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 a decision of the Constitutional Court dated 22 July 2016, the French tax authorities 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). A tax bill of 29 December 2016 profoundly changed the regime of penalties applicable as from 1 January 2017 and, in a recent decision of 16 March 2017, the Constitutional Court confirmed that the penalties which were imposed in the past were unconstitutional (CC Decision 2016-618 QPC of 16 March 2017).

New penalties

As of 1 January 2017, no flat rate penalty (5% or 12.5%) applies to the trust assets. A €20,000 fine might apply instead.

In addition, the settlor (or deemed settlors) and/or the beneficiaries face a penalty of 80% of the unpaid wealth tax or income tax due to their failure to disclose their assets or income from the trust.

Past penalties

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 6 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.

A similar penalty of 5% existed for French tax residents in relation to failure to disclose foreign bank accounts. In a decision dated 22 July 2016, the Constitutional Court ruled that this penalty was unconstitutional because it was against the constitutional principle of proportionality of penalties.

The same reasoning could easily be applied to the penalty for non-disclosure of trusts.

This has been confirmed in a recent Constitutional Court decision dated 16 March 2017, in which the Court rules that the 5% and 12.5% penalties in force before 1 January 2017 are unconstitutional.

What next?

This is clearly good news for trustees of trusts that have never been disclosed to the French tax authorities and that were in quite a tricky situation (given the level of penalties that they could have faced with the application of penalties of 5% and 12.5% annually on the total trust assets).

Now we know that the French tax authorities would not be able to charge these flat rate penalties for past failures to disclose.

The new penalty regime applicable as of 1 January 2017 and the decision of the Constitutional Court for past declarations should now encourage trustees to regularise situations.

We can help trustees with their French disclosure obligations.