The proportional penalty of 5% for the absence of disclosure of foreign bank accounts is unconstitutional

By decision dated July 22, 2016 (Decision n° 2016-554 QPC), the French Constitutional Court ruled that the provisions of Article 1736, IV of the French Tax Code (“FTC”) which determine the penalty for the absence of disclosure of foreign bank accounts according to a percentage of the balance of such accounts (5%), provided the balance exceeds EUR 50,000, disregard the principle of proportionality of penalties and, thus, that said provisions are unconstitutional.

For a reminder, according to the first section of paragraph IV of Article 1736 of the FTC, the absence of annual disclosure of bank accounts opened, used and closed in a foreign country is subject to a EUR 1,500 penalty per non disclosed account, increased to EUR 10,000 if the concerned account is located in a State or country that has not concluded a convention on administrative assistance with France. According to the second section of paragraph IV of Article 1736 of the FTC, if the balance of the non-disclosed foreign account exceeds EUR 50,000 as at December 31 of the year under which the disclosure obligation applies, the penalty per non-disclosed foreign account amounts to 5% of the balance of such account.

The French Constitutional Court pointed out that such proportional penalty is due even in the case where the funds deposited in these accounts have not been misappropriated for tax evasion purposes. The Court ruled that the application of such penalty to the mere failure to fulfill declaratory obligations is clearly disproportional to the seriousness of the failure that the French legislator intended to prosecute.

The ruling does not challenge the applicability of the lump sum penalty of EUR 1,500 (if applicable, increased up to EUR 10,000). Such penalty has been declared compliant to the French Constitution by decision of the French Constitutional Court dated September 17, 2015 (Decision n° 2015-481 QPC).

The unconstitutional provisions are amended as from the date of publication of the French Constitutional Court’s ruling, i.e. July 22, 2016. The ruling applies to penalties that have been imposed by virtue of paragraph IV of Article 1736 of the FTC prior to the French Constitutional Court’s ruling and which have not been confirmed by a final judgment or against which a claim can still be filed.

The taxpayers who intend to regularize their tax situation in France should file their application for regularization prior to a future Finance Bill that may introduce a new penalty, but which may not be retroactive.

The taxpayers who currently regularize their tax situation should contact the French tax authorities as soon as possible in order to seek the application of the French Constitutional Court’s decision.

This decision should also have an impact on the 12,5% penalty for the absence of disclosure of foreign trusts.