The zeal behind the law on Trusts adopted in 2011 is slowly dissipating.
After the recent Constitutional Court decision declaring unconstitutional the use of a public registry for trusts (see our November 3, 2016 newsletter), the Amended 2016 Finance Act that was just published provides for the suppression of the proportional penalty of 12.5% of net assets in the event of the absence of reporting or false reporting relating to trusts. The only remaining penalty would be a flat fine of 20,000 euros.
Background – Trust legislation
The Amended 2011 Finance Act implemented a new tax regime relating to trusts instituting reporting obligations on trustees. Article 1649 AB of the French General Tax Code establishes two types of reporting obligations: - A declaration relating to the creation, modification or termination of a trust and the terms thereof; - An annual declaration of the net value on January 1 of the assets, rights or reinvested income in the trust.
The scope of application of these reporting obligations is wide as they must be fulfilled when (i) the settlor, beneficiary or beneficiaries or trustee of the trust is a French tax resident, or (ii) the trust contains French assets (with certain exceptions including when the trust with non-French tax resident parties contains certain French financial investments). In addition, a trustee may be required to complete the obligations on a regular basis, for example, when the trust sells certain assets since it would be deemed to be a modification of the trust.
The failure to meet these obligations was, until now, subject to a fine of 20.000 euros or, if higher, 12.5% of the value of the assets in the trust. The amount of this fine could therefore be extremely severe especially since the texts provide for application of the fine for each omission or false declaration. A high burden of oversight was required in view of the potential penalties.
Perspectives in view of the Amended 2016 Finance Act
Recently, the Constitutional Court declared as unconstitutional the proportional penalty applicable in the absence of reporting of a foreign bank account. Following this decision, the French tax authorities indicated that it would adhere to the Constitutional Court decision for penalties on foreign bank accounts but without mentioning the proportional penalty applicable to trust reporting obligations. Several cases are pending before the courts and, in our opinion, should be decided according to the same principles.
The Ministry of Finance has decided to head off constitutional challenges by eliminating the proportional penalty applicable to trusts.
The suppression of the proportional penalty is a positive development for foreign trusts where often the trustee is not fully aware of the financial consequences of the failure to report. One should also note that the new provisions regarding penalties will apply retroactively to fact situations before December 31, 2016, the probable date of entry into force of the Amended Finance Act.
Please note that the penalty is not completely eliminated: the flat penalty of 20.000 euros was neither abrogated nor modified.
One may be surprised to see that the degree of sanctions when reporting requirements are not met remains disparate depending on the types of investments triggering the declaration.
The failure to report a foreign bank account gives rise to a penalty of only 1,500 euros (10,000 if the account not reported is in a non-cooperative State or territory).
Is this striking difference of treatment constitutional? The question is even more pertinent since a sanction such as a financial penalty must be proportional in application of the constitutional principle that the Law must prescribe only the punishments that are strictly and evidently necessary under Article 8 of the Declaration of Human and Civil Rights of 1789.