Bonds Issued by SARLs: Legal and Tax Framework under French Law

1. Introduction

Although the Société à responsabilité limitée (SARL) is historically a closed company form designed for small and medium enterprises, it has gradually gained access to more flexible financing methods. Among these, the issuance of bonds — once reserved for joint-stock companies — is now possible for SARLs under certain strict conditions.

The issuance of bonds allows the company to borrow directly from investors by delivering debt securities in exchange for funds. This alternative financing method enables a SARL to raise capital without increasing its share capital or diluting control among partners. However, the process remains highly regulated to preserve transparency and protect creditors.

This article provides a detailed analysis of the legal, accounting, and tax rules applicable to bond issues by SARLs, as well as the particularities related to intercompany loans and bearer instruments.

2. Legal Conditions for Issuing Bonds

2.1 Eligibility of SARLs

Under Article L. 223-11 of the French Commercial Code, a SARL may issue registered bonds (obligations nominatives) provided that it does not make a public offering of such securities. In other words, the issuance must be carried out through a private placement, targeting a limited circle of investors.

To do so, the company must meet two cumulative conditions:

1. It must have appointed an auditor (commissaire aux comptes); and

2. The accounts of the last three financial years must have been regularly approved by the partners.

Consequently, a SARL must have at least three years of existence before it can legally issue bonds. Failure to comply with either condition renders the issuance null and void (Commercial Code, Art. L. 223-11, para. 1).

There is no statutory requirement concerning the amount of the company’s share capital or its full release. A SARL with modest capital may therefore issue bonds, provided it satisfies the governance and compliance prerequisites.

2.2 Decision by the Partners’ Meeting

The decision to issue bonds belongs exclusively to the meeting of partners. It cannot be delegated to the management. Any issue decided otherwise — even if approved informally by all partners — is subject to nullity (Commercial Code, Art. L. 223-11, para. 2).

The provisions governing bond issues by SARLs refer, by cross-reference, to the rules applicable to joint-stock companies (sociétés par actions), excluding Articles L. 228-39 to L. 228-43 and L. 228-51 of the Commercial Code, which relate to bondholders’ representation and assemblies.

This reference ensures that the bond issuance by a SARL respects the general principles of corporate debt financing while preserving its simplified internal structure.

3. Scope of the Prohibition on Issuing Other Securities

Beyond the authorized issuance of bonds, SARLs remain prohibited from issuing other types of transferable securities.

According to Article L. 241-2 of the Commercial Code, any manager who issues, directly or through an intermediary, securities other than bonds (in compliance with Article L. 223-11) commits an offence punishable by six months of imprisonment and a €9,000 fine.

The same article also prohibits SARLs, under penalty of nullity, from guaranteeing the issue of securities by third parties, except in two limited cases:

• When the issue is made by a regional development company (société de développement régional), or

• When it concerns an issue of bonds benefiting from a State guarantee.

These restrictions reflect the legislator’s intention to limit speculative or financial activities by SARLs and to ensure that bond financing remains a tool of prudent corporate borrowing.

4. Convertible Bonds: Legal Admissibility

While the Commercial Code does not expressly mention convertible bonds (obligations convertibles en parts sociales), neither does it prohibit them. The ANSA (Association Nationale des Sociétés par Actions) and the CNCC (Compagnie Nationale des Commissaires aux Comptes) have clarified this point:
A SARL may legally issue convertible bonds, provided that the conversion mechanism is clearly provided for in the articles of association.

At the time of conversion, the new shares (parts sociales) are paid up by offsetting the bondholders’ claims against the company. This procedure is permitted under Articles 1347 and 1347-1 of the Civil Code concerning compensation of obligations.

However, it is strongly recommended that the articles expressly authorize this form of payment to ensure full legal certainty. Convertible bonds may thus represent an interesting tool for medium-sized SARLs wishing to attract investors while preserving future flexibility.

5. Accounting Treatment of Bond Issues

When a SARL issues bonds, the accounting must reflect both the debt itself and any associated redemption premium.

According to Article 941-16 of the French General Chart of Accounts (Plan Comptable Général), bonds with redemption premiums are recorded on the liabilities side of the balance sheet at their total redemption value. The corresponding premium is simultaneously entered as an asset under account 169 “Prime de remboursement des obligations”.

At each financial year-end, an allocation is made to amortize this premium:

• Debit account 6861 “Amortization of bond redemption premiums”;

• Credit account 169 “Bond redemption premium.”

This ensures a regular spread of the expense throughout the life of the loan, maintaining a fair presentation of the financial statements.

6. Tax Treatment of Bonds

6.1 Deductibility for the Issuing SARL

Interest paid on bonds and premiums associated with bond redemption are deductible expenses for companies subject to corporate income tax (IS), under Article 39, 1.1° ter of the General Tax Code.

• The annual interest (coupon) is deductible for the financial year in which it accrues.

• The remuneration corresponding to premiums, where the premium exceeds 10% of the principal borrowed, must be deducted in proportion to its actuarial accrual, based on the compound interest method.

Alternatively, if the premium does not exceed that threshold, the company may opt to deduct it:

• Either proportionally to accrued interest,

• Or on a straight-line basis over the loan’s term.

These accounting and fiscal rules ensure a match between economic reality and taxable results.

6.2 Mechanisms Limiting the Deduction of Financial Expenses

The deductibility of interest is not absolute. Two cumulative limitation mechanisms may apply to companies under IS:

1. Interest rate limitation for related-party loans:
   The interest rate cannot exceed the average effective rate used by banks for variable-rate loans of the same duration. Any excess is permanently non-deductible (CGI, Art. 39.12 and 212.I.a).

