Advances and loans to French companies: limitations to be aware of

Background

Unlike many countries, a banking monopoly continues to exist in France.

This banking monopoly has two sides. On the one hand, only a bank is allowed to extend credit on a regular basis; on the other hand, only a bank is allowed to receive funds from third parties on a regular basis.

Providing credit on a regular basis

An infringement of the banking monopoly only occurs if the credit is provided on a regular basis. This usually implies that the lender has extended loans to multiple entities.

Receiving funds from third parties on a regular basis

It is also prohibited to receive funds from third parties on a regular basis. These are funds that a recipient receives from a third party, with the right to use them for his own benefit but with the obligation to return them. In essence, this concerns deposits.

This prohibition does not apply to funds made available by shareholders and directors. Thus, a company may receive funds from its shareholders or directors without violating the banking monopoly.

The regularity criterion also applies in this case. To be noted that if a company regularly receives funds from parties that do not participate in its share capital (even if these are always different parties), there is a breach of the banking monopoly on the part of the recipient of the funds.

Exceptions to the banking monopoly

There are two main exceptions to the banking monopoly:

• First, intra-group cash flow operations are allowed. This requires the capital links between the companies involved where one company has effective control over the others;
• Secondly, commercial companies whose last financial year has been certified by a chartered accountant can, in addition to their usual activity, provide loans of less than 3 years to relatively small companies with which they have an economic relationship that justifies it.

Sanctions

Infringement of the banking monopoly is a criminal offence. The maximum penalty is 3-year imprisonment and € 375,000 fine.

International situations

In international situations, where part of the credit operations takes place in France, and the other part abroad, it is yet to be fully determined if the banking monopoly rules apply. However, the risk of infringement cannot be ruled out when either the lender or the borrower is based in France.

In the context of financing a French (subsidiary) company, it is therefore worth examining the conditions and circumstances of financing carefully. Besides the legal sanctions, there may also be practical difficulties (for example, a notary may refuse to notarise a loan agreement that violates the banking monopoly). The tax treatment (especially in terms of interest deduction) may also vary depending on the context.