Property dealer — LPF L.169 / CGI 1728

Hidden property dealer activity:
the heaviest sanction

When an individual or a structure carries out repeated buy-and-resell real-estate transactions without having declared the activity or registered with the Trade and Companies Register (RCS), the tax authorities may recharacterise the whole as a hidden (undeclared) property dealer activity. The consequences are among the heaviest in French tax law: reassessment period extended to 10 years (Tax Procedure Code, art. L.169, L.174 and L.176), 80% surcharge without prior formal notice (French Tax Code, art. 1728, 1, c), applied to all the taxes concerned (income tax/corporate tax, VAT, CFE, CVAE). The defence requires a rigorous analysis of the repetition of the transactions, the speculative intent and the material elements relied upon by the tax authorities.

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— In brief
Definition
No tax return filed + (no RCS registration OR unlawful activity)
Reassessment period
10 years (LPF art. L.169, L.174, L.176) instead of 3 years
Surcharge
80% without prior formal notice (CGI art. 1728, 1, c)
Taxes concerned
Income tax/corporate tax, VAT, CFE, CVAE and additional taxes
Doctrine
BOFiP BOI-CF-PGR-10-70 and BOI-CF-INF-10-20-10
— 01

A formidable characterisation, frequently applied

A hidden activity is presumed (Tax Procedure Code, art. L.169) when two conditions are met: (1) the taxpayer has not filed within the statutory deadline the returns they were required to submit; and (2) they have not disclosed their activity to the body referred to in the second paragraph of article L.123-33 of the French Commercial Code (registry of the commercial court, URSSAF, etc.), or have carried on an unlawful activity. This presumption may be rebutted if the taxpayer establishes that they made an error justifying the failure to file.

The tax authorities frequently rely on the hidden-activity characterisation for undeclared property dealer transactions, in particular where the repetition of the transactions and the speculative intent are established. The consequences are cumulative: extension of the reassessment period to 10 years (instead of 3) for income tax/corporate tax, VAT, CFE and CVAE; an 80% surcharge without prior formal notice (French Tax Code, art. 1728, 1, c); and a risk of overlap with other procedures (abuse of law, deliberate breach, fraudulent manoeuvres).

The defence is built on two fronts: challenging the characterisation itself (insufficient repetition, transaction pursued for wealth-management rather than speculative purposes, excusable error as to taxable-person status) and, in the alternative, obtaining the discharge of the 80% surcharge, it being noted that the case law holds that discharge of the surcharge does not, in itself, put an end to the ten-year reassessment period.

— 02

5 lines of analysis to characterise, or to contest

The hidden-activity characterisation is never purely formal. Several criteria combine, and each one opens a ground of defence.

1. Repetition: a relative criterion

A property dealer activity in principle requires repeated purchases and resales. But repetition is not an absolute condition: the Conseil d'État accepts that a single large-scale transaction may suffice where the speculative intent is established at the time of acquisition (CE 12 June 1992, no. 67758 and 67759). The case law assesses the whole in light of the number of transactions, their frequency, the financial volumes involved, the resources deployed and, above all, the initial intent. A documented wealth-management transaction (main residence, long-term investment, personal enjoyment) remains, by contrast, outside the scope.

2. Speculative intent from the time of acquisition

A property dealer activity requires an intention to resell from the time of acquisition (speculative intent). The tax authorities infer it from a body of evidence: short holding period, absence of personal enjoyment or of long-term letting, financing through short-term credit, resale-oriented advertising, works clearly geared towards a sale. The taxpayer may rebut this presumption by demonstrating an initial wealth-management intention.

3. The absence of RCS registration

The absence of registration with the RCS as a property dealer is a trigger for the presumption of hidden activity (LPF art. L.169). Late regularisation does not cure the hidden nature of the earlier years. The case law of the Conseil d'État nevertheless allows the taxpayer to invoke an excusable error (for instance as to the characterisation of the activity or the filing obligation) in order to escape the ten-year period and the 80% surcharge.

4. The position of foreign companies with a permanent establishment

The Conseil d'État has clarified how the hidden-activity rules apply to foreign companies whose activity is attributable to a French permanent establishment. Where the foreign company does not register in France and carries on an economic activity on French territory through a permanent establishment, a hidden activity may be established, with the extended reassessment period and the 80% surcharge. Litigation is abundant in this area (cross-border workers, foreign holding companies, international structures).

