Tax and Corporate Law - Clare Légal

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The concept of mismanagement is not explicitly defined by law but is subject to the discretion of the trial judge. It manifests itself through an act, omission, or negligence on the part of an executive that runs counter to the company’s interests. Mismanagement may manifest, for example, in the form of excessive spending, a risky investment made without prior analysis, insufficient oversight of the company’s accounting, or the continuation of a loss-making business without implementing corrective measures.

The shareholders may bring a claim, individually or collectively, against the director at fault on behalf of the company (“action ut singuli”). If the director is found liable, damages are awarded to the company (Article 1843-5 of the Civil Code). The statute of limitations for an “action ut singuli” is three years from the date of the tortious act or, if it was concealed, from the date of its discovery (Article L 223-23 (SARL), Article L 225-254 (SA) of the Commercial Code).
For actions against directors of unincorporated business entities (SCI, SCP, SCM), the statute of limitations is five years under general law (Article 2224 of the Civil Code).

It is incumbent upon the plaintiff partners to establish the director’s managerial misconduct.

In addition to the conditions for the admissibility of a legal action under general law (legal interest, standing, and capacity to sue, Articles 30 and 31 of the Code of Civil Procedure), the partners must name the company as a party to the proceedings. If the company is not named as a defendant, the shareholders’ claim is declared inadmissible (Court of Cassation, Commercial Chamber, July 9, 2025, No. 24-14.565).

In the event of a conflict of interest between the company and its executive (a lawsuit brought against the executive while in office), they must request that the court appoint an ad hoc representative so that the company is validly represented (Articles R223-32 (SARL) and R225-170 (SA) of the Commercial Code). If the company is represented by the executive being sued despite the conflict of interest, the action is declared inadmissible (Court of Cassation, Commercial Chamber, November 9, 2022, No. 20-19.077).

However, in a ruling dated May 7, 2025, the Court of Cassation established the principle that the “action ut singuli” constitutes a right inherent to the shareholder that is not contingent upon the inaction of the directors. Even in the case of a lawsuit brought by the company against its executive, the shareholders may act on behalf of the company (Court of Cassation, Commercial Chamber, May 7, 2025, No. 23-15.931).

One or more partners representing at least 10% (SARL) or 5% (SA) of the share capital may petition the court to appoint one or more experts to prepare a report on one or more management transactions (“accounting and management audit,” Articles L223-37 (SARL), L225-231 (SA) of the Commercial Code). The action is filed with the president of the commercial court, who rules on the merits under the expedited procedure (Article 481-1 of the Code of Civil Procedure).

They also have the option, without any requirement regarding the minimum number of shares held, to apply to the judge presiding over summary proceedings under general law to request an accounting expert opinion, provided they can demonstrate the existence of a legitimate reason to preserve or establish, prior to any trial, evidence of facts likely to influence the resolution of a dispute (summary proceedings “in futurum,” Article 145 of the Code of Civil Procedure).

To establish the director’s personal liability, the plaintiff must prove that the director committed a wrongful act that is separable from his or her official duties (also known as a “separable wrongful act”) and that it can be attributed to him or her personally.

According to the established case law of the Court of Cassation, for a fault to be classified as separable, it must be intentional (committed knowingly by the executive), of particular gravity (going beyond mere negligence or error), and incompatible with the normal performance of the executive’s duties.

This is the case, for example, when a director presents a seriously inaccurate picture of the company’s financial situation in order to mislead the purchaser of the business (Court of Cassation, Commercial Chamber, November 4, 2020, No. 18-19.747), or deliberately fails to take out mandatory insurance (Court of Cassation, Commercial Chamber, September 7, 2022, No. 20-20.404, 20-20.538).

When the misconduct committed by the executive does not meet these conditions (culpable negligence, not particularly serious, committed in the normal course of business), the third party must bring a claim against the company.

