The French Ministry of Finances issued a new circular on 20 September 2016 which formalizes the announcement made on 15 September 2016.

The reduced rates of penalties due on a surplus of income and wealth taxes due on non-reported income or assets held in an offshore account/portfolio, life insurance contract or in trust are increased:

  • From 15% to 25% for “passive" taxpayers (notably those who inherited an account);
  • From 30% to 35% for “active” taxpayers (in lieu of the legal rate of 40%).

These increased rates are applicable to taxpayers who enter into a voluntary disclosure procedure with the French tax authorities as from 15 September 2016, date of this announcement. The other conditions and reductions offered by the previous circulars are maintained.

This increase of rates takes place further to the decision of the French Constitutional Court on 22 July 2016, which held that the 5% penalty applicable in the case of a failure to disclose offshore bank accounts/portfolios that exceeded EUR50,000 is disproportionate and unconstitutional. From 22 July 2016, the 5% penalty can no longer be applied, and only the flat annual penalties of EUR1,500 or EUR10,000 per undeclared account will be applicable.

Whether this 5% penalty will be replaced with a new proportional penalty in the future is unknown: we will need to wait for the next Finance Acts. It is likely that a new penalty will be introduced as from 2017 (possibly applicable in the case of failure to report an account opened, held or closed in 2016).

We note that the official French voluntary disclosure procedures are still in place, however it is uncertain how long they will still be offered to taxpayers who have failed to report foreign accounts, income and assets. Taxpayers with undeclared assets are therefore encouraged to come forward and regularize their tax situation as soon as possible.