Types and formation of partnerships

Sources of partnership law

What is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?

There is no general definition of a partnership under French law. However, article 1832 of the Civil Code contains a general definition of a société or company, which includes most partnerships:

A partnership or company is created by two or several persons who agree by contract to appropriate property or their industry for a common business with a view to sharing the profit, or benefiting from the saving which may result therefrom . . . The partners bind themselves to contribute to the losses.

Most partnerships and partnership-like structures are bodies corporate, defined by a specific statutory provision. Most of them must be, and generally are, registered as such with the Trade and Companies Register (RCS) available via www.infogreffe.com.

French tax law does not provide for a statutory definition of a partnership or partnership-like structure but rather a list of French entities treated as partnerships for income or corporation tax purposes (articles 8 and 206 of the French General Tax Code; see ‘Taxation’). In most situations where the entity is treated as a partnership, the partners have unlimited liability and are personally liable for income or corporation tax on their share of the income or profits of the partnership as if they had generated it themselves, although the partnership is deemed a different entity.

Types of partnerships

Identify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?

In order of economic significance, the most important types of partnerships or partnership-like structures are the following.

Civil partnership

The civil partnership is the basic and generic form of partnership under the French Civil Code, provided it carries out no trading activity other than property development. Civil partnerships are commonly used in real estate investments, professional activities, asset holdings, etc.

General partnership

The general partnership is the basic form of trading partnership under the French Commercial Code.

Silent partnership

The silent partnership (SP) is an unregistered general partnership loosely regulated in the Civil Code, provided the partners’ names and addresses are disclosed to the tax administration. Well-known examples of SPs include financial syndicates, joint enterprises in the construction business or in theatre activities. In the international context, an SP existed between the two concessionaire companies of the Channel Tunnel and was referred to in an earlier version of the France-UK double taxation agreement.

De facto partnership

The de facto partnership is where the essential elements of a partnership are combined without the parties expressing the intention to create a partnership.

Limited partnership

Limited partnerships (SCSs) have two types of partners: general partners, who are indefinitely, jointly and severally liable for the debts of the company; and limited partners, whose liability is limited to their contributions.

Unless the articles of association provide otherwise, all general partners are managers of the company. However, the articles of association may provide for the SCS to be managed by one or more managers appointed among general partners or third parties. The limited partners must not interfere with the management of the entity.

Limited partnerships have a split-tax status for French tax purposes: general partners are treated as if they were partners in a general partnership but the profits attributable to the limited partners are liable to corporation tax and further liable to dividend taxation upon distribution. Accordingly, SCSs are much less common in France than in other jurisdictions.

Other forms of partnerships

Other forms of partnerships include certain limited liability entities and certain groupings, such as economic interest groupings (GIEs), European economic interest groupings (EEIGs), public interest groupings and certain agricultural groupings. A single shareholder entity would not be a partnership but could be treated like a partnership for tax purposes. Airbus Industries was originally created as a GIE and remained so for many years before being converted into a corporation (SA). Economic interest groupings were also commonly used in asset financing structures and nicknamed ‘GIE fiscaux’ until the European Commission criticised the embedded state aid and French tax law was changed to reduce certain tax breaks.

Further, certain companies or corporations may elect to be treated as partnerships for tax purposes, such as:

  • certain forms of joint ownership, excluding ‘indivision’;
  • the French equivalent of LLPs for lawyers, the AARPI;
  • limited liability companies (SARLs) or companies where the members are exclusively close relatives; and
  • certain newly created SAs, joint-stock companies (SASs) or SARLs with mainly individual partners, in order to enable them to deduct start-up losses from their taxable income.

An investment vehicle akin to a limited partnership, the société de libre partenariat (SLP) was introduced in 2015. It is organised as an SCS with special characteristics: articles of association may be drafted in English and part of them may be available to the public via the RCS. Generally regarded as an alternative investment fund (AIF), an SLP must be declared to the French Financial Markets Regulator. Like certain other investment funds, the SLP is tax-exempt in France and both its general and limited partners may be taxable upon distribution only. The trade-off is that access to double taxation treaty benefits in cross-border transactions is uncertain.

With the exception of de facto partnerships, partners in the above forms of partnerships generally enter into a partnership agreement, which may be either very simple or more sophisticated. The key document for French partnerships and companies is their articles of association, which address the powers granted to the managers; the duration; the sharing of profits; and a system for dispute resolution. Statutes must be filed with the RCS and are generally accessible to the public, together with the names and addresses of the partners.

