If you hold one or more undeclared foreign accounts, this guide written by our tax law firm can give you a comprehensive overview of the tax issues at stake in France.

Save for exceptions, holding foreign accounts is not illegal.

The first thing to understand is that holding bank accounts abroad is not prohibited.

The French General Tax Code (Code général des impôts, CGI) simply states that where bank accounts are held with a foreign bank, the taxpayer is required to declare them every year. The declaration is made on form 3916.

In the event of failure to declare, the taxpayer is liable to a fine generally set at €1,500 per year and per undeclared account.

Example: a taxpayer holds an account with a Swiss bank and another with a Belgian bank. He has never declared these accounts, both of which were opened in the 1990s.

He is therefore liable to fines of 2 x €1,500 per year, in principle over 4 years. The total fine would therefore amount to €3,000 x 4 = €12,000.

However, very often, the person holds various types of accounts with his or her foreign bank (a current account, a savings account, a securities account, etc.). A strict application of the texts should in principle lead to a fine being applied 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 if 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 generate only a single fine.

In practice, it is rare for the numbers to be 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 one 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 (régularisation spontanée) 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 simple “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 has not replied to all the letters, has not always attended the meetings, has provided no or few supporting documents, has put forward explanations that seemed far-fetched, etc.), the negotiation will be more uncertain.

Criminal aspect of holding foreign accounts

In some cases, tax adjustments 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) when they consider that fraud has been committed and that the amount of the adjustments exceeds €100,000.

If the amount of the adjustments 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 referral of cases to the public prosecutor by the tax authorities has been observed.

Adding a criminal layer on top of the tax layer formed by the adjustments is “in fashion”.

Whereas in the past criminal penalties were rarely applied to tax cases (this concerned only the most extreme cases of tax fraud), today criminal penalties are applied more and more often, even to cases which, in the past, might have seemed relatively standard (for example, repeated receipts of undeclared cash sums).

The media, moreover, increasingly report on this reality.

Criminal prosecutions in tax matters therefore tend to be increasing quite significantly.

Nevertheless, taking charge of the case as soon as the first letter from the tax authorities is received, or, even better, 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 regularising foreign bank accounts, or to tax audits on this subject, we are “walking on eggshells”, because these cases present several complex aspects whose consequences can sometimes be very significant; the involvement of a tax lawyer therefore seems far 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 overwhelming 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
• wealth tax (impôt de solidarité sur la fortune, ISF)
• undeclared financial income
• origin of the funds

The reassessment period and the concept of hidden income

Where there are undeclared foreign accounts, the tax authorities in principle have 10 years to apply adjustments.

More precisely, they have until 31 December of the tenth year following the year audited to apply adjustments.

Example: we are in 2020. The tax authorities have until 31 December 2020 to apply adjustments 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). Since we are now in 2020, the year 2009 and earlier years can therefore no longer be subject to adjustments.

Where there are international tax treaties (a tax treaty signed between France and the State in which the bank account is located), shorter reassessment periods could be applied until 2011; since Law no. 2011-1978, the 10-year period applies regardless of the State in which the account is located (unless the total of the balances did not exceed €50,000).

ISF

The reassessment period is in principle 10 years.

Example: we are in 2020. The following ISF years may be reassessed:

ISF 2010, ISF 2011, ISF 2012, ISF 2013, ISF 2014, ISF 2015, ISF 2016, ISF 2017.

The years 2018, 2019 and 2020 are in principle not concerned, since the real estate wealth tax (impôt sur la fortune immobilière, IFI) replaced the ISF and applies only to real estate assets. However, if the taxpayer held, for example, life insurance policies or financial investments made up mainly of real estate assets or rights, the adjustments would also concern IFI 2018, 2019 or even 2020.

The fines are therefore generally only the small part of the adjustments

Indeed, other adjustments may be added to them, and will in most cases make up the bulk of the total amount of the adjustments:

• adjustments relating to the ISF (years prior to 2018) or, in certain specific cases, the IFI (from 2018)
• adjustments relating to undeclared foreign income. This income is broadly of two types: “passive” income (interest, dividends, etc.) and active income (hence hidden: cash, for example).

Of course, all the adjustments applied will be increased:

• by 40% in the event of a deliberate failure (manquement délibéré) (the most common case) or 80% in the event of fraudulent practices (manœuvres frauduleuses)
• by late-payment interest (intérêts de retard) at a rate of 2.40% per year (0.20% per month since 2018, compared with 4.80% per year previously), halved, subject to conditions, in the event of voluntary filing of a corrective return

Quick focus on the reassessment periods for each tax or fine

Fine for an undeclared account: 4 years

ISF/IFI: 10 years

Income tax: 10 years, regardless of the State in which the account is located. This period will moreover be shortened where the assets did not exceed €50,000 in one or more years.

