Have you received a letter from the tax authorities concerning bank accounts located in Portugal?
If you hold one or more undeclared foreign accounts in Portugal, this guide written by our tax law firm will give you a comprehensive overview of the tax issues at stake in France.
Please note: the tax authorities automatically receive information from foreign banks.
This is the myPOS system of the French tax authorities.
Our firm has recently handled numerous cases involving undeclared assets in Portugal (generally bank accounts and real estate). Letters from the tax authorities targeting assets in Portugal have indeed been on the rise for roughly two years. This is due in particular to the transmission of information by Portuguese banks to the French tax authorities.
Save for exceptions, holding accounts in Portugal is not illegal.
The first thing to understand is that holding bank accounts in Portugal is not prohibited.
The French General Tax Code (Code général des impôts, CGI) simply states that where a taxpayer holds bank accounts with a foreign bank, he or she is required to declare them every year. The declaration is made on form 3916.
Failure to declare exposes the taxpayer to a fine, generally set at €1,500 per year and per undeclared account.
Example: a taxpayer holds an account with each of two Portuguese banks. He has never declared these accounts, both of which were opened in the 1990s.
He therefore faces fines of 2 x €1,500 per year, in principle over 4 years. The total fine would thus amount to €3,000 x 4 = €12,000.
However, the person very often holds various types of accounts with his or her Portuguese bank (a current account, a savings account, a securities account…). A strict application of the texts should in principle lead to one fine per undeclared account (one fine for the current account, another for the savings account, etc.).
However, it is sometimes possible to negotiate with the tax authorities on this point, and to have only a single fine applied for all the accounts held with the same bank.
This will be all the more feasible where the account numbers share the same root. For example, a current account No. 200300400 and a savings account No. 200300400-2. It is immediately apparent that the savings account is in fact a sub-account of the current account. The two accounts should therefore be treated as one and the same account and give rise to only one fine.
In practice, account numbers are rarely constructed in exactly the same way, but identifying a common root, or at least the beginning of a common root, will help show the similarity of the accounts and will argue in favour of a single fine for all the accounts held with the same bank.
The context will also play an important role.
In the case of a voluntary disclosure by the taxpayer, or of a regularisation following the first non-contentious letter (751-SD, which means that we are not yet dealing with a tax audit procedure, but with a mere “amicable” invitation to regularise), the tax authorities will in principle be more inclined to accept this type of argument.
On the other hand, in the case of a tax audit or, above all, at the end of a tax audit that has gone badly (a taxpayer who did not reply to all the letters, did not always attend the meetings, provided no or few supporting documents, put forward explanations that appeared far-fetched…), negotiation will be more uncertain.
Criminal aspects of holding foreign accounts
In certain cases, tax reassessments may be accompanied by criminal penalties.
Since the “Bercy lock” (verrou de Bercy) was abolished, the tax authorities are in principle required to refer the case to the public prosecutor (procureur de la République) where they consider that fraud has been committed and that the amount of the reassessments exceeds €100,000.
If the amount of the reassessments does not exceed €100,000, the tax authorities remain entitled, if they so wish, to refer the case to the public prosecutor, but they are not obliged to do so.
Recently, an increase in the number of cases referred to the public prosecutor by the tax authorities has been observed.
Adding a criminal layer on top of the tax layer formed by the reassessments is “in fashion”.
Whereas in the past criminal penalties were rarely applied to tax cases (only the most extreme cases of tax fraud were concerned), today criminal penalties are applied more and more often, even to cases which, in the past, might have seemed relatively ordinary (for example, repeated receipt of undeclared cash sums).
The media are, moreover, increasingly reporting on this reality.
Criminal prosecutions in tax matters therefore tend to be increasing quite significantly.
Nevertheless, taking the matter in hand as soon as the first letter from the tax authorities is received, or, better still, making a voluntary disclosure, will work in the taxpayer’s favour as regards any criminal aspects of the case.