Organisation and operation of these entities is fairly simple. There are no legal requirements as to a minimum level of capital. A partnership may have a single manager and no board of directors. Collective decisions of the partners may be reached without gathering a general meeting, etc. These partnership or partnership-like structures are mainly used as follows:

  • A société civile is generally chosen as a vehicle for joint ventures in non-commercial activities and real estate activities (investment, portfolio management, certain professional activities, etc). Most of the tax treaty cases reported below relate to the taxation of foreign partners in French sociétés civiles immobilières (ie, civil partnerships investing in real estate).
  • A société en nom collectif is chosen for trading activities when there is a limited number of partners who accept the joint and several liability and want to benefit from the half-tax transparency without meeting the conditions for tax consolidation.
  • An SP is mostly used when one or several partners do not want to disclose either their participation in, or the organisation and governance of, the joint venture.
  • A de facto partnership is not generally intended to be a partnership but effectively displays the essential elements of a partnership.
  • GIEs may only develop the activities of its members; members of EEIGs must be entities of a EU jurisdiction but can include European subsidiaries from a non-European group.
Differences between types of partnership

What are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?

Excluding SPs and de facto partnerships, which are not legal entities, all the entities listed under ‘Types of partnerships’ must be registered with the RCS, and consequently enjoy full legal capacity. All registered partnership or partnership-like structures are treated as bodies corporate.

In most French partnerships or partnership-like structures, partners or members have unlimited liability for partnership debts. In the société civile, this unlimited liability is not joint and several but equals pro rata each partner’s contribution to capital. On the contrary, in the société en nom collectif, SP and de facto partnerships with a trading activity, partners are jointly and severally liable as well as members of GIEs, EEIGs, etc.

As mentioned above, in French-style limited partnerships, general partners have unlimited liability while limited partners have limited liability. The share of profits allocated to limited partners is liable to French corporation tax when realised and distribution taxes apply upon effective distribution.

Reasons for choosing a partnership structure

What are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?

Advantages

French income tax is a major reason businesses and individuals choose to operate through partnerships rather than corporations or other entities liable for corporation tax. In a partnership structure, partners may deduct their share of partnership losses from their own other taxable income; there is no economic double taxation of partnership profits upon distribution to the partners; upon redemption or transfer of partnership interest, the gain or loss is deemed to apply to the share or interest in the partnership (as opposed to a portion of the partnership’s assets) and often taxed at a lower rate than a sale of the underlying assets, the taxable base is adjusted in relation to retained profits or unrelieved losses of the partnership to avoid both double taxation of gains and double deduction of losses. The situation is more complex in cross-border circumstances but similar results may be obtained, at least on the French side.

Simpler organisation, absence of capital requirement, dispense of statutory auditors or public filing of financial statements may also be considered, although certain facilities have been reduced while, coincidentally, corporate structures such as the SAS now provide similar features.

Disadvantages

The main disadvantages of partnership structures are:

  • Except for the shareholders of an SARL, SA or SAS, which may elect for partnership treatment for tax purposes only, partners have unlimited liability for partnership debts. In the société civile, this unlimited liability is not joint and several but equals the ‘prorata’ of each partner’s contribution to capital. On the contrary, in the société en nom collectif, SP and de facto partnerships with a commercial activity, as well as in GIEs, EEIGs, etc, partners are jointly and severally liable.
  • Transfers of shares normally require the prior consent of all partners.

Except in an SA or SAS, where stamp duty is fixed, transfers of shares or interest in a partnership are subject to a 3 per cent registration duty on the part of the sale price or value that exceeds an amount equal to €23,000 multiplied by the percentage of the share capital transferred. As an exception, registration tax is due at the rate of 5 per cent, uncapped and without any rebate, when the transferred shares or interest are in an unlisted real estate company or partnership. The 5 per cent duty is also applied on a broader basis, as it is assessed on the value of the assets under the sole deduction of the debts having financed the acquisition of the real estate property.

Formation (formalities and bars to formation)

How are partnerships and the similar structures available in your jurisdiction formed?

Under French law, any partnership must have a registered office in France, corresponding to actual premises available for the effective management of its business. Neither a private letter box nor PO address would be satisfactory, but the personal residence of a partnership officer, demonstrated by property or lease title, utilities bills or other relevant documents, would meet the test. A location in a business centre where an office would be available part-time and other services would be permanently provided is also accepted.

Any manager of the partnership must hold a residence permit with the permission to carry out a business in France, unless he or she is a French national, or a citizen from an EEA country or Switzerland.

Certain activities (approximately 105) are regulated and require a special declaration or authorisation.

The partnership agreement or articles of association must be written and signed by each partner and a copy must be registered with the relevant tax office, which also serves to establish their date. In the absence of a written agreement, a de facto partnership would be deemed to exist.

Certain formalities are further required; they are similar to those applicable to the formation of a company or corporation, namely publication of an insertion in an official newspaper for legal announcements, filing a formal request for registration with a centre for business formalities (CFE). France operates point-of-single-contact websites such as Guichet-entreprises.fr (available in English). See also Legal Guide: Doing Business in France, available online at www.businessfrance.fr.