 per account and per year, or €10,000 if the account is located in a State or territory that has not concluded an administrative assistance agreement with France |
| Surcharge on the tax reassessed | Article 1729-0 A of the French General Tax Code | 80% of the additional tax linked to the assets of the undeclared account; it then replaces the fine per account and excludes the other surcharges for the same tax |
| Presumption of income on transfers | Articles 1649 A and 1758 of the French General Tax Code | Amounts transferred through an undeclared account may be presumed to be taxable income, with a 40% surcharge on the corresponding tax |
| Extended reassessment period | Article L. 169 of the French Tax Procedure Code | In principle ten years for income linked to an undeclared account, unless total credit balances did not exceed €50,000 during the year (see the limitation periods) |
| Criminal prosecution | Article 1741 of the French General Tax Code | In the most serious cases, tax fraud committed through accounts opened abroad may be punished by seven years’ imprisonment and a fine of €3 million |
The former proportional fine of 5% of balances was declared unconstitutional in 2016 and no longer applies. The regime of taxation under article 755, in particular as regards limitation periods, is also the subject of debate and recent court decisions; its application deserves a case-by-case analysis.
How a response is generally prepared
The quality of the response often plays a decisive role. It is generally based on the following elements, ideally gathered with a lawyer:
- a complete inventory of the accounts concerned: holders, joint holders, powers of attorney, opening and closing dates;
- a year-by-year reconstruction of the movements on and use of each account;
- evidence of the origin of the funds and of their path to the account;
- a precise and consistent written explanation, sent within the time limits;
- an assessment of the risks: fine, surcharge, presumption of income, possible criminal exposure.
Regularising today: the ordinary rules
The service handling corrective returns (STDR), which applied a reduced scale of penalties to foreign assets declared voluntarily, closed at the end of 2017. Since 2018, regularisation follows, as a general rule, the ordinary rules: corrective returns for the years not yet time-barred, declaration of the accounts and payment of the tax, late-payment interest and any penalties.
The voluntary nature of the step, good faith and the quality of the file may nevertheless be taken into account, and a settlement with the tax authorities may, in some cases, reduce penalties. Whether regularisation is appropriate, and how it is carried out, depend on each situation and deserve to be analysed beforehand with a lawyer.
A request under article L. 23 C in principle calls for a documented response within short time limits. An analysis with a lawyer, as soon as the letter is received, generally makes it possible to prepare the response and assess the options.
What I see in my cases
When the tax authorities ask for a foreign account to be regularised, it is no coincidence: they have received information, generally on significant amounts, and intend to make maximum use of it. Without a solid file, the additional tax can be very heavy, up to 60% of the assets in some cases. As the documents are abroad, time matters: the file is substantial, but it can be built intelligently, because many options exist and the same situation can lead to very different reassessments depending on how it is presented.
Having handled many cases with the PCRP (pôles de contrôle des revenus et du patrimoine, the departments that audit individuals) throughout France, I know the information they generally have, their objectives and their way of working. In my experience to date, a rigorous presentation and negotiation can, depending on the case, weigh significantly on the outcome, on the tax as well as on the penalties. This is only my experience: every case depends on its facts, and no result can be guaranteed.
The reverse is also true: a poorly presented file can steer the tax authorities towards avenues unfavourable to the taxpayer, and some choices made too quickly are then hard to undo. The role of the tax authorities is to audit and, where appropriate, to reassess: hence the attention I pay to every detail of the file, every document and every word, before anything is sent.
In my cases, the information behind this request almost always comes from the automatic exchange of information. The mistakes of those who have tried to reply on their own are similar: too much detail, answers that miss the question asked or go beyond it, which draw attention to other subjects. The tax authorities then pull on the thread, as if unwinding a ball of wool, and the resulting reassessments are often substantial. As regards the origin of the funds, it is gifts that are the hardest to justify. A regularisation generally takes four to twelve months.
FAQ
How long is there to respond to a request under article L. 23 C?
In principle sixty days. If the response is insufficient, a formal notice may grant a further thirty days to complete it.
What happens without a sufficient response?
The assets may be deemed to be wealth acquired free of charge and taxed at 60%, on their highest known value during the previous ten years (article 755 of the French General Tax Code).
Is an account used under a power of attorney concerned?
In principle yes: the declaration obligation also covers a person who used an account opened abroad during the year, even without being its holder.
Are the €1,500 fine and the 80% surcharge cumulative?
In principle no: where the 80% surcharge applies to the tax reassessed, it replaces the fine per account and excludes the other surcharges for the same tax.
Is voluntary regularisation still possible?
In principle yes, under the ordinary rules, as long as no audit has been started. As the STDR closed at the end of 2017, there is no longer a specific scale; a settlement may, in some cases, reduce penalties. Whether to take this step deserves to be analysed with a lawyer.
