Foreign Accounts, Digital Assets, and Life Insurance: Stay Compliant with Reporting Obligations to Avoid Heavy Penalties in France

Introduction: Automatic Information Exchange in the Fight Against Tax Evasion

In 2023, France received information on 7.7 million bank accounts held abroad by French tax residents, provided by partner countries' tax administrations (press release no. 26 from the Ministry in charge of the Budget and Public Accounts, November 14, 2024). These data, exchanged under international frameworks for automatic information exchange, demonstrate enhanced cooperation between states to promote transparency and combat tax evasion.

Automatic information exchanges are governed by two key frameworks:

• At the European level, Directive 2014/107/EU of the Council of December 9, 2014, known as "DAC 2";
• At the international level, the Multilateral Competent Authority Agreement of October 29, 2014, initiated by the OECD, commonly known as the Common Reporting Standard (CRS).

These frameworks enable tax administrations to share information annually about taxpayers' financial accounts. In 2023, these data allowed the French General Directorate of Public Finances (DGFiP) to enhance tax audits: over 7,000 audits were conducted, recovering a total of €210 million in taxes and penalties, a 35% increase from the previous year.

These results highlight the growing effectiveness of such exchanges in detecting and penalizing undisclosed foreign accounts and assets, particularly in matters of income tax and inheritance tax.

At TaxLhab, we are fully committed to assisting taxpayers in regularizing undeclared foreign bank accounts, life insurance contracts, or digital assets. When faced with a tax authority inquiry, swift action is crucial. Consulting a specialized lawyer ensures a strategic and efficient management of your situation.

Regularization cases can be particularly complex and time-consuming, especially due to the administration’s reassessment right, which extends up to the end of the tenth year following the tax year in question. Providing an appropriate and timely response is essential to limit the risks of surcharges and penalties.

This article offers a concise overview of taxpayers' reporting obligations and the applicable surcharges and penalties in cases of non-compliance.

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Reporting Obligations for French Tax Residents

Individuals with their tax residence in France are generally subject to income tax on their worldwide income, subject to the provisions of international tax treaties. In this context, French tax residents are subject to several specific reporting obligations aimed at ensuring full transparency of their financial and digital assets:

1. Foreign Bank Accounts: Bank accounts held abroad, whether opened, used, owned, or closed, must be declared (Article 1649 A of the French General Tax Code – CGI).
2. Capitalization and Life Insurance Contracts: Contracts signed with institutions established outside France must also be declared (Article 1649 AA of the CGI).
3. Digital Asset Accounts: Digital asset accounts, such as cryptocurrency wallets held on foreign platforms, have been subject to mandatory reporting since January 1, 2020 (Article 1649 bis C of the CGI).

These obligations cover a wide variety of situations. Some taxpayers maintain foreign bank accounts opened during professional assignments or for family reasons, for instance, accounts inherited through succession or donations. Others may open foreign accounts for tax purposes, particularly in uncooperative tax havens, to reduce or avoid taxation on certain income. These accounts are sometimes held through legal structures such as trusts or foundations located in jurisdictions like Liechtenstein or Panama.

It is also common for financial income (interest or dividends) earned abroad to be taxed lightly or even exempt in some jurisdictions, such as Switzerland or Belgium for capital gains on shares. When these practices are not properly reported, taxpayers face severe penalties.

Reporting Foreign Bank Accounts

Under Article 1649 A of the CGI, as amended by Article 7 of Law No. 2018-898 of October 23, 2018, individuals, associations, and non-commercial entities domiciled or established in France must declare, along with their income or tax return, the details of bank accounts opened, held, used, or closed abroad.

Evolution of Reporting Obligations

Before this reform, the obligation applied only to accounts "used," i.e., those involving at least one credit or debit transaction during the relevant period. Since January 1, 2019, the obligation has been extended to include passive account ownership, thereby covering inactive or dormant accounts. This represents a significant tightening of reporting requirements for taxpayers.

Definition of a Bank Account

The definition of a "bank account" is interpreted broadly by the tax administration. According to BOI-CF-CPF-30-20 (§120, May 26, 2021), it encompasses all accounts held abroad with entities habitually accepting deposits of securities, titles, or funds. This includes accounts held with banks, investment service providers, public administrations, notaries, or brokers.

Reporting Methods

Each account opened, held, used, or closed during the year must be declared individually. This obligation also extends to accounts held by members of the tax household, including dependents. To comply, taxpayers must complete Form No. 3916, available for the relevant tax year on the tax administration's website. The form must be submitted alongside the paper tax return or completed online in the taxpayer's personal account before the filing deadline.

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Reporting Digital Asset Accounts

Under Article 1649 bis C of the CGI, French tax residents must declare digital asset accounts opened, held, used, or closed during the year. This obligation also applies to members of their tax household and dependents attached to that household.