Often thorny cases
When it comes to the regularisation of bank accounts in Portugal, or tax audits on this subject, we are “walking on eggshells”, since these cases present several complex aspects whose consequences can sometimes be very significant; the involvement of a tax lawyer therefore appears highly preferable, if not indispensable.
There are all the fines we have mentioned, but they are generally only the tip of the iceberg. They apply mechanically and their amount is generally not crushing in relation to the sums held abroad (except in the case of “small” accounts).
The most problematic aspects are generally the following:
- hidden income over the reassessment period
- ISF (wealth tax)
- undeclared investment income
- origin of the funds
The reassessment period and the concept of hidden income
Where accounts in Portugal have not been declared, the tax authorities in principle have 10 years to apply reassessments.
More precisely, they have until 31 December of the tenth year following the year audited to apply reassessments.
Example: we are in 2020. The tax authorities have until 31 December 2020 to apply reassessments to the years 2010 to 2019.
The year 2009 and earlier years, on the other hand, are time-barred; the tax authorities can no longer reassess them. Indeed, the year 2009 could be reassessed until 31 December 2019 (31 December of the tenth year following 2009). Now, we are in 2021, soon to be 2022, so the year 2010 and earlier years can no longer be reassessed. And the year 2011 will be time-barred from 1st January 2022.
ISF/IFI
The reassessment period is in principle 10 years.
Example: we are in 2021. The following ISF/IFI (wealth tax / real estate wealth tax) years may be reassessed:
ISF 2011, ISF 2012, ISF 2013, ISF 2014, ISF 2015, ISF 2016, ISF 2017, IFI 2018, IFI 2019, IFI 2020, IFI 2021.
Fines are therefore generally only a small part of the reassessments
Indeed, other reassessments may be added to them and will, in most cases, make up the bulk of the total reassessments:
- reassessments relating to ISF/IFI
- reassessments relating to foreign income that was not declared. This income is broadly of two types: “passive” income (interest, dividends…) and active income (hence hidden: cash, for example).
Of course, all the reassessments applied will be increased by:
- in principle 80% surcharges, but submitting a well-constructed regularisation file may, depending on the case, make it possible to negotiate surcharges of 40%, i.e. half as high
- late-payment interest at the rate of 2.40% per year (0.20% per month since 2018; 4.80% per year previously), which may be halved (1.20% per year), subject to conditions, in the event of the voluntary filing of an amended return, i.e. half as high
Submitting a well-constructed regularisation file may, depending on the case, make it possible to reduce penalties.
Quick focus on the reassessment periods for each tax or fine
Fine for an undeclared account: 5 or 4 years
ISF/IFI: 10 years
Income tax: 10 years. This period is shortened where the assets did not exceed €50,000 in one or more years.
First standard letter sent by the tax authorities: the 751-SD (look at the top right-hand corner of the letter)
Subject: regularisation of the tax situation with regard to assets held abroad
Dear Sir or Madam,
In the context of international automatic exchanges, the tax authorities receive precise information relating to financial accounts held in foreign financial institutions by French residents.
Accordingly, the tax authorities have been informed, within the framework of the automatic exchange of information, of the existence of financial accounts opened in the names of XXXXX and held in Portugal.
Articles 1649 A and 1649 AA of the French General Tax Code provide that taxpayers who have opened, subscribed to, closed, held or used bank accounts or life insurance contracts abroad must declare the references of those accounts together with their income tax return.
Under the provisions of Article L. 169 of the French Tax Procedures Handbook (Livre des procédures fiscales, LPF), the tax authorities’ right of reassessment may be exercised until the end of the tenth year following the year in respect of which the tax is due, where the taxpayer has not declared accounts held abroad to the tax authorities, contrary to the provisions of Article 1649 A of the French General Tax Code.