First standard letter sent by the tax authorities

PARIS, 08/12/2020,

Subject : accounts held abroad

Dear Sir or Madam,

Pursuant to Article 4 A of the French General Tax Code (Code Général des Impôts, CGI), persons whose tax domicile is in France are liable to tax on all of their income, including income from foreign sources.

Under the provisions of Articles 1649 A and 1649 AA of the CGI, persons domiciled in France are also required to declare, together with their income tax return, the details of accounts opened, used or closed abroad and of life insurance contracts taken out, amended or terminated with bodies established outside France.

As no foreign account or life insurance contract was declared in 2017, 2018 and 2019, I invite you to bring yourself into compliance with the tax regulations.

To this end, please provide the following returns and supporting documents:

● for income tax:

– signed and dated corrective income tax returns:

– form no^. 2047 returns for income received abroad;

– form no^. 3916 returns declaring accounts opened abroad (one per account)

– a statement on plain paper of life insurance contracts taken out abroad.

● on the origin of the assets:

a written statement setting out precisely and in detail the origin of the assets held abroad, accompanied by any conclusive document substantiating this origin or constituting a body of evidence capable of establishing it

– a sworn statement (attestation sur l’honneur) that the information you submit is truthful and covers all the undeclared accounts and assets that you hold abroad or of which you are the beneficiary or beneficial owner.

statements of wealth or statements of assets as at 1 January of each year or as at 31 December of the previous year,

● the annual income statements for 2017, 2018 and 2019 issued by the foreign banks or foreign financial institutions, substantiating the income being regularised (dividends, interest, etc.)

the annual statements of gains and losses for 2017, 2018 and 2019 issued by the foreign banks or foreign financial institutions, substantiating the existence of gains (capital gains or losses).

I remain at your disposal for any further information. Yours faithfully.

If you have received this letter, you are strongly advised to reply to it quickly and, above all, to reply to it precisely and exhaustively.

A certain amount of information will need to be obtained from your bank. In addition, a number of returns will have to be produced.

This is painstaking work and, in the vast majority of cases, highly technical.

Using a professional seems advisable.

Corrective income tax returns

The methodology consists of starting again from the returns that were 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 has been 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” (that is, a sum that reduces the tax due in France).

Declaring this foreign income as well as the tax credits involves very specific reporting rules.

The income tax returns must be redone: this is what the tax authorities are asking for when they refer to “corrective income tax returns“.

The form is no. 2042 (the standard “blue” return you are already familiar with).

Form no^. 2047 returns for income received abroad

Form 2047 is the reporting medium for foreign income.

In addition to being declared on form no. 2042, foreign income must be declared on form 2047. One is required per year, except where there is no foreign income in a given year, which is quite rare (there is generally always at least some interest paid).

Form no^. 3916 returns declaring accounts opened abroad

This is the reporting medium for accounts held abroad.

This form will state, among other things, your surname, first name, address, date of birth, and information relating to the bank (name of the bank, its address, account number, etc.). The date the account was opened and, where applicable, the date it was closed must be stated.

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 3916 forms for each account or sub-account could lead to a fine being applied per return (in principle, each fine amounts to €1,500).

Should one therefore 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 held with the same bank, in order to push the tax authorities to apply only a single 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 need to be examined according to 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 current account with bank Z and a savings account with the same bank. If the situation leads to the conclusion that the savings account cannot be regarded as a sub-account of the current account, two 3916 returns will then have to be filed per year. Since 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 x €3,000).

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 raised for earlier years. An account is considered unused if it has recorded no debit or credit transactions, other than passive income (interest, etc.). In practice, if you yourself have 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).

The statement on plain paper of life insurance contracts taken out abroad

If you hold life insurance policies located abroad, they must be declared on plain paper, or on form 3916.

In practice, using 3916 forms seems advisable.

The written statement on the origin of the assets

This is generally where the most important point of the case will lie.

Broadly speaking, the origin of the assets will determine:

• whether you should be regarded as an “active fraudster” or a “passive fraudster”, and therefore the level of the surcharges
• the degree of interest the tax authorities take in your case: a person holding sums from a distant inheritance will generally be “less in the sights” of the tax authorities than a person who has received hidden income for years from an undeclared activity…
• the application of the “double penalty” (tax adjustments and criminal penalties). If the sums come from a distant inheritance, the risk of the case taking on a criminal dimension will seem 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 adjustments, where hidden income was received during the reassessment period (in principle 10 years, unless the total of the account balances did not exceed €50,000)

Your written statement must be truthful.

Lying is very strongly discouraged.