2. EBITDA-based limitation:
   Net financial expenses are deductible only up to 30% of the company’s tax EBITDA or €3 million, whichever is higher (CGI, Art. 212 bis).
   For under-capitalized entities, stricter rules apply.

These mechanisms apply sequentially: first the rate limitation, then the EBITDA limitation.

Within tax-consolidated groups, the “Charasse amendment” (CGI, Art. 223 B, para. 7) may further disallow interest relating to intragroup share buybacks.

Finally, the anti-hybrid rules transposing Directive (EU) 2017/952 (ATAD 2) prevent deduction when the interest is not correspondingly taxed in the creditor’s jurisdiction.

7. Intragroup and Intercompany Loans

7.1 Intragroup Treasury Operations

Under Article L. 511-7 I, 3 of the Monetary and Financial Code, a company may engage in treasury operations with other entities it controls or that control it, directly or indirectly, provided that effective control exists.

This exception to the general prohibition of credit activities allows intragroup cash pooling and short-term financing within corporate groups, without the company being considered a credit institution.

7.2 Intercompany Loans

Since the Macron Law (Law No. 2015-990 of 6 August 2015), extended by the PACTE Law (Law No. 2019-486 of 22 May 2019), commercial companies — including SARLs — may grant short-term loans to other enterprises with which they have established economic relationships.

To do so, the lending company must:

• Have its accounts certified by an auditor; or

• Have voluntarily appointed one.

The maximum duration of such loans was extended from two to three years in 2019.

Eligible borrowers are micro, small, medium, or intermediate-sized enterprises that have genuine economic links with the lender (e.g., supplier or customer relationships).

In practice, the use of intercompany loans remains limited, but it constitutes a useful instrument for group financing in times of liquidity pressure.

8. Bearer Bonds

8.1 Definition and Mechanism

Bearer bonds (obligations à ordre ou au porteur) are debt securities subscribed mainly by individuals. The investor lends funds to the issuing company and receives repayment and interest at maturity. Unlike traditional bank loans, interest is capitalized until the end of the period.

Bearer bonds may be issued not only by financial institutions but also by commercial companies, including SARLs (Monetary and Financial Code, Art. L. 223-2).

The PACTE Law (2019) modernized this financing method by:

• Allowing companies to issue bearer bonds from the end of their first financial year, rather than after three years; and

• Extending the maximum subscription period from five to seven years (Monetary and Financial Code, Art. L. 223-3).

These changes aimed to facilitate direct financing of businesses by individual investors.

8.2 Legal and Financial Characteristics

Bearer bonds are not listed and must be registered. They are repayable at a fixed term, with interest paid at maturity. This structure allows issuers to postpone cash outflows while immediately obtaining liquidity.

However, the issuance of bearer bonds remains subject to prior verification by auditors, compliance with private placement rules, and adherence to the prohibition on public offers by SARLs.

9. Minibonds: Creation and Repeal

Minibonds (minibons) were introduced to facilitate crowdfunding-based financing. They allowed SMEs to borrow from individuals through digital platforms authorized by the Financial Markets Authority (AMF).

Initially, they could be issued by SARLs, provided their share capital was fully paid up (Monetary and Financial Code, former Arts. L. 223-6 and L. 223-7).

However, Ordinance No. 2021-1735 of 22 December 2021 abolished the minibond regime, effective 24 December 2021. The framework was rendered obsolete by new EU regulations allowing legal entities to grant loans via crowdfunding mechanisms.

Minibonds subscribed before 10 November 2023 remain valid for the PEA-PME (small business investment plan) and retain the ability to offset capital losses against interest income realized during the same year or the following five years.

10. Taxation of Bond Income for Individuals

For individual investors, income from bonds and similar instruments constitutes fixed-income investment income (revenus de capitaux mobiliers).

Since the introduction of the flat tax (prélèvement forfaitaire unique, PFU), such income is taxed at a single rate of 12.8%, plus social contributions of 17.2%, resulting in an effective rate of 30%.

Taxpayers may, however, opt for taxation under the progressive income tax scale, which allows a partial deduction of the CSG and, in some cases, a more favorable treatment depending on income levels.

Interest is taxable at the time it becomes available to the bondholder, i.e., at maturity or upon receipt.

12. Practical Implications and Strategic Use

The bond issue mechanism offers SARLs a valuable financing alternative to traditional bank credit, particularly when expansion requires significant but temporary capital resources.

It allows for:

• Diversification of financing sources;

• Preservation of control among existing partners;

• Possible conversion into equity through convertible bonds;

• Strengthening of corporate credit image before financial institutions.

However, because the framework is restrictive, any issuance must be carefully prepared, documented, and validated by legal counsel.

For family or medium-sized SARLs, this tool should be used as part of a long-term capital strategy aligned with the company’s financial structure and risk profile.

13. Conclusion

The possibility for SARLs to issue bonds reflects the gradual evolution of French corporate law toward more open and diversified financing mechanisms for SMEs. Nevertheless, this flexibility comes with rigorous legal, accounting, and tax obligations.

Before issuing bonds or structuring intercompany financing, managers must:

• Verify compliance with all statutory prerequisites;

• Ensure proper deliberation and documentation;

• Anticipate the fiscal and accounting consequences over the term of the loan.

Legal advice is indispensable to secure the operation and avoid nullity or requalification risks.

Through prudent use, the issuance of bonds can provide SARLs with an efficient and legitimate means of accessing long-term capital without altering their ownership structure.