Consequently, I would be grateful if you would send me, for the accounts opened abroad:
Account NO : XXXXXX
The following documents:
- Supporting documents on the origin of the assets:
- a written statement setting out in a precise and detailed manner the origin of the assets held abroad, accompanied by any probative document establishing that origin (e.g. a certificate from the foreign bank attesting to the source of the funds credited to the account when it was opened) or constituting a body of evidence capable of establishing it;
- For taxpayers subject to income tax, the file must include:
- the amended income tax returns, signed and dated:
- returns no 2047 of income received abroad:
- forms n o 3916 declaring accounts opened abroad (one per account);
- For taxpayers subject to the wealth tax (impôt de solidarité sur la fortune):
- the amended ISF /IFI returns, signed and dated (or the initial returns if you become liable to ISF or IFI as a result of the regularisation of these accounts abroad);
- All supporting documents relating to the amounts of the assets abroad and the income from those assets over the period covered by the filing of the amended returns:
- a certificate of ownership or account-opening agreement;
- if the account was closed during the period, any document making it possible to trace the financial flow upon closure;
- statements of assets or portfolio statements as at 1 January of each of the 10 years concerned or as at 31 December of the preceding year;
- the annual income statements issued by the foreign bank or foreign financial institution substantiating the income being regularised (dividends, interest…);
- the annual statements of gains and losses issued by the foreign bank or foreign financial institution substantiating the existence of gains (capital gains or losses); the bank account statements for the years 2011 to 2021.
I remain at your disposal for any further information and, Madam, Sir, please accept the assurance of my highest consideration.
If you have received this letter, you are strongly advised to reply quickly and, above all, to reply in a precise and comprehensive manner.
A certain amount of information will have to be obtained from your bank. In addition, a number of returns will have to be filed.
This is painstaking work and, in the vast majority of cases, highly technical.
Using a tax lawyer is recommended.
Amended income tax returns
The methodology consists of starting from the returns that were originally filed and supplementing them so as to bring them into line with the information obtained from your foreign bank.
Indeed, the annual income statements provided by the foreign bank (see below) may show that income was received. This income is generally of three kinds: interest, dividends, capital gains or losses.
This income should have been declared in your income tax return.
Any tax withheld at source by your bank will generally constitute a “tax credit” (i.e. an amount reducing the tax payable in France).
Declaring this foreign income and the tax credits involves very specific reporting procedures.
The income tax returns must be redone: this is what the tax authorities are requesting when they refer to “amended income tax returns“.
The form is No. 2042 (the standard “blue” return with which you are already familiar).
Returns no 2047 of income received abroad
Form 2047 is the reporting form for foreign income.
In addition to being declared on form No. 2042, foreign income must be reported on form 2047. One is required per year, unless there is no foreign income in a given year, which is quite rare (there is generally always at least some interest paid).
Forms n o 3916 declaring accounts opened abroad
This is the reporting form for accounts held abroad.
This form will state, among other things, your surname, first name, address and date of birth, as well as information relating to the bank (name of the bank, its address, account number…). The date on which the account was opened and, where applicable, the date on which it was closed must be indicated.
The account balance is not requested.
In principle, one return must be filed per account.
The question arises where there are sub-accounts, since filing a 3916 for each account or sub-account could lead to the application of one fine per return (in principle each fine amounts to €1,500).
Should one then file as many 3916 forms as there are accounts and sub-accounts?
The temptation is strong to file only a single 3916 for all the accounts with the same bank, in order to encourage the tax authorities to apply only one fine.
However, the question is: what is a sub-account?
In my view, there will in principle be no obstacle to treating as a sub-account an account that meets all of the following conditions:
- same number root as the main account
- same opening date as the main account
In other cases, the question will have to be considered in light of each specific situation and the overall context of the case; consult your tax lawyer.
The 3916 forms must be filed for each year.
Example: you hold a main cheque account with bank Z and a savings account with the same bank. If the circumstances lead to the conclusion that the savings account cannot be regarded as a sub-account of the cheque account, two 3916 returns will have to be filed per year. As the limitation period is in principle 4 years, the tax authorities will apply 4 years of fines on two accounts, i.e. a total of €12,000 in fines (4*€3,000).
