It is common for one of the companies in a group to use part of its surplus cash to lend it to other companies in the group.
Fund movements are carried out directly either between the mother and her daughters, or between subsidiary companies. In some groups, treasury operations may be centralized within a company responsible for raising the funds, redistributing them or investing them; this is the purpose of the so-called “OMNIUM” convention.
In addition, for the tax administration, intra-group fund movements must normally be remunerated. Interest-free advances are likely to be considered by the lending company as an abnormal act of management.
Thus, we will observe the process of intra-group financial advances through four chapters:
- Definition of the “OMNIUM” agreement
- Limits with banking regulations
- Corporate law regarding inter-company loans
- The tax aspect
I – Definition of “OMNIUM” agreement
Here is the operating principle: a company in the group is mandated to collect the receivables of all the companies in the group and settle the debts of the companies. Financial resources are pooled and distributed according to the needs of the companies.
The company designated as the centralization body aims to effectively receive cash flows from group companies and meet their needs. It must therefore have an object including this type of mission.
Each company must mandate the centralizing company to manage its cash flow in the best common interests. With this in mind, it is authorized to grant advances to subsidiaries and to receive them from them. Its mission is also to make all investments while respecting the rules specific to these operations which would be in force in the subsidiaries concerned.
The provision of funds is made through current accounts. The agreement specifies the conditions of remuneration and reimbursement of advances as well as the calculation of interest paid by the centralizing company to the subsidiaries and resulting from investments.
The treasury agreement must in principle be subject to the control procedure for regulated agreements. The parties to the convention must affirm the absence of solidarity between them and their total independence as well as their desire not to favor or disadvantage any of them.
II – Limits with banking regulation
The Monetary and Financial Code stipulates that the receipt of deposits of funds and the granting of credits are banking operations which can only be carried out by credit institutions.
However, this same Code specifies that it is not prohibited for a company, whatever its nature, to carry out treasury operations with companies having with it, directly or indirectly, capital links conferring to one of the companies an effective control over the others. When this condition is met, companies can receive and use the funds for the benefit of one or more of them.
There is another relaxation of the banking monopoly. Commercial companies whose accounts for the last closed financial year have been certified by an auditor or which have voluntarily appointed an auditor may grant, on an ancillary basis, loans of less than 3 years to micro -companies, SME and mid-sized companies with which they maintain economic links which justify it.
1 – Clarifications on the concept of control
Control can be through the majority of voting rights, direct or indirect control, de facto control or control in application of an agreement allowing the disposal of the majority of voting rights. Likewise, effective control is recognized for the benefit of the non-majority parent company, provided that no other company holds a stake likely to obstruct its power of control.
Subsidiaries and sub-subsidiaries can receive deposits from the parent without violating banking regulations.
On the other hand, regarding treasury operations between sister companies, it is necessary to be much more reserved, the text of the law stating effective control. However, the validity of an agreement uniting two sister companies under the control of a natural person holding a majority stake in one of them was nevertheless validated by the judges.
2 – Authorized treasury operations
The Monetary and Financial Code does not provide any precise definition of treasury operations that can be freely entered into. The banking regulation committee clarified that the texts must be interpreted without any restriction.
III – Corporate law regarding inter-company loans
1 – Nature of the agreement
Treasury agreements are generally not considered as regulated agreements but as so-called current operations.
However, the assessment of the normal nature of the operation is assessed through the conditions under which the loan is granted. This situation is judged according to several criteria:
- the importance of the amounts in question with regard to the financial situation of the company bearing the burden;
- the rate applied with regard to the nature of the operation and its duration, this assessment based on the conditions in force both inside and outside the group. The conditions must be, with some exceptions, equal between the subsidiaries.
Note 1: If the loan or overdraft is granted without interest, the agreement is abnormal. But this lack of remuneration could be justified by another real and proportional advantage for the creditor company; in this case, the loan must respect the procedure of regulated agreements within the paying company.
Note 2: Financial assistance must be dictated by a common economic, social or financial interest, assessed in the light of a policy developed for the entire group and must neither be devoid of compensation, nor upset the balance between the respective commitments of the various companies concerned, nor exceed the financial possibilities of the one who bears the burden. In the event of non-compliance with one of these three conditions, the manager may be convicted of misuse of corporate assets.
In addition, the decision must not be entirely dictated by the interest of one of the shareholders belonging to the majority and in disregard of the social interest.
IV – The tax aspect
1 – Devices to limit financial charges
In principle, the tax administration is not entitled to call into question the financial structure of companies, or the choice of a financing method. The law has, however, provided limits to the financing methods of companies by setting the two following rules:
- Setting a maximum rate for deductible interest => Interest relating to sums left or made available to a company by a related company, directly or indirectly, is deductible within the limit of that calculated according to the rate provided for associate accounts.
These companies can, however, deduct interest at a rate higher than this limit rate, but they must provide proof that the rate used corresponds to that which they could have obtained from independent financial organizations under similar conditions.
Otherwise, the fraction of interests exceeding the rate limits is definitively non-deductible. However, the parent company regime is applicable to the non-deductible interest portion. - Capping of the deduction of net financial charges based on “tax EBITDA”: A limitation system caps the deduction of net financial expenses (financial charges minus financial income) of companies subject to IS at 30% of profit before taxes, interest, depreciation and amortization (tax EBITDA), or at €3 million if this amount is higher.
Calculation of the cap:
The financial charges to be used for the calculation are not limited by law. This therefore concerns all deductible expenses incurred and taxable income acquired for this financial year, regardless of the date of payment of the sums concerned.
In the event that financial income exceeds expenses, no capping will be made.
Net financial expenses are deductible from the company’s taxable income, up to the greater of the following two amounts:
- €3 million per 12 month financial year (amount adjusted pro rata temporis depending on the length of the financial year);
- 30% of its taxable income before taxes, interest, depreciation and amortization (tax EBITDA).
Remarks: The calculation of tax EBITDA is done according to a precise procedure defined by law; we can provide you with this calculation method upon your request.
We also specify that it is possible to carry forward to subsequent financial years the net financial expenses not allowed as deduction for the financial year.
We will not develop the procedure in this article, but we can also give you all the details upon your request.