Definition of Ownership and Use

A taxpayer is considered to hold a digital asset account if they are the account holder, co-holder, beneficial owner, or economic beneficiary. The term "use" applies as soon as a credit or debit transaction is carried out during the year, whether by the account holder or through a proxy, for their own benefit or on behalf of another French tax resident.

Reporting Methods

Each digital asset account, whether for private, professional, or mixed (private and professional) use, must be declared individually. Taxpayers must complete Form No. 3916-bis, accessible on the tax website (www.impots.gouv.fr). The form must be attached to the paper tax return or completed online in the taxpayer’s personal account before the deadline.

Scope of the Obligation

The reporting requirement applies to all digital asset accounts held with foreign platforms or any entity authorized to receive deposits of digital assets. This aims to ensure greater transparency, particularly as digital assets, such as cryptocurrencies, are often used in cross-border transactions.

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Penalties and Criminal Offenses

The reporting obligations for foreign bank accounts and digital assets come with significant penalties under Articles 1729-0 A and 2 of IV Article 1736 of the CGI. These penalties vary depending on whether the funds held in the accounts have been declared or not.

Penalties for Non-Declaration of Foreign Bank Accounts

1. Flat-Rate Fine: €1,500 per undeclared account, increased to €10,000 if the account is located in a non-cooperative state or territory (ETNC).
2. 80% Surcharge: On the tax due, if the sums in these accounts lead to a tax adjustment. This surcharge cannot be less than the above-mentioned fines.

The fine for failure to declare is subject to a four-year statute of limitations following the year of the offense. For instance, a violation committed in 2017 (relating to the 2016 declaration) could be penalized until December 31, 2021.

Additionally, if a taxpayer fails to declare a foreign bank account, any funds transiting through that account are presumed to be taxable income unless the taxpayer proves otherwise. This proof must demonstrate that the sums are exempt, already taxed, or outside the scope of taxation.

Specific Penalties for Digital Assets

For digital asset accounts not declared under Article 1649 bis C of the CGI:

• A fine of €750 per undeclared account or €125 per omission or inaccuracy, capped at €10,000 per declaration.
• If the fair market value of the accounts exceeds €50,000 at any time during the year, these amounts increase to €1,500 per undeclared account and €250 per omission or inaccuracy.

Expanded Powers of the Tax Administration

In cases of repeated non-declaration within the past ten years, the tax administration may require explanations about the origin of funds in foreign accounts. If the responses are insufficient or absent, the administration can impose a flat-rate taxation of 60%, applicable as gift or inheritance tax.

Criminal Prosecution for Tax Fraud

The tax administration may also report taxpayers for tax fraud to the criminal court when intentional fraud is established. Since the October 23, 2018 law, such reporting is mandatory when tax reassessments exceed €100,000 and involve at least a 40% penalty.

Tax fraud is punishable by:

• Five years of imprisonment and a €500,000 fine, doubled if the offense’s proceeds exceed this amount.
• Seven years of imprisonment and a fine of €3 million (or double the proceeds) in cases of aggravated tax fraud.

These sanctions underscore the importance of strict compliance with reporting obligations and reflect heightened vigilance by tax authorities in combating tax evasion.

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Reporting Life Insurance and Capitalization Contracts

Under Article 1649 AA of the CGI, introduced by Article 37-III of Law No. 98-1266 of December 30, 1998, French tax residents are required to declare life insurance or capitalization contracts signed with entities established outside France along with their annual tax returns. The declaration is made using Form No. 3916.

Scope of the Obligation

This obligation applies to all contracts signed with foreign entities covered by Article 990 I of the CGI, including contracts guaranteeing life risks, death risks, or mixed insurance. It applies regardless of the payment terms (lump-sum or periodic) and benefits (capital or annuity).

The declaration covers all contracts signed, amended, or terminated during the previous calendar year, including those held by dependents under Articles 196 to 196 B of the CGI. Since Decree No. 2021-184 of February 18, 2021, Article 344 C of Annex III to the CGI specifies the details of this declaration.

Penalties for Non-Declaration

Taxpayers who fail to declare these contracts face strict financial penalties:

• A fine of €1,500 per undeclared contract, increased to €10,000 if the contract is held in a non-cooperative state or territory (ETNC).
• An 80% surcharge on the taxes due, applied when tax adjustments are made on amounts in the contracts. This surcharge replaces the above fines but cannot be less than their amount.

Special Regime and Income Presumption

Since 2012, undeclared contracts are presumed to generate taxable income. Payments to or from an undeclared life insurance contract are presumed taxable unless the taxpayer proves otherwise. Such income is also subject to social contributions and a 40% penalty, along with late payment interest.

Finally, for contracts whose origin and acquisition details are not justified, Article 755 of the CGI presumes them to be gratuitous acquisitions subject to gift or inheritance tax at the highest applicable rate.

Application Period of Current Provisions

The current provisions of Article 1649 AA of the CGI apply to failures related to declarations required from December 31, 2016. For earlier violations, a fine equivalent to 5% of the contract's market value remains applicable.

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