Please note: since Law No. 2018-898 of 23 October 2018 (applicable from 2019), the obligation covers accounts opened, held, used or closed abroad; the argument based on an unused account can now only be relied upon for earlier years. An account is considered unused if it has recorded no debit or credit transactions, other than passive income (interest…). In practical terms, if you yourself made no credit to and no debit from this account, you will not incur a fine on the account for the year concerned (there may be interest credits, which have no impact; the fine will not be applied).
Declaration on plain paper of life insurance contracts taken out abroad
If you hold life insurance policies located abroad, they must be declared (today on form No. 3916-3916-bis, like accounts).
The written statement on the origin of the assets
This is generally where the most important point of the file will lie.
Broadly speaking, the origin of the assets will determine:
- whether you are to be regarded as an “active fraudster” or a “passive fraudster”, and therefore the level of the surcharges
- the degree of interest the tax authorities will take in your file: a person holding sums derived from a distant inheritance will generally be “less in the sights” of the tax authorities than a person who received hidden income for years from an undeclared activity…
- the application of the “double penalty” (tax reassessments and criminal penalties). If the sums derive from a distant inheritance, the risk of the case taking on a criminal dimension will appear low, whereas in the case of prolonged hidden activities involving large sums, the criminal risk will in principle be high
- the amount of the tax reassessments, where hidden income was received during the reassessment period (in principle 10 years)
Your written statement must be truthful.
Lying is very strongly discouraged (for my part, when I take on a client’s case, any lie is totally prohibited).
Of course, the aim is not to present the facts in a way that makes the situation even more complicated.
The truth must be expressed sincerely, but also with tact.
This statement plays a decisive role in your file. It is probably the most important document in your file. Its drafting must be carefully thought through.
Of course, your statement on the origin of the assets must be accompanied by supporting documents backing up your account. And, of course, the tax authorities will be entitled to request further supporting documents from you subsequently if they consider those provided to be insufficient.
The tax authorities may ask holders of accounts opened abroad which have not been declared at least once during the previous ten years to substantiate the origin of the assets held, or previously held, in those accounts.
Failure to substantiate results in taxation at 60% of those assets, which are deemed to constitute property acquired free of charge (CGI art. 755).
Under Article 755 of the CGI, assets held in an account abroad whose origin and terms of acquisition have not been substantiated under the procedure provided for in Article L 23 C of the LPF are deemed, unless proven otherwise, to constitute property acquired free of charge, subject, on expiry of the time limits provided for in that same Article L 23 C, to gift and inheritance tax (droits de mutation à titre gratuit) at the rate of 60%.
The tax is calculated on the highest value known to the tax authorities of the assets held in that account during the ten years preceding the sending of the request provided for in Article L 23 C.
Article L 23 C of the LPF provides that where the taxpayer has not declared his or her foreign account at least once in respect of the previous ten years, the tax authorities may ask him or her for substantiation of the origin and terms of acquisition of the assets.
In the absence of substantiation, or where substantiation is insufficient (substantiation meaning documents, not mere explanations), the taxpayer is then subject to a presumption of transfer free of charge in the year in which he or she was unable to provide the requested evidence, with a tax rate of 60%.
The tax consequences are therefore crushing.
This is why you are advised to put together the most complete file possible to substantiate the origin of the funds, the production of which should ideally be entrusted to a tax lawyer.
In the case of an inheritance: death certificate, deeds drawn up by foreign professionals, any will, bank certificates, bank statements showing the origin of the financial flows…
In the case of a gift: any foreign deeds, bank certificates, private agreements, bank statements showing the origin of the financial flows…
Activity abroad: all documents relating to that activity. Employees: payslips, foreign tax returns… Self-employed persons: certificate of registration with the local authorities, foreign tax returns…
Sale of foreign movable property (shares…) or real estate: returns filed abroad, foreign deeds…
The sworn statement
This is the document in which you affirm that the account or accounts you are declaring in response to the tax authorities’ letter constitute all of the accounts abroad that you hold (i.e. that you are not continuing to “hide” other accounts abroad).