A director may be ordered to pay all or part of the shortfall in assets during the judicial liquidation of a company if his or her mismanagement contributed to the shortfall (Article L651-2 of the Commercial Code).

Since the enactment of Law No. 2016-1691, known as the Sapin II Law, of December 9, 2016, mere negligence does not give rise to the director’s liability for a shortfall in assets in the event of judicial liquidation; and for the liquidator to hold the director liable for the shortfall in assets, the liquidator must establish that the director’s fault was not merely negligence in the management of the company (Court of Cassation, Commercial Chamber, October 2, 2024, No. 23-15.995).

When a director fails to file for insolvency within the statutory 45-day period from the date of the cessation of payments, he or she may be held liable for a shortfall in assets. According to the case law of the Court of Cassation, this date of insolvency corresponds to the date set in the judgment opening judicial liquidation proceedings, and not to the de facto insolvency arising from circumstances preceding the filing for bankruptcy.

Thus, if the date of suspension of payments set by the judgment opening insolvency proceedings corresponds to the date on which such suspension was declared, this does not constitute a management fault on the part of the executive (Court of Cassation, Commercial Chamber, April 20, 2017, No. 15-19.465; July 4, 2018, No. 14-20.117). Conversely, if the date of insolvency established by the order commencing proceedings precedes the date of the declaration by several months, the executive is liable for the insufficiency of assets (Court of Cassation, Commercial Chamber, June 28, 2017, No. 14-29.936).

In an SARL, the amount of capital is freely determined by the articles of incorporation. The amount of capital can be relatively small, which is an advantage over an SA, whose formation requires a minimum capital of €37,000.

An SARL can be validly formed with a single shareholder (in such a case, the SARL is called an EURL, or single-member limited liability company). An SARL cannot have more than 100 shareholders.

Shareholders are required to pay up (= contribute the amounts promised to the company) only a portion corresponding to at least 20% of the total cash contributions. The remaining amount must be paid up within five years of registration.

The manager’s powers may be specifically limited in the articles of incorporation. In this case, the manager must obtain authorization from the body of shareholders before entering into certain contracts or carrying out transactions deemed too significant to be left to his or her sole discretion.

If the articles of incorporation do not contain a clause defining the manager’s powers, the manager may perform “all acts of management in the interest of the company ” (Art. L221-4 of the Commercial Code).

No, unless otherwise provided in the articles of organization, the death of the sole member does not dissolve the company.

If there is only one heir, the company automatically continues with that heir.

If there are multiple heirs, they become undivided co-owners of the deceased’s shares, so that the company becomes a limited liability company (SARL) with multiple members.

The manager can only be held liable if he or she has committed a mistake separate from his or her duties and if it is personally attributable to him or her. This is the case, for example, when the manager intentionally commits a particularly serious act of misconduct that is incompatible with the normal performance of his or her duties. In such a case, the manager must bear the consequences of his or her misconduct without the possibility of seeking recourse against the company, even if the wrongful act was committed in the course of his or her duties.

The minimum share capital is set at €37,000. There are exceptions to this rule; for example, the minimum share capital is set at €300 for press writing companies and €18,500 for cooperative societies. In all cases, the amount of the capital must be specified not only in the articles of incorporation but also in all deeds and documents issued by the corporation and intended for third parties.

The Ordinary General Meeting makes all decisions that do not fall within the jurisdiction of the Extraordinary General Meeting, namely all those that do not involve an amendment to the articles of incorporation. It decides on the annual approval of the financial statements, the appointment or replacement of members of the company’s administrative, control, or supervisory bodies, and decisions regarding regulated agreements.

Decisions intended to amend the articles of incorporation; for example, to change the company’s name, relocate the registered office, increase the capital, or terminate the company’s corporate purpose.

An Ordinary General Meeting may validly deliberate on first call only if the shareholders present or represented hold at least 1/5 of the voting shares. On second call, no quorum is required.
The meeting must decide by a majority of the votes cast by the shareholders present or represented.

