The publication of the Circular of 21 June 2013 marked the start of the fight against tax fraud, an effort that continues to intensify. At present, more and more countries transmit a large amount of banking information to the French tax authorities every year: account balances, opening dates, account number(s), income generated by the accounts, etc.
This is the myPOS system of the French tax authorities.
The French tax unit for the voluntary regularisation of foreign accounts has no longer been operational since 2018. However, it is still possible to carry out the voluntary regularisation of one’s accounts.
Furthermore, owing to the ever-increasing volume of banking information received from foreign countries, the French tax authorities now almost systematically initiate “pseudo” tax audits, which, from a legal standpoint, are not tax audits in the strict sense, but a final warning before a tax audit, a last chance to voluntarily regularise the accounts.
The letters sent bear the number 751-SD at the top right. And the Department in charge of this “audit” is very often a PCRP (Income and Wealth Audit Unit, pôle de contrôle des revenus et du patrimoine): this is indicated at the top right of the letter.
Unfortunately, the potential penalties are fairly heavy, especially if the offence is characterised as tax fraud.
Penalties are in principle 80%, plus late-payment interest. Criminal penalties may also be applied in certain cases.
However, a properly conducted regularisation may, depending on the case, make it possible to significantly reduce the penalties and limit the risk of criminal sanctions.
The regularisation of a foreign bank account: what exactly does it involve?
The expression “regularisation of a foreign account” refers to the action by which a taxpayer voluntarily fulfils their tax obligations in order to comply with the legislation in force. The regularisation procedure must be voluntary: this means that the taxpayer must declare the assets held abroad to the French tax authorities on their own initiative, before a tax audit is initiated. To do so, they must submit a foreign account regularisation file to the tax office.
When you receive letter 751-SD requesting regularisation, the tax audit in the legal sense of the term has not yet been initiated; legally, your regularisation is still voluntary.
In practice, this letter constitutes the “last chance” before a real tax audit in the legal sense of the term, which is even tougher and at the end of which the penalties will generally be much higher.
The regularisation file must in principle include, in particular, all bank accounts and insurance contracts taken out abroad. It should be noted that the obligation still applies even to accounts closed during the year.
Please note, however, that the regularisation procedure does not, in principle, apply to certain types of assets or holdings, in particular those deriving from fraudulent or concealed activities.
All tax residents of France are required to declare their foreign accounts and assets every year, using form 3916/3916-bis.
Article 4 B of the French General Tax Code (Code général des impôts, CGI) specifies which persons are French tax residents:
- Those whose home or main place of residence is in France;
- Those who carry on their main professional activity in France;
- Those whose centre of economic interests is in France.
- Persons whose family is in France (in principle in the nuclear sense: partner/children)
Why and how should you regularise your accounts abroad?
When a taxpayer wishes to regularise a bank account held abroad, they must complete several steps, which are often burdensome. The file to be put together is indeed often complex and substantial, as it frequently covers a period of 10 years; the services of a tax lawyer are therefore recommended, or even practically indispensable, if you wish to put together a proper file.
Preparing this file requires in-depth knowledge of international tax rules: this is why it is recommended to seek the assistance of a tax lawyer, who will provide informed support and help you put together a compliant file, with the benefit of all the advantages to which you may be entitled: foreign tax credit, reduction of fines, possible reduction of surcharges and, subject to conditions, of late-payment interest, etc. The involvement of a lawyer is not, however, mandatory: you are fully entitled to use another type of professional, for example your chartered accountant, or to choose to prepare the file yourself.
For very small accounts, the regularisation steps are generally simplified, provided of course that the origin of the funds can be justified. In any event, the support of a tax lawyer ensures that the steps are carried out under good conditions.
Which accounts are covered by the regularisation obligation?
All bank accounts, savings accounts, life insurance accounts, capitalisation contracts, securities accounts, cryptocurrency accounts, etc. may be audited.
Regularisation applies to all these types of accounts where the account was opened, held, used or closed during the last 10 years (in some cases the regularisation period is reduced to 3 years instead of 10).
The regularisation obligation does not, however, in principle concern accounts dedicated to online purchase payments or to receiving payments in connection with sales where the total annual receipts credited to these accounts do not exceed €10,000. These accounts dedicated to online purchases or to receiving payments in connection with a sale must, however, be linked to another account opened with a French bank.
Regularisation of a foreign account: a procedure in principle covering the last ten years
When a taxpayer decides to regularise their foreign accounts, the process must in principle cover the accounts opened, held, used or closed during the past 10 years. Thus, a taxpayer who decides to regularise their accounts in 2022 must in principle include all accounts opened, held, used or closed since 2012 inclusive. The year 2011 and previous years will not be included in the file; there will be no reassessment for those years, which are legally time-barred, meaning that the tax authorities are not entitled to reassess them.
Be careful, however: the origin of the funds “is never time-barred”. In practice, this means that a taxpayer who is unable to prove the origin of their funds faces heavy reassessments on all of their assets, and therefore possibly also on income received more than 10 years ago.
Conversely, if the origin of the funds can be justified, reassessments cannot in principle go back more than 10 years.
When the tax authorities apply a regularisation tax reassessment, they take into account various parameters such as liability to wealth tax (Impôt sur la Fortune, ISF), income received abroad, and the origin of the funds (inheritance, gift, professional income, etc.).
In general, a perfectly constructed regularisation file can make it possible to reduce the penalties.
In the event of a tax audit, the surcharges are in principle 80%. A well-constructed regularisation file may, depending on the case, make it possible to obtain a reduction of the surcharges.
The regularisation file will cover a wide range of taxes: wealth tax, real estate wealth tax, income tax and social security contributions.
The surcharge is calculated on the amount of the reassessment. For example, if a reassessment of €100 in wealth tax is ultimately applied, the sum of €100 + 40% will be due: €140, to which late-payment interest will be added, the amount of which will be higher the older the tax concerned.
Focus on the penalties provided for in the event of failure to regularise a foreign account
The regulations provide for two types of penalties: financial penalties and criminal penalties (criminal penalties apply, in practice, only in certain cases)
1- The fines provided for in the event of failure to regularise a foreign account
When a taxpayer does not declare their accounts opened in a country that has signed a convention facilitating the exchange of banking information with France, they face a fine of €1,500 per year and for each undeclared account. This fine may be claimed over a period of 5 years, i.e. a maximum amount of €7,500 per undeclared account.
In the case of an account opened in a foreign country that has not signed an agreement facilitating the exchange of banking information with France, the fine is much higher and may reach €10,000 per year and for each account, i.e. a maximum amount of €50,000 per undeclared account.
If the assets derive from an inheritance or a gift, certain international tax treaties will, in certain very specific cases, make it possible to benefit from an exemption. The treaty must still be invoked in the regularisation file, as the exemption is not automatic.
2- Criminal penalties in the event of failure to regularise a foreign account
Where the taxpayer has deliberately attempted to conceal their accounts from the tax authorities, criminal proceedings for tax fraud may in certain cases be brought. If fraudulent conduct has been established, the penalties can be very heavy, both in terms of fines and prison sentences.
Article 1741 of the French General Tax Code states that the fine may reach €3,000,000 (or twice the proceeds of the offence) and that a prison sentence of up to 7 years may be imposed.
