Foreign VAT Compliance Does Not Automatically Protect a Business from the “Hidden Activity” Penalty

French Supreme Administrative Court: Foreign VAT Compliance Does Not Automatically Protect a Business from the “Hidden Activity” Penalty

Summary

A Spanish company assessed for French corporate tax and VAT argued that its failure to register and report in France was an honest error because it had complied with its tax obligations in Spain.
The French authorities may compare the actual amounts of corporate tax and VAT paid abroad with the amounts that would have been payable in France. Comparing statutory tax rates alone is insufficient.
Differences in social security contributions may also be considered when determining whether the failure to comply in France was a genuine error or an undeclared activity.

Extended article

On 30 September 2026, the Conseil d’État delivered an important judgment concerning the circumstances in which a foreign business operating in France can avoid being treated as carrying on a hidden or undisclosed activity. The case concerned Sermain Mantenimiento Industrial, the successor to SMI Montajes, a Spanish company that had conducted business in France over several years without fulfilling its French corporate tax and VAT obligations. [conseil-etat.fr]

The French tax authorities considered that the company had operated through a French establishment between 2008 and 2014. They therefore issued additional corporate tax and VAT assessments, together with the penalties applicable to an undisclosed activity. The company did not deny that it had failed to submit the required French returns. Instead, it argued that the omission resulted from an error because it had declared its activities and paid taxes in Spain. [conseil-etat.fr]

Under French tax procedural rules, an activity may be presumed to be hidden where a taxpayer has neither filed the required tax returns nor notified the relevant French registration authorities of its activity. The taxpayer may rebut that presumption by demonstrating that the failure resulted from an error rather than a deliberate attempt to conceal the activity. Whether an error has been established must be assessed in light of all the relevant circumstances. [conseil-etat.fr], [conseil-etat.fr]

A central issue was how the tax burden in France and Spain should be compared. The company argued that the analysis should focus on the statutory corporate tax and VAT rates in the two countries. The Conseil d’État rejected that approach. It confirmed that the relevant comparison concerns the amounts of tax actually paid in Spain and the amounts of corporate tax and VAT that would have been payable in France if the company had correctly fulfilled its French obligations. [conseil-etat.fr]

This is important from a VAT perspective. A company cannot show that an incorrect VAT treatment was harmless merely by pointing to broadly comparable VAT rates in two jurisdictions. The authorities may examine the complete financial outcome, including the VAT actually accounted for, the French VAT that should have been declared and the interaction with corporate taxation. Differences in taxable amounts, deduction rights, place-of-supply rules or reporting periods may therefore be more significant than the headline VAT rates.

The Court also accepted that differences in social security contributions could form part of the overall assessment. By failing to declare its French activity, the company had potentially reduced not only its French tax burden but also the social security contributions associated with the salaries paid in connection with that activity. A material reduction in social charges could therefore constitute an additional indication that the failure was not merely an innocent error. [conseil-etat.fr]

The judgment does not establish that compliance in another country is irrelevant. It confirms, however, that foreign compliance is only one factor in a broader factual analysis. The taxpayer must provide a credible explanation for why it reasonably believed that no French registration, VAT reporting or corporate tax obligations arose.

For international businesses, the practical message is clear. Cross-border operating models should be reviewed jointly from the perspectives of corporate tax, VAT, payroll and social security. A conclusion reached for one tax cannot automatically be applied to another. Businesses should maintain documentation showing how they determined the location of their activities, whether a French establishment existed, where their supplies were taxable and why no French VAT registration or return was considered necessary.

Practical implications

Review activities performed by employees or subcontractors in France to determine whether they create French corporate tax or VAT obligations.
Compare the actual overall tax outcome, rather than relying on statutory rate comparisons.
Document place-of-supply, VAT-registration and establishment analyses contemporaneously.
Include payroll and social security consequences in cross-border tax-risk reviews.
Where an error is discovered, prepare a complete factual explanation before relying on the French “right to make a mistake” or droit à l’erreur.

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