Once the annual accounts of a French Company have been approved, the shareholders must decide how to allocate the profit or loss for the financial year. As one of the shareholders’ fundamental prerogatives, this decision is strategic, at least where the company has generated a profit. Indeed, it involves balancing the company’s financing needs against the distribution of value to shareholders as a return on their investment.
As the annual general meeting season is in full swing, we offer a series of articles to help officers and shareholders better understand the rules relating to the approval of French SAS and SARL’s annual accounts for SAS and SARL, as well as the obligations arising from them. Fifth round of Q&As.
After approving the annual accounts for the completed financial year, the shareholders of a French limited liability company (société à responsabilité limitée – SARL) or simplified joint-stock company (société par actions simplifiée – SAS) must decide how to allocate the result for the financial year as reflected in those accounts.
The allocation of profits, at least where the company has generated a profit, is therefore strategic for the company’s future. Shareholders must strike a balance between their interests as investors and financing the company’s development. Indeed, while the distribution of dividends may enhance the company’s attractiveness to investors, allocating profits to reserves or carrying them forward strengthens the company’s equity and may support its future growth.
This refers to the company’s accounting result at the end of a given financial year, as reflected in the annual accounts and determined in accordance with the applicable accounting rules and principles. It may be positive (profit) or negative (loss).
It must be distinguished from distributable profits, which correspond to the amount that may legally be distributed to shareholders as dividends (see below).
Where the financial year result is positive, certain amounts may be distributed to shareholders. This is referred to as “distributable profit” (“bénéfice distribuable”), defined under the French Commercial Code1 as the profit for the financial year:
In addition to distributable profits, certain “distributable reserves” may also be distributed to shareholders. These notably include:
The terms and timing of dividend payments are determined by the shareholders’ decisions or, failing this, by management.
In any event, payment must occur within a maximum period of nine months following the end of the financial year.
Yes. In both SASs and SARLs, shareholders may be required to allocate part of the annual profit to reserves, either pursuant to law (legal reserves) or under the company’s articles of association (contractual reserves).
Finally, shareholders may also decide to create “optional reserves” outside any legal or statutory requirement.
In principle, the allocation of profits is decided by the shareholders at the annual ordinary general meeting. However, this decision may sometimes be governed by agreements entered into between them, notably through shareholders’ agreements.
Accordingly, shareholders may agree to either prohibit any dividend distribution for a specified number of financial years or, conversely, to mandate the distribution of a minimum percentage of distributable profits.
In French SASs, it is also possible to organise unequal dividend rights through the creation of preferred shares reserved for certain categories of shareholders (founders, investors, etc.). These shares may provide for various mechanisms:
However, this flexibility is subject to certain limitations. First, no distribution may occur in the absence of distributable profits.2 Second, the prohibition of leonine provisions (clauses léonines) prevents a shareholder from being entirely excluded from profits or from being allocated all of them.3
Although they may appear similar, these two mechanisms differ in several respects.
Retained earnings carried forward correspond to a portion of profits whose allocation has been deferred pending a future decision by the shareholders. They are added to the result of the following financial year for the purpose of determining distributable profits.
They are therefore temporary in nature, whereas reserves are intended to form a more permanent equity.
This distinction has practical consequences where distributions are contemplated:
As general rule, any decision to distribute dividends out of distributable profits for a given financial year must be adopted during the annual shareholders’ meeting approving the financial statements.
In a decision dated 12 February 2025,6 the French Cour de cassation clarified that distributions from retained earnings carried forward account must not be decided during a financial year. Traditionally, such amounts are considered not yet allocated by shareholders, with the decision postponed until the following year. Accordingly, they will be added to the result for the following financial year, the allocation of which may then be decided by the annual shareholders’ meeting.
The position is less certain regarding interim distributions out of reserves. In a decision dated 30 January 2025,7 the Paris Court of Appeal upheld such distributions on the basis that the allocation of sums to reserve accounts had necessarily been approved by a prior annual shareholders’ meeting. These sums therefore constitute accumulated profits that have become lasting assets and may accordingly be distributed outside the annual meeting process.
In all cases, such interim distributions must be carried out with great caution, ensuring that they do not in any way undermine the company’s financial soundness, especially where they occur long after the latest approved financial statements.
It should also be noted that the principles established by the French Cour de cassation in its 2025 decision also prohibit transferring retained earnings carried forward into reserve accounts during the financial year for the artificial purpose of enabling their distribution.
Although dividends may not generally be distributed during the financial year out of past distributable profits, interim dividends may nevertheless be paid. Interim dividends are payments made before the annual accounts for a financial year have been approved by shareholders, based on the distributable profit anticipated for that financial year.
This possibility is strictly regulated in order to ensure that the sums paid correspond to profits that may reasonably be expected. Accordingly, interim financial statements must be prepared showing that the company has generated distributable profits since the end of the previous financial year at least equal to the amount of the interim dividends. These statements must be certified by a statutory auditor (commissaire aux comptes – the company’s statutory auditor or, if none has been appointed, a statutory auditor specifically appointed for this mission).
The president of an SAS or the general manager of a SARL then has exclusive authority to decide on the distribution of interim dividends, including their amount and payment date. Several interim dividends may be paid during the same financial year.
Where shares are subject to split ownership between bare ownership and usufruct, both the bare owner and the usufructuary are entitled to attend any shareholders’ meeting.
The allocation of voting rights is nevertheless subject to a specific regime. While voting rights generally belong to the bare owner pursuant to Article 1844 of the French Civil Code, an exception applies to decisions relating to the allocation of profits, for which voting rights belong to the usufructuary.
Any dividend distributed in breach of the rules governing profit allocation and the calculation of distributable profits may constitute a fictitious dividend.8 This risk especially arises where the company’s accounts fail to provide a true and fair view of its results and financial position or where the legal or contractual reserve allocations have not been made.
The distribution of fictitious dividends is not sanctioned in the same way in SASs and SARLs.
Finally, any officer knowingly proceeding with the distribution of fictitious dividends incurs criminal liability. The offence is punishable by up to five years’ imprisonment and a fine of EUR 375,000. Civil liability may also arise in order to compensate the company for any loss suffered.
Related Q&As
> Annual Accounts Approval: Key Obligations
> Annual General Meeting: Organization and Convening of the Shareholders
> Information to Be Delivered to Shareholders and Third Parties
> Management Report on the Annual Accounts: How to Prepare It?
> Profit & Loss Allocation and Dividend Distribution