5. Discharge of the surcharge ≠ end of the 10-year period

The case law holds that the discharge of the 80% surcharge obtained by the taxpayer (for example by demonstrating an excusable error as to the filing obligation) does not automatically put an end to the ten-year reassessment period. The two mechanisms are legally distinct. The defence must therefore be built on both fronts simultaneously.

— 03

Our approach at the firm

In these matters, which carry significant financial and procedural stakes, the firm builds the defence on three pillars: (1) an in-depth factual analysis of the chronology of the transactions, the documented intentions, the notarial deeds, the financing, the advertising and the mandates, in order to establish the absence or the existence of a genuine commercial activity; (2) procedural command of the sequence: proposed reassessment, response, hierarchical appeal, administrative court, administrative court of appeal, Conseil d'État; (3) coordination of the arguments on two distinct fronts (hidden-activity characterisation and 80% surcharge).

Voluntary regularisation before any audit remains the most protective option where the situation is ambiguous: it makes it possible to avoid both the ten-year period and the 80% surcharge, at the cost of the ordinary taxation (sometimes spread over time).

— Frequently asked questions

Everything you need to know when facing a hidden-activity audit

How do the tax authorities establish a hidden activity?

Under article L.169 of the Tax Procedure Code, a hidden activity is presumed where the taxpayer has not filed within the statutory deadline the returns they were required to submit and either has not disclosed the activity to the body referred to in the second paragraph of article L.123-33 of the French Commercial Code (court registry, URSSAF, etc.), or has carried on an unlawful activity. The presumption may be rebutted if the taxpayer demonstrates an excusable error justifying the failure to file, a factual assessment made case by case by the court.

What is the tax authorities' reassessment period?

10 years instead of the 3 years normally applicable. This extension covers: income tax (categories of income deriving from a professional activity) and corporate tax (LPF art. L.169), the CFE and the CVAE (LPF art. L.174), VAT and similar taxes (LPF art. L.176). The starting point is 31 December of the year in respect of which the tax is due. For transactions carried out in 2018, the tax authorities may therefore challenge the assessments until 31 December 2028.

What surcharge applies?

A surcharge of 80% on the basis of point c of paragraph 1 of article 1728 of the French Tax Code. This surcharge is applied without prior formal notice, a notable difference from the other cases of article 1728, where a formal notice is required. The surcharge may be combined with the late-payment interest of article 1727 (0.20% per month, i.e. 2.40% per year) on all the taxes evaded over the ten-year period.

How can the presumption of hidden activity be rebutted?

The taxpayer must demonstrate an excusable error justifying the failure to file. The administrative case law assesses this excuse case by case: it accepts an error as to the characterisation of the activity (for example, the mistaken belief that the transactions amounted to mere private wealth management rather than a commercial activity), or an error as to the filing obligation (notably for non-residents or foreign companies unaware of the existence of a French permanent establishment). The burden of proof lies with the taxpayer, on the basis of objective evidence.

If I obtain the discharge of the 80% surcharge, am I safe?

Not entirely. The case law holds that the discharge of the 80% surcharge has no bearing on the application of the ten-year reassessment period, as the two mechanisms are legally distinct. The taxpayer may therefore have the surcharge cancelled while remaining exposed to tax reassessments over 10 years. The defence must therefore be built on both fronts simultaneously: the hidden-activity characterisation (which conditions the 10-year period) AND the 80% surcharge (a sanction in its own right).

What should I do if I fear I may be in a hidden-activity situation?

Regularise voluntarily before any audit. A well-conducted voluntary regularisation makes it possible to avoid both the ten-year reassessment period and the 80% surcharge, at the cost of the ordinary taxation (sometimes spread over several years). The analysis must nevertheless be carried out with a tax lawyer: a poorly calibrated regularisation may, on the contrary, worsen the situation. A prior audit is essential.

Special case: foreign companies with real-estate activity in France

The Conseil d'État has repeatedly clarified how the hidden-activity rules apply to foreign companies whose activity is attributable to a French permanent establishment. Where the company does not register in France and carries on an economic activity through a permanent establishment (typically an office, staff, or a regular property-management activity), a hidden activity may be established. The firm regularly handles these international matters, in coordination with its foreign correspondents (notably in the Franco-Swiss corridor).

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© BENSAID Avocats — The information on this site does not constitute legal advice and cannot replace a personalised tax analysis.