#Cash Pooling Agreement Lawyer in France

Your situation and your risks

You run a group of several companies whose cash needs do not match. Some subsidiaries generate surpluses, while others need to finance their operations. You want to centralise these flows at the level of the holding company or of a hub company. The cash pooling agreement (convention de trésorerie) organises this pooling and sets the rules that apply between the participating companies. It forms part of the wider organisation of your corporate group.

Three risks must be addressed at the drafting stage. The first is a banking risk: lending on a habitual basis is in principle reserved to credit institutions and financing companies. The second is a tax risk: a poorly justified interest rate may limit the deduction of interest by the borrowing company. The third is a company law risk: depending on the parties involved, the agreement may be subject to the regulated agreements procedure.

The legal framework for cash pooling in France

Article L. 511-5 of the French Monetary and Financial Code (Code monétaire et financier, CMF) (in French) reserves lending on a habitual basis to credit institutions and financing companies. Point 3 of Section I of Article L. 511-7 of the same code (in French) lifts this prohibition for cash management transactions between related companies. These companies must have, directly or indirectly, capital links giving one of them effective control over the others. The scope of the agreement must therefore be checked company by company.

On the tax side, Article 212 of the French Tax Code (CGI) (in French) governs the deduction of interest paid to an associated or related enterprise. This interest is deductible up to a reference rate, provided for in Article 39, 1-3° of the same code. A higher rate is accepted if it matches the rate the borrower could have obtained from independent financial institutions under similar conditions. Where the group includes companies located outside France, Article 57 of the Tax Code (in French) also applies. It allows profits indirectly transferred to those companies, in particular by increasing or reducing prices, to be added back to taxable income.

Under company law, the regime depends on the form of each company that is a party to the agreement:

• SA (public limited company) with a board of directors: the procedure covers agreements entered into with a director, the chief executive officer or a deputy chief executive officer. It also covers a shareholder holding more than 10% of the voting rights or, if that shareholder is a company, the company that controls it. These agreements require the prior and reasoned authorisation of the board (Article L. 225-38 of the French Commercial Code (Code de commerce) (in French)). The same applies to agreements with an enterprise in which one of these persons is also a corporate officer.
• Exclusions in an SA: this procedure does not apply to ordinary transactions entered into on arm’s length terms. Nor does it apply between two companies where one holds, directly or indirectly, the entire share capital of the other. Where applicable, the minimum number of shares required by law is disregarded in this calculation (Article L. 225-39 of the Commercial Code (in French)).
• SAS (simplified joint-stock company): the statutory auditor or, failing that, the president prepares a report for the shareholders. This report covers agreements entered into with the president, an executive or a shareholder holding more than 10% of the voting rights. The shareholders vote on this report (Article L. 227-10 of the Commercial Code (in French)). Ordinary transactions entered into on arm’s length terms are excluded (Article L. 227-11 of the Commercial Code (in French)).
• SARL (private limited company): for agreements entered into with a manager or a shareholder, the manager or the statutory auditor presents a report to the general meeting, which votes on it; the manager or shareholder concerned does not take part in the vote (Article L. 223-19 of the Commercial Code (in French)).

In an SAS as in an SARL, an agreement that has not been approved nevertheless takes effect. However, the persons concerned and, depending on the case, the executives may have to bear its detrimental consequences for the company.

How we assist you

• Check, for each participating company, that the capital links and the effective control required by Article L. 511-7 of the Monetary and Financial Code exist.
• Draft the agreement: participating companies, direction of flows, calculation and payment of interest, term, entry and exit of a group company.
• Document the interest rate chosen under Article 212 of the Tax Code and, for cross-border flows, under Article 57, together with your chartered accountant.
• Run the appropriate procedure for each company: board authorisation, report to the shareholders or confirmation that one of the statutory exclusions applies.
• Update the agreement as the group changes: acquisition, sale or restructuring of a subsidiary.

What is at stake for you

A well-drafted cash pooling agreement secures your intragroup flows on three levels. It brings the advances within the exemption provided for by the Monetary and Financial Code. It allows you to justify the interest rate to the tax authorities. Finally, it complies with each company’s internal procedures and limits the directors’ exposure. Every situation is different: the overall structure of the agreement depends on the structure of your group and where its companies are located.

Every situation is different: the information on this page is general and does not replace legal advice tailored to your case. The firm makes no promise of outcome; it commits to the means it deploys.