Undeclared (hidden) activity: an aggravated regime
The tax authorities allege an undeclared activity against you? The characterisation carries heavy consequences: an assessment period extended to ten years, an 80% surcharge, and automatic assessment without prior formal notice. Yet it rests on precise conditions, which can be challenged, and the taxpayer can set it aside by demonstrating a justified error as to his filing obligations. The firm contests the characterisation, its cascading effects and the penalties.
- Concept
- Undeclared activity, with no registration of existence, or an unlawful activity
- Assessment
- Assessment period extended to 10 years (LPF art. L. 169)
- Surcharge
- 80% (CGI art. 1728, 1, c)
- Procedure
- Automatic assessment, without prior formal notice (LPF art. L. 66 and L. 68)
- Defence
- Characterisation set aside if the taxpayer demonstrates a justified error as to his filing obligations
What is an undeclared (hidden) activity?
An activity is deemed hidden where the taxpayer has not filed the required returns within the time limits, and has not registered the activity with a business formalities centre or the court registry, or carries on an unlawful activity. It is the combination of the failure to file and the lack of visibility of the activity that characterises concealment.
The characterisation cannot be presumed: it requires all of these conditions to be met. Above all, the case law accepts that a taxpayer acting in good faith, who demonstrates a justified error as to his obligations, escapes the characterisation of undeclared activity.
An aggravated regime on three fronts
The characterisation of undeclared activity triggers a markedly harsher regime:
- 10-year assessment period: the tax authorities may go back well beyond the ordinary time limit (LPF art. L. 169);
- 80% surcharge applied to the reassessed tax (CGI art. 1728, 1, c);
- Automatic assessment: the tax is established without the adversarial procedure and without prior formal notice (LPF art. L. 66 and L. 68);
- A risk of criminal prosecution for tax fraud where the facts so warrant.
The combination of these effects makes undeclared activity one of the heaviest grounds for reassessment: the financial stakes, multiplied by the length of the period and the surcharge, can be considerable.
Lines of defence
The defence bears first on the characterisation itself: the tax authorities must establish that all the conditions of concealment are met. It then bears on good faith: proof of a justified error as to the filing obligations sets aside the characterisation and its aggravated effects. Finally come the challenge of the ten-year assessment period, of the 80% surcharge, and of the methods of the automatic assessment (reconstruction of the tax bases, respect for the residual guarantees).
How the firm assists you
The firm contests the characterisation of undeclared activity and demonstrates, where appropriate, the taxpayer's good faith. It challenges the assessment period, the reconstruction of the bases assessed automatically, the 80% surcharge, and coordinates the defence with any criminal tax law proceedings. Where the situation allows, it assists with a voluntary disclosure beforehand, which remains the best protection. The firm conducts the litigation before the tax courts.
Undeclared activity: your questions
What is an undeclared (hidden) activity for tax purposes?
It is an activity for which the taxpayer has not filed his returns within the time limits and has not registered the activity with a business formalities centre or the court registry, or which is unlawful. All of these conditions must be met.
What are the consequences of an undeclared activity?
An assessment period extended to 10 years (LPF art. L. 169), an 80% surcharge (CGI art. 1728, 1, c), automatic assessment without prior formal notice (LPF art. L. 66 and L. 68), and a criminal risk.
Does good faith allow the characterisation to be avoided?
Yes. A taxpayer who demonstrates a justified error as to his filing obligations may escape the characterisation of undeclared activity and its aggravated regime. Demonstrating good faith is a central line of defence.
Can the ten-year assessment period be challenged?
Yes, by contesting the characterisation of undeclared activity itself: if the conditions are not met, the assessment period reverts to the ordinary rules. The methods of the automatic assessment can also be challenged.
Is a voluntary disclosure possible?
Where the situation allows, a voluntary disclosure, before any audit, limits the consequences. That is the value of anticipating with counsel.
An undeclared activity alleged against you?
A confidential initial discussion to contest the characterisation, demonstrate good faith and challenge the assessment period and the 80% surcharge.
This page presents the regime applicable to undeclared activity for information purposes only; each case calls for a specific analysis. References to the French Book of Tax Procedures and the French Tax Code as in force at the date of writing.