The quorum required for the validity of extraordinary general meetings is one-quarter on the first call and one-fifth on the second call. Extraordinary general meetings must pass resolutions by a two-thirds majority of the votes cast by shareholders present or represented.

In publicly traded companies, the proportion of directors of each gender must be at least 40%. If the board consists of no more than 8 members, the difference between the number of women and men cannot exceed 2 (Art. L225-18-1 of the Commercial Code).
When its composition no longer complies with these rules, the board of directors must make provisional appointments to remedy the situation within six months from the date the vacancy occurs (Art. L225-24 of the Commercial Code). Failure to comply with the 40% ratio or the maximum difference of 2 members results in the nullity of the appointment and the suspension of compensation paid in connection with the director’s duties.

The number of members on the Executive Board may not exceed 5 (Art. L225-58 of the Commercial Code), or 7 if the company is publicly traded. Members must be natural persons.
The supervisory board must consist of at least 3 members and no more than 18 (Art. L225-59 of the Commercial Code). They may be legal entities, but any legal entity appointed to the supervisory board must designate a permanent representative (Art. L225-76 of the Commercial Code).

The SAS is the most common type of commercial company in France. It offers great flexibility, making it a popular choice among entrepreneurs.

Yes, any legal entity, whether French or foreign, can be a shareholder in an SAS.

In an SAS, its operations are governed solely by the will of its members. Although an SAS is formed, dissolved, and liquidated according to the same rules as an SA, its organization and management procedures are set forth in the articles of incorporation—that is, by the sole collective will of the members.

Unless otherwise provided by laws or regulations applicable to companies engaged in certain activities, the law does not set a minimum amount for the share capital of an SAS; this amount is freely determined by the articles of incorporation.

Under penalty of nullity of the contract, SAS officers are prohibited from taking out loans from the company, obtaining an overdraft from it, or having the company act as guarantor or surety for their obligations to third parties.

The appointment of a statutory auditor becomes mandatory once two of the following three thresholds are met:
– total assets: 4,000,000 euros,
– revenue excluding tax: 8,000,000 euros,
– average number of employees: 50
(Articles L227-9-1 and D 221-5 of the Commercial Code)

No. If the majority manager awards himself or herself excessive compensation, this may constitute misuse of corporate assets (Court of Cassation, Criminal Chamber, December 13, 1988, 87-82.268).

For an individual, the penalty is 5 years’ imprisonment and a fine of 375,000 euros. This is increased to 7 years’ imprisonment and a fine of €500,000 when the offense was committed or facilitated through either accounts opened or contracts entered into with entities established abroad, or through the involvement of individuals, legal entities, or any entity, trust, or comparable institution established abroad (Article L242-6(3) of the Commercial Code).

The bad faith of the executive—that is, their awareness of the harm they are causing or the risk they are posing to the company—must be assessed at the time the alleged acts were committed.

Six years (as opposed to three years prior to the law of February 27, 2017). This period begins on the day the misuse of corporate assets came to light and could be established under conditions permitting the initiation of criminal proceedings.

No, the offense of misappropriation of corporate assets applies only to corporate officers, namely the managers of limited liability companies (SARLs), the president, directors, chief executive officers, and members of the executive board or supervisory board of joint-stock companies (SA). For embezzlement committed by a company accountant, the offense of breach of trust applies (Articles 314-1 through 314-4 of the Penal Code).

It consists, for executives, of publishing or presenting annual financial statements that do not give a true and fair view of the results of operations for the fiscal year, the financial position, and the assets, with the intent to conceal the company’s true financial situation. (=specific intent, Art. L241-3, 3° for SARLs and Art. L242-6, 2° for SA corporations).

Abuse of tax law is governed by Articles L64 and L64A of the Book of Tax Procedures (LPF), which provide for the following two categories:

1. Abuse of law through simulation: fictitious acts (false or disguised) carried out to reduce or evade the tax burden (Article L64, paragraph 1 of the LPF);

2. Abuse of rights through circumvention of the law: legal acts or arrangements, although genuine, that involve using legal provisions in a manner contrary to their original purpose in order to reduce or evade the tax burden.

