In a group of companies, centralized cash management is a major lever for financial optimization. Cash management agreements between sister companies make it possible to pool financial resources and optimize cash flows within the same group. These agreements enable groups to make substantial savings, with rates generally 1 to 3 percentage points lower than traditional bank financing, while still complying with the tax rules applicable to groups of companies. This practice, widely adopted by SME groups, which use it for advances representing on average 15 to 25% of their consolidated cash flow, requires particular attention to legal and tax aspects.

You need to structure these operations rigorously to avoid any tax requalification. Setting up such an agreement requires compliance with strict conditions in terms of remuneration and documentation.

What is a cash flow agreement between sister companies?

A treasury agreement between sister companies is an arrangement whereby companies owned by the same parent company grant each other cash advances. These companies, at the same hierarchical level in the Group’s organization chart, can thus lend each other funds on a temporary basis.

This agreement falls into the category of intra-group agreements. It differs, however, from loans granted by a parent company to its subsidiaries, or from management fee agreements concerning the provision of services.

The main objective is to optimize the Group’s cash management. In this way, you avoid systematic recourse to costly external financing. Companies with cash surpluses finance those with short-term needs.

The legal framework for cash management agreements

The cash flow agreement between sister companies must comply with precise legal formalities. It must be submitted for approval to the competent bodies of each company concerned. It constitutes a regulated agreement within the meaning of Articles L. 225-38 (SA), L. 223-19 (SARL) or L. 227-10 (SAS) of the French Commercial Code, depending on the corporate form concerned. Each corporate form has its own specificities: in the case of SAs, approval is a matter for the Ordinary General Meeting; in SARLs, the non-managing partners must approve the agreement; in SASs, the procedures depend on the Articles of Association.

The agreement must be drawn up in writing. It must specify the essential elements: maximum amount of advances, duration, applicable interest rate, repayment terms and any guarantees. This documentation constitutes proof of the existence and conditions of the agreement.

You must also comply with the approval procedures specific to each corporate form, notably the 15-day notice period prior to the approval meeting for SAs and SARLs. Failure to comply with these formalities may invalidate the agreement or render the directors liable. The procedure varies according to whether the company is a SA, a SARL or a SAS, the latter benefiting from greater statutory flexibility.

Remuneration and implementation conditions

The remuneration of cash advances is a crucial point. You must apply an interest rate in line with market conditions. The tax authorities systematically check that the rate applied corresponds to that which would have been applied between independent companies.

To determine this arm’s length rate, you need to carry out a documented comparability study. In practice, Euribor plus a margin of 50 to 200 basis points (0.5% to 2%) is an acceptable benchmark, with the margin varying according to several criteria. You assess credit risk on the basis of the borrower’s rating, debt ratios, repayment capacity and any collateral provided. A company with solid financial ratios and guarantees will justify a lower margin, while a higher risk profile will require a higher mark-up. This carefully documented comparability analysis considerably enhances the legal security of your agreement.

The practical details must also be precisely defined. You should specify the conditions under which funds are made available, the frequency with which interest is calculated and the repayment schedule. Traceability of financial flows is essential to justify operations.

Anticipating tax risks

The main tax risk lies in the qualification of anabnormal management act. The tax authorities may call into question the deductibility of the interest paid, leading to its reintegration into taxable income, together with interest on arrears (0.20% per month, i.e. 2.4% per annum) and potentially a surcharge of 40% in the case of deliberate failure to comply, or even 80% in the case of fraudulent maneuvers.

There are several situations in which you run this risk. An interest rate that is manifestly excessive or, on the contrary, insufficient is grounds for requalification. The absence of remuneration on advances also represents a major risk, except in duly justified exceptional circumstances. In the event of an inadequate rate, the tax authorities may classify the transaction as a disguised distribution, with taxation of the difference between the market rate and the rate applied.

The financial capacity of the lending company must be demonstrated. You need to prove that the loaned funds are actually at the company’s disposal, and that it has not had to borrow to make them available. Otherwise, the tax authorities may consider that the transaction lacks economic substance.

The arm’s length principle also applies to guarantees. If you grant advances without collateral when an independent lender would have required it, this situation may be requalified. The total absence of remuneration also exposes the lending company to taxation of interest not received as income distributed to its associates. The tax statute of limitations is three years, extended to six years in the event of concealed activity or failure to declare.

Securing and optimizing the agreement

To secure your cash flow agreement, you need to compile a complete set of documentation. This documentation includes an analysis of the comparability of financial conditions, a justification of the interest rate chosen and a demonstration of the financial capacity of the parties.

Regular updating of the agreement is necessary. You adapt the conditions to changes in the financial market and in the situation of the companies concerned. An annual review is good practice.

The support of a consultant specialized in group taxation enables you to anticipate risks. You’ll benefit from our expertise in structuring the agreement in the best possible way, and in compiling the supporting documentation needed in the event of a tax audit.

Centralized document management facilitates monitoring and control. You keep all supporting documents: signed agreements, approval minutes, flow charts, interest calculations and payment receipts. This organization enables you to respond effectively to requests from the tax authorities.

Distinction from other cash management mechanisms

It is essential to distinguish between cash management agreements between sister companies and cash pooling mechanisms. Cash pooling, often also referred to as cash centralization, involves the automatic offsetting of balances within the group. On the other hand, it generally requires a specific agreement and often the involvement of a banking institution, making it more complex to set up. Cash pooling is particularly well suited to groups with large, recurring cash flows, because of its ability to efficiently optimize these movements.

In comparison, a cash agreement between sister companies is simpler to set up, especially for one-off advances. This type of agreement is therefore ideal when cash requirements are only temporary.

Lastly, these agreements should not be confused with partners’ current accounts, which directly involve the partners, whether individuals or legal entities, and do not relate to inter-company cash flow arrangements.