For my part, when I agree to take on a client’s case, any lie will be strictly prohibited (I will never file, on behalf of one of my clients, a submission that is not truthful).

If that is your plan (not to be truthful), there is therefore no point in contacting my tax law firm.

Of course, this does not mean presenting the facts in a way that complicates the situation even further.

The truth must be expressed with sincerity but also with tact.

This written statement plays a predominant role in your case. 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 version. And, of course, the tax authorities will be entitled to ask you subsequently for other supporting documents if they consider that those provided are insufficient.

The tax authorities may ask holders of accounts opened abroad that were not 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 these assets, which are deemed to constitute wealth acquired free of charge (CGI Article 755).

Under Article 755 of the CGI, assets held in an account abroad whose origin and method of acquisition have not been substantiated under the procedure provided for in Article L 23 C of the Tax Procedure Code (Livre des procédures fiscales, LPF) are deemed, unless proven otherwise, to constitute wealth acquired free of charge, subject, upon 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 duties are 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 method of acquisition of the assets.

In the absence of substantiation, or where the substantiation is insufficient (substantiation means documents, not mere explanations), a presumption of a transfer free of charge is then applied to the taxpayer 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.

That is why you are advised to put together the most complete file possible to substantiate the origin of the funds, the production of which will 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: certificate of registration with the local authorities, foreign tax returns…

Sale of foreign movable property (shares, etc.) or real estate: returns filed abroad, foreign deeds…

The sworn statement

This is the document in which you will affirm that the account or accounts you are declaring in response to the tax authorities’ letter constitute all the foreign accounts you hold (that you are not continuing to “hide” other accounts abroad).

Statements of wealth or statements of assets, 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 closing, 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, etc.)

These documents will enable you to produce your income tax returns (forms 2047 and 2042) as well as any necessary ISF/IFI returns.

Bercy

When the assets held in the foreign account exceed a certain amount, the case will in principle be handled by Bercy (the French Ministry of the Economy and 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, even though 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 case 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 the handling of your case.

This is an important point, because the staff posted at Bercy will very often be far more technically expert than local staff.

A case handled by Bercy will therefore generally be more difficult to defend than a case handled by the local tax office.

Good and bad practices

Good practices:

– reply to all letters

– produce exhaustive response files

– well presented in form

– clear in substance

– keep in telephone contact with the person in charge of your case (call him or her from time to time to find out more about how the case is progressing, etc.)

– produce the requested returns with meticulousness and technical rigour

– provide all the information requested

Bad practices:

• Not replying

• Producing incomplete response files

• Providing incorrect information

• Producing inaccurate or incomplete returns

Why follow these good practices? What risks are associated with bad practices?

From a legal point of view, you hold foreign assets that have not been declared, in breach of the applicable law.

Moreover, the government had given taxpayers holding undeclared accounts abroad the opportunity, for almost five years, to voluntarily regularise their situation on more favourable terms.

The tax authorities therefore do not have a very good image 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 voluntarily regularise their accounts).

However, receiving 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 offering you a last helping hand to be transparent about your situation “amicably”.

In practical terms, from a legal point of view, the 751-SD marks:

• the absence of a tax audit procedure in the legal sense of the term
• and therefore the absence of any obligation on your part to reply

However, in the event of no reply or a very incomplete reply, the tax authorities could launch a “real” tax audit in the legal sense of the term, much more burdensome and coercive than a simple exchange of letters (there may be summonses to the tax authorities’ offices, the gathering of information from your banks or other bodies with which you have dealings, etc.).

Furthermore, the climate will not be the same.

In one case, you replied voluntarily to the tax authorities’ letter at the first request; in the other, you turned a deaf ear and the amicable procedure turned into a tax audit.

In more legal terms, in the event of no reply to the 751-SD letters (there are generally at least two, the first letter plus a reminder), a tax audit will generally be launched. In the event of no reply or no cooperation during the tax audit, the tax authorities will in principle be entitled to issue the adjustments “automatically” (d’office). In that case, the amount of the adjustments will in practice be set by “rule of thumb”, and of course in a way that is very unfavourable to you, with the burden on you to prove that the tax authorities are wrong.

Moreover, you will have lost a whole range of possible remedies, the vast majority of which disappear in the event of an automatic assessment (imposition d’office). Your defence will have become much more complicated.

Conclusion

This procedure is not to be taken lightly.

It will very often be a long and tedious procedure.

The tax (or even criminal) consequences may sometimes be significant, hence the need to be assisted by a tax lawyer experienced in this field.

Failure to reply to the tax authorities’ letters, or incomplete replies, may lead to a tax audit, or even an automatic assessment from which it will be even more difficult to extricate yourself.

Our tax law firm can assist you.