Those initiating in covert activities under French tax law are in a very awkward position with regard to the tax authorities.
They shall be subject to taxation without any prior formal notice (Article L 68 of the French General Tax Code), with an intervention period extended to ten years (Article L 169 of the French General Tax Code) and the application of an increase of 80% of the rights recalled (Article 1728 of the French General Tax Code).
These rules are not surprising when they are applied to persons who intentionally concealed an economic activity which they knew was subject to French taxation.
Yet, often, the difficulty is found when you dig deeper into the details and an activity may be subject to taxation by its very nature or by its localization in France, for reasons that are sufficiently ingenious not to have been perceived as such by the person carrying out such activity.
The danger zone for companies
In the business world, it is cross-border relations which shall cause risks in this regard due to the complexity of the qualification criteria for permanent company establishments or registered offices.
Yet, Article L 169 of the French General Tax Code sets forth that: "Covert activity is considered to have taken place when the tax payer or the legal entity mentioned in the first phrase of this paragraph has not submitted the declarations within the statutory period which he was obliged to do and either has not provided information on its activity to a company registration center or the court registry of the Commercial Court, or has been taking part in a covert activity."
Article L 68 of the French General Tax Code makes reference to this definition and Article 1728 of the French General Tax Code simply uses the term "covert", but the consistency of the French Tax Code justifies that the tax authorities may use the same definition for the interpretation of this Article.
It is evident that the persons considering that they exercise their activity in a tax jurisdiction other than France, shall not submit a declaration in France and shall not register with the registry of trade and companies or the business formalities center and are particularly exposed to the implementation of these measures in their regard if they still have material elements that bind them to France.
The extent of the risk
The issue which has been raised since the beginning of these texts, and which was only recently "partially" resolved by the French Council of...