The law distinguishes between abuse of rights through fraud against the law with an exclusive purpose (Article L64, paragraph 2) and abuse of rights through fraud against the law with a principal purpose (Article L64A), in order to apply distinct penalties.

Abuse of rights through simulation occurs, for example, in the context of a gift disguised as a sale in order to evade transfer taxes, a fictitious employment contract accompanied by pay stubs intended to generate tax-deductible expenses, an acknowledgment of debt drawn up to reduce the net estate assets subject to estate tax, or a commercial lease entered into between two companies belonging to the same group, with the aim of distorting accounting results to reduce corporate taxes.

An abuse of rights through circumvention of the law occurs when the mechanism or transaction established by a taxpayer is real but artificial and lacks economic substance.

This is the case, for example, with a gift or transfer intended to eliminate capital gains, followed by the donor’s return of the entire amount; complex arrangements involving corporate structures or cross-shareholdings with no real economic substance designed to conceal ownership and evade taxation or obtain benefits; or the transfer of tax residency abroad.

In the event of abuse of tax rights, the tax authorities revoke the tax benefit obtained and order the taxpayer to pay the tax that was initially evaded.

This tax is increased by 80% in the event of an abuse of rights as defined in Article L64 of the LPF, unless the taxpayer was not the primary instigator of the act constituting the abuse of rights or was not its primary beneficiary (in which case the surcharge is reduced to 40%) (Article 1729 of the General Tax Code).

In the event of an abuse of rights as defined in Article L64A of the LPF, referred to as a “minor abuse of rights,” this surcharge does not apply (only late-payment interest is charged).

Tax abuse involves acts that are fictitious or, on the surface, legally valid but are misused for the purpose of saving or evading taxes.

Tax fraud, on the other hand, involves illegal acts such as the use of false documents, the concealment of income, or the failure to disclose foreign bank accounts, and is subject to criminal penalties (5 years’ imprisonment and a fine of €500,000 (for individuals) or €2,500,000 (for corporations).

Pursuant to Article 228 of the General Tax Code (LPF), when the back taxes assessed in connection with an abuse of rights exceed €100,000, the tax authorities are required to report the facts to the public prosecutor, who may decide to criminally prosecute the taxpayer for tax fraud.

If the tax authorities discover foreign bank accounts through the automatic exchange of information (OECD CRS standard), they will impose a flat-rate fine of €1,500 per undeclared account, or an 80% surcharge on the tax due on the income generated by the account.

If fraudulent intent is established, the failure to report foreign bank accounts constitutes the crime of tax fraud, which is punishable by 5 years’ imprisonment and a €500,000 fine for simple tax fraud, and up to 7 years’ imprisonment and a €3,000,000 fine in the presence of aggravating circumstances (Article 1741 of the General Tax Code).

A “gift-sale” is a tax optimization mechanism used in the context of wealth transfer that allows one to avoid double taxation on capital gains and transfer taxes.

When transferring real estate or shares in a real estate investment company (SCI) to a third party, first making a gift to a child and then selling that property or those shares to a third party at the same price as the gift allows the transferor to be subject only to gift tax and to avoid capital gains tax. However, since this constitutes a gift between a parent and a child, an exemption of 100,000 euros per child applies. This method is therefore advantageous when the amount of transfer taxes—calculated after applying this exemption—is less than the capital gains tax (36.2% of the capital gain) applicable to the real estate or securities.

However, if the donating parents recover the sale price after the transfer, the “donation-sale” arrangement is deemed an abuse of rights because such recovery is contrary to the charitable intent required for a donation under Article 894 of the Civil Code (Council of State, February 5, 2018, No. 409718, Administrative Court of Appeal of Nantes, July 2, 2020, No. 18NT01415).