Key points
- An intragroup cash pooling agreement (convention de trésorerie) allows a holding company to centralise its subsidiaries’ cash, but its legal and tax validity depends on specific conditions.
- Each company that is a party must have its own interest in the agreement: the concept of group interest does not remove the need to analyse the position of each entity.
- The agreement must provide for remuneration of the lending company at a market rate, which is closely examined during a tax audit.
- An agreement that systematically favours one company without any consideration may constitute misuse of corporate assets (abus de biens sociaux), a criminal risk separate from the tax risk.
- It must be in writing before any flows take place and specify amounts, rate, repayment dates and termination, and the flows actually carried out must be documented (statements, tracking of interest).
An intragroup cash pooling agreement allows a holding company to centralise the cash management of its subsidiaries, to finance the needs of some entities with the surpluses of others, and to optimise the group’s financing costs. It relies on an exception to the banking monopoly: Article L. 511-7 of the French Monetary and Financial Code (Code monétaire et financier) (in French) authorises cash management transactions between companies linked by capital ties that give one of them effective control over the others. Its legal and tax validity is not automatic, however: it depends on compliance with specific conditions laid down by case law and the tax authorities.
See also: cash pooling agreement lawyer.
Corporate interest: a requirement for each party
The fundamental condition is that each company that is a party to the agreement must have its own interest in it. A subsidiary that lends its cash to its parent company on unfavourable terms, or that bears disproportionate risks, cannot validly rely on the group’s interest to justify a transaction contrary to its corporate interest. The concept of group interest, accepted by the criminal chamber of the French Supreme Court (Cour de cassation) subject to strict conditions (Cass. crim., 4 February 1985, No. 84-91.581, Rozenblum judgment), does not remove the need to analyse the position of each entity.
In practice, this means that the agreement must provide for remuneration of the lending company (interest), that the rate must be in line with market conditions between independent parties, and that the ceilings on outstanding amounts must be adapted to the financial position of each entity.
What interest rate for intragroup advances?
The rate applied to intragroup advances is one of the points most closely examined during a tax audit. For the lending company, an insufficient rate amounts to forgoing income: where the borrower is established outside France, Article 57 of the French Tax Code (Code général des impôts, CGI) (in French) allows the tax authorities to add the profit thus transferred back to the lender’s taxable profit. The tax authorities may also challenge an excessive rate: interest paid to a related enterprise is deductible only up to the rate provided for in 3° of 1 of Article 39 of the CGI or, if higher, the rate that the borrower could have obtained from independent financial institutions under similar conditions (Article 212 of the CGI (in French)).
Determining the market rate applicable to intragroup advances is a specific analysis that takes into account the duration of the advances, the borrower’s financial position and credit market conditions at the time of the advances.
The risk of misuse of corporate assets
A cash pooling agreement that systematically favours one company to the detriment of another, without consideration and without any interest for the company harmed, may constitute misuse of corporate assets (abus de biens sociaux) by the corporate officers of the disadvantaged company: Article L. 241-3 of the French Commercial Code (Code de commerce) for the SARL, a private limited company, and Article L. 242-6 for the SA, a public limited company. This criminal risk is separate from the tax risk, but the two may arise together. It is particularly present where the parent company imposes its terms on the subsidiaries without leaving them any room for manoeuvre.
Formal requirements
The cash pooling agreement must be drawn up in writing before the financial flows begin. It must specify the parties, the maximum authorised amounts, the interest rate and how it is revised, the repayment dates and the termination conditions. Depending on the company form and the links between the parties, it may fall under the regulated agreements procedure (Articles L. 225-38 for the SA, L. 227-10 for the SAS, a simplified joint-stock company, and L. 223-19 for the SARL, all of the Commercial Code), unless it concerns an ordinary transaction entered into on arm’s length terms. In an SA, agreements entered into between two companies where one holds, directly or indirectly, the entire share capital of the other are also excluded (Article L. 225-39).
A cash pooling agreement between companies in the same group may also fall under the regulated agreements procedure. Our corporate law firm checks the interest of each company and the applicable procedure before signature.
Documenting the flows
Beyond the agreement itself, the flows actually carried out must be documented: current account statements, periodic statements, tracking of accrued interest. This documentation is essential in the event of a tax audit or of insolvency proceedings affecting one of the entities.
For assistance with drafting or auditing your intragroup agreements, see our page dedicated to the cash pooling agreement lawyer and to the corporate group lawyer.