Statements of assets or portfolio statements, annual income statements and annual statements of gains and losses
These documents must be requested from your foreign bank.
I also recommend asking your bank for the certificate of opening (and of closure, where applicable) of each of your accounts (these are important because they will state the opening and closing dates, enabling you to complete the 3916 returns).
You must ask your bank for a summary document for each year mentioned in the 751-SD letter. This summary document must state, for each account:
- the balance as at 31 December
- the amount of annual income, by type of income (interest, dividends, capital gains or losses…)
These documents will enable you to prepare your income tax returns (forms 2047 and 2042) as well as any necessary ISF/IFI returns.
Bercy
Where the assets held in the foreign account exceed a certain amount, the file will in principle be handled by Bercy (the French Ministry of Finance).
The letter you received states (in the top left-hand corner) the department that sent it.
In most cases, it is your local tax office that will have sent the letter.
However, although your local office is indicated on the letter, if the assets exceed, in principle, €600,000, it will very possibly be Bercy that manages your file behind the scenes.
The inspector (or controller) who signed the letter, a member of your local tax office, is in reality “remote-controlled” by Bercy. He or she will forward to Bercy the letters you send.
He or she will receive precise instructions from Bercy on how to handle your file.
This is an important point, because staff posted at Bercy will very often be far more technically expert than local staff.
A file managed by Bercy will therefore generally be more difficult to defend than a file managed by the local tax office.
Good and bad practices
Good practices:
– reply to all letters
– submit comprehensive response files
– well presented in form
– clear in substance
– keep in touch by telephone with the person in charge of your file (call them from time to time to learn more about how the file is progressing…)
– prepare the requested returns with care and technical rigour
– provide all the information requested
Bad practices:
- Not replying
- Submitting incomplete response files
- Providing incorrect information
- Filing imprecise or incomplete returns
Why follow these good practices? What risks are associated with bad practices?
From a legal standpoint, you hold assets in Portugal that have not been declared, in breach of the applicable law.
Furthermore, the government had given taxpayers holding undeclared accounts abroad the opportunity, for nearly five years, to voluntarily regularise their situation on more favourable terms.
The tax authorities therefore do not have a very good view of people who still hold undeclared accounts abroad (not only are they in breach of the law, but they also failed to seize the opportunity they were given for a long time to regularise their accounts voluntarily).
However, receipt of a 751-SD letter (in the top right-hand corner of the letter) shows that the tax audit has not yet begun.
The tax authorities are extending a final helping hand so that you can come clean about your situation “amicably”.
However, in the event of no reply or a very incomplete reply, the tax authorities will very probably launch a “real” tax audit in the legal sense of the term, which is much more burdensome and coercive than a mere exchange of letters (there may be summonses to the tax authorities’ offices, information may be obtained from your banks or other bodies with which you have dealings…). Moreover, the climate will not be the same. In one case, you spontaneously replied to the tax authorities’ letter upon first request; in the other, you turned a deaf ear and the amicable procedure turned into a tax audit.
Your defence will have become much more complicated.
Conclusion
This procedure should not be taken lightly.
It will very often be a long and tedious procedure.
The tax (or even criminal) consequences can sometimes be significant, hence the need to be assisted by a tax lawyer experienced in this area.
Failure to reply to the tax authorities’ letters, or incomplete replies, may lead to a tax audit, or even to an ex officio assessment from which it will be even more difficult to extricate yourself.
To date, our tax law firm has assisted many clients with the regularisation of bank accounts and real estate in Portugal, seeking for them, depending on the circumstances of each case, the benefit of:
where applicable, a reduction in penalties
reduced stress thanks to full handling from A to Z of the file vis-à-vis the tax authorities
a limitation of the risk of criminal prosecution
