Shareholder current account loans: funding a French subsidiary without a capital increase

A U.S. parent needs to fund its French subsidiary's next six months of operations. A capital increase requires a shareholders' decision, a bylaws amendment and filings. A shareholder current account (compte courant d'associé) is faster: the shareholder lends money to the company, which records it as a liability owed to that shareholder. It is the most common way foreign groups finance French subsidiaries day to day.

This guide explains how current account advances work, what the agreement should contain, how interest is treated for tax purposes and what happens in insolvency. It flags the points Romain Waiss-Moreau reviews for foreign shareholders.

What is a shareholder current account?

A current account records amounts a shareholder makes available to the company outside its capital contribution. Legally, it is a loan: the shareholder becomes a creditor. It confers no additional voting or dividend rights. French banking monopoly rules allow shareholders holding at least 5% of the capital, as well as certain officers, to make such advances.

Capital increase or current account?

French companies whose net equity falls below half of their share capital must take corrective action within a set period. Current account advances do not solve that problem by themselves; converting them into capital does.

What should the current account agreement contain?

Without a written agreement, the advance is repayable on demand. The agreement should set out:

• the amount and drawdown terms;
• duration and lock-up, if the shareholder agrees not to request repayment for a period;
• interest, capitalised or paid;
• repayment terms and events of early repayment;
• subordination to bank lenders, if required;
• conversion into share capital by set-off at a future capital increase.

A locked-up current account is often treated by French banks as quasi-equity, which supports the subsidiary's borrowing capacity.

How is interest treated for tax purposes?

Interest paid by the French company is deductible only if its share capital is fully paid up and within a maximum rate published quarterly, unless the company can show that a higher rate reflects arm's-length conditions. For intra-group loans, French transfer pricing and interest limitation rules also apply. Interest paid to a non-resident shareholder must be checked for withholding tax and treaty relief.

Where the lender is a director or holds more than 10% of voting rights, the agreement may be a related-party agreement requiring specific approval or reporting.

What happens if the subsidiary becomes insolvent?

In French insolvency proceedings, the shareholder files its claim like any creditor. Without security, it ranks as an unsecured creditor, and after other creditors if it agreed to subordination. Romain Waiss-Moreau reviews the structure when advances are made to a subsidiary in difficulty, since the choice between debt and equity then has significant consequences.

Worked example: how much interest is deductible?

A U.S. parent lends €200,000 to its French subsidiary at 6% per year. Assume the maximum deductible rate published for the period is 5%.

The excess is not deductible unless the subsidiary can show that a higher rate reflects what an independent lender would have charged. For intra-group loans, French transfer pricing rules and the general limitation of financial charges must also be checked.

Case study: a U.S. group funding its French launch

A U.S. group funds its new French SAS with €500,000 of advances over its first year, without documentation. When the subsidiary's accounts show negative equity below half of its share capital, the auditors flag the issue. The fix combined a written current account agreement with a lock-up and arm's-length interest, and the conversion of part of the advances into share capital by set-off, restoring equity. The firm now sets up a framework agreement at the outset, so that each transfer of funds is documented for tax, accounting and corporate purposes.

Current account advances: key points

• Lending without an agreement: the funding is repayable on demand and poorly documented for transfer pricing.
• Charging interest above the deductible rate: the excess is not deductible in France.
• Using advances to fix negative equity: only conversion into capital does that.

Frequently asked questions

Can the advance be converted into shares later?

Yes, through a capital increase paid up by set-off against the receivable, which must be certain, liquid and due. A statement of account is prepared for that purpose.

Is a current account advance a foreign investment requiring clearance?

A loan alone does not usually trigger French foreign investment screening. Conversion into shares can, if it changes control or crosses a threshold in a sensitive sector.

Must the loan be reported?

Loan agreements above a certain amount must be declared by the French company to the tax authorities with its annual tax return.

Is withholding tax due on interest paid to a U.S. parent?

France generally does not levy withholding tax on interest paid to foreign lenders, except for payments to non-cooperative jurisdictions. The France-U.S. tax treaty should still be reviewed, along with U.S. tax treatment on the parent's side.