Until now, Article 1736 IV bis of the French Tax Code (FTC) has imposed very high penalties for trustees who fail to comply with filing requirements imposed by French tax legislation applicable to trusts. Following the decision of the Constitutional Court dated 22 July 2016, French tax authorities have made changes to the penalties applicable for failure to comply with some disclosure obligations, in particular the ones applicable to trustees ("circulaire" of 14 September 2016).

Current penalties

As it stands, trustees who have failed to comply with the filing requirements for trusts can receive a penalty under Article 1736 IV bis of the FTC. This includes 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 assets.

This penalty applies to all the assets held in trust and arises each time a failure occurs.

New penalties

As part of the French tax authorities changes, trustees who have failed to comply with the filing requirements for trusts will now receive a fine of either €20,000 or a percentage of the total value of the assets held in trust, whichever is higher.

The percentage varies depending on the origin of the funds settled in trust:

  • If the funds were "received" through a transfer on death, the rate is 3.75%;
  • If the funds were placed in trust by the settlor while he was not a French tax resident, the rate is still 3.75%;
  • If the funds were placed in trust by the settlor while he was a French tax resident, the rate is 7.5%

In addition to these penalties, settlors or deemed settlors also face penalties if they have failed to comply with their personal wealth tax filing obligations. In the case of voluntary disclosure, the penalty is 25% or 35% of the tax due.

The penalties applicable for failure to disclose foreign bank accounts have also been reduced from 5% to 1.5% or 3% depending on the origin of the funds as mentioned above.

However, the question remains as to whether these new rates will be acceptable.

Considering that the Constitutional Court already considered that a penalty of 5% was too high outside the context of tax fraud, we do not see why a penalty of 3.75% or 7.5% would be acceptable.

The Constitutional Court has sanctioned the application of flat rate percentage penalties when no fraud can be identified. The government is therefore expected to propose in the next tax bill new provisions in respect of penalties to replace the application of automatic flat rate percentages.