A judgment of the French Supreme Court dated 12 December 2018 reminds us to pay the greatest attention to the invoicing of services between companies belonging to the same group and having common legal representatives.
The Supreme Court has already had the occasion to rule that there was no consideration for the services agreement concluded between a French joint stock company (Société Anonyme - SA) and a French limited liability company (SARL) whose Managing partner was also the Managing Director of the SA, since this agreement exactly corresponds to the latter's functions as Managing Director and since the decision appointing him provided that he do not receive any remuneration in this respect (cf. judgment dated 14 September 2010 known as "Samo Gestion" and subsequent case-law).
Practitioners are aware of the importance of this case law, particularly during tax audits, which requires the greatest care in drafting management fees agreements. Many parameters must be taken into account, such as the corporate form of the company receiving the services (SA, SARL or SAS), the purpose of said services (cf. technical services vs. services falling within the legal representative’s duties), the scope of the powers granted to the company’s legal representative (cf. limitations of power in force within the company) and the method of remuneration.
The legal (nullity of the agreement and repetition of the sums paid / characterization of an ABS), tax (non-deductibility of the sums paid) and social (reclassification of fees as remuneration treated as wages subject to social contributions) implications are sufficiently significant to pay the greatest attention to this matter.
In its judgment dated 12 December 2018, the French Supreme Court held that an agreement signed by a French simplified joint stock company (société par actions simplifiée - SAS) with an affiliated company having the same legal representative, had a counterpart, since his functions as described in the SAS' articles of association were clearly distinct from the technical missions entrusted to the services provider (management and development of a specific branch of activity, strategic advice, adaptation of its industrial assets, etc.).
In addition, it is worth recalling that this services agreement was concluded by the services provider not with the company receiving the services but with the sole shareholder of the SAS.
It should also be noted that this decision was rendered under the visa of article 1131 of the French Civil Code (notion of "unlawful cause"). As the notion of "cause" has disappeared from French law since the entry into force of the law of obligations of 10 February 2016, the new article 1169 of the Civil Code could nevertheless serve as a legal basis for an action for a declaration of invalidity based on the "illusory or derisory" counterpart; the next judgments of the Supreme Court of Cassation on this subject will therefore be interesting to follow.
What to remember.......
In the light of the facts of the case, this judgment confirms a certain practice whereby legal representatives participate in the sale of the company they manage and receive a financial contribution to this intervention.
The officers of companies and their partners are invited by this new judgment of the French Supreme Court to pay particular attention to the validity of this type of agreement, particularly when approving the annual accounts and regulated agreements.
The analysis of agreements must be carried out in concreto, on a case-by-case basis, especially when the company receiving the services is a SAS for which the shareholders have been in position to freely determine the nature and scope of the powers of the President and the other legal representative.