Turning Shareholder Loans into Equity in a French SAS

Shareholder loans into equity: the set-off mechanism

A shareholder who has lent money to a French SAS — through a current account, a separate loan agreement, or any other recognised receivable against the company — can capitalise the loan at the next capital increase. The mechanism is libération par compensation — the set-off of the shareholder's claim against the subscription price of the new shares. The claim is extinguished; the shareholder receives shares of the same value; the company's debt to the shareholder falls to zero and its equity rises by the same amount.

This guide covers what the mechanism is, the conditions a claim must satisfy to be set off, how the arrêté de comptes records the claim, the two points where an auditor or a notary intervenes, the libération mechanics, the tax lines, and the practical configurations where converting shareholder loans into equity makes sense — pre-fundraise cleanup, distressed restructuring, group-treasury balancing. For the capital-raise procedure that carries the operation, see our step-by-step cash-raise guide; for the panorama of the other methods, our raising-capital guide.

What turning shareholder loans into equity in a French SAS means

A French SAS can raise capital in cash, in kind, by capitalisation of reserves, or by capitalisation of shareholder loans. The last route — libération par compensation — is a specific mechanism that converts a debt the company owes to a shareholder into share capital.

The mechanism has two simultaneous effects:

The shareholder's claim disappears. The receivable that was on the company's balance sheet as a debt is extinguished. The shareholder is no longer a creditor of the company on that amount, and any future interest on the loan ceases to accrue from the moment of the set-off.

The shareholder receives new shares. New shares are issued to the shareholder, with par value (and any premium) matching the value of the extinguished claim. The shareholder's equity stake grows by the corresponding amount.

The mechanism rests on Art. L 225-128 of the Commercial Code, applicable to the SAS: cash contributions can be liberated by set-off against liquid and due claims on the company. The set-off is treated as a cash subscription — the cap-table effect is the same as if the shareholder had paid cash, and the extinction of the loan is the simultaneous counterpart.

The mechanism is contractual in form (the shareholder agrees to convert; the company agrees to issue) but procedural in substance — it runs inside the capital-increase procedure and follows the standard rules on shareholder decisions, bylaws amendments, registry filings, and legal notices.

The conditions for a shareholder loan to be capitalised into equity in a French SAS

For the set-off to operate at a capital increase, the shareholder's claim against the company must be liquide et exigible (C. com. Art. L 225-128) — and, as with any set-off, it must be a claim the company actually recognises.

The claim must be liquide — liquid. The amount must be fixed and certain. A claim still being calculated, or that depends on a future event (an earn-out, a performance bonus, an unquantified damages claim), does not qualify. The set-off requires that the parties know exactly how much is being capitalised.

The claim must be exigible — due. The claim must be currently payable, not deferred and not subject to an undischarged condition. A shareholder loan maturing in 2030 is not due in 2026 and cannot be set off without first being made due — typically the parties agree to accelerate the maturity or the shareholder waives the deferral. A claim subject to a pending condition precedent is not due until the condition is met.

The claim must be recognised — not disputed. The claim must appear in the company's accounts. A claim the company has not recognised, or actively disputes, cannot ground a set-off — the general law of compensation requires a certain claim, and the arrêté de comptes below is precisely the document that establishes it.

The conditions apply cumulatively, and each can be engineered where it is missing: the maturity accelerated by agreement, the amount reconciled and recorded, a settlement fixing a contested figure. Once the conditions are met, the set-off is workable.

In practice, the most common claim used is the current-account claim — the compte courant d'associé. The current account is a recognised receivable on the company's books, the amount is fixed at the date of the set-off, and the claim is normally due on demand or made due by waiving any blocking provision. The current account is the natural candidate for the mechanism.

When converting shareholder loans into equity in a French SAS makes sense

Three configurations call for the mechanism in practice.

Cleaning up the balance sheet before a fundraise. A new investor coming into a French SAS typically prefers a company with low or zero shareholder debt. Existing shareholder loans rank ahead of the new equity in any liquidation and create a layer of obligations the new investor does not control. Capitalising the loans before the round simplifies the structure — the loans become equity, the new investor enters clean.

Restructuring a distressed company. Where the company is approaching the loss-of-half-capital threshold or is already past it, capitalising shareholder loans cuts the debt overhang and rebuilds equity in one operation. The mechanism often runs alongside fresh cash injections, and it can form part of the increase leg of an accordion recapitalisation — see our dedicated accordion guide.

Group-treasury balancing. A French subsidiary funded through current-account advances from its parent can convert the advances into equity to align its capital structure with its operational scale. Tax considerations apply on both sides — the parent's position on the advances and the subsidiary's equity treatment — and the analysis runs case by case.

A neighbouring mechanism should not be confused with the capitalisation: the debt write-off (abandon de créance). In a write-off, the shareholder forgives the loan and receives nothing — no new shares. The write-off generates a one-time profit for the company that absorbs part of its losses, but it does not grow the shareholder's stake, and it can generate taxable income for the company. Capitalisation converts; write-off forgives. The two are sometimes combined in the same restructuring — write off part of the loan to absorb the losses, capitalise the rest to rebuild equity — the standard intra-group rescue package alongside the accordion.

The mechanism does not fit a shareholder who wants the cash back. Capitalisation requires the shareholder's consent — the subscription bulletin records it. Where the company cannot repay and the shareholder will not convert, the situation is a debt-overhang problem needing a different solution (negotiated rescheduling, conciliation, or a formal procedure).

How a shareholder loan is set off against an equity subscription in a French SAS

The procedural mechanics run within the broader capital-raise framework.

Step 1: shareholder decision authorising the increase. The shareholders take a décision collective authorising the capital increase — the amount, the par value, the issue premium where applicable, and the configuration, including the fact that part or all of the increase will be liberated by set-off against shareholder claims. One precondition carries over from the general regime: the existing capital must be fully paid up before any new cash-type issue, and the set-off route counts as one.

Step 2: subscription bulletin signed by the shareholder. Each converting shareholder signs a subscription bulletin recording the commitment to subscribe a defined number of shares, with the standard mandatory mentions plus a reference to the claim being set off — amount, origin, the underlying agreement or current-account history.

Step 3: arrêté de comptes recording the claim. The president (or the body authorised by the bylaws) draws up an arrêté de comptes — a statement of account recording the claim (C. com. Art. R 225-134). Where the SAS has a statutory auditor, the auditor certifies the arrêté exact; an SAS without an auditor is dispensed from the certification (see the next section).

Step 4: the set-off certificate. The payment-by-set-off is recorded in a certificate issued by a notary or by a statutory auditor, which stands in for the depositary's certificate for the set-off portion (C. com. Art. L 225-146, al. 2).

Step 5: registration and extinction. The bylaws are amended to reflect the new capital figure; the registration update is filed at the Guichet unique with the decision, the bulletins, the arrêté and the certificate; the legal notice is published; the K-bis is updated. The claim is extinguished on the company's books — the current account closed or reduced by the capitalised amount — and the shareholder's holding grows by the corresponding shares.

The depositary's blocked account is not involved in the set-off portion. Where a single increase combines cash subscriptions and set-off subscriptions, the cash side goes through the depositary as usual — with the depositary's certificate covering it — and the set-off side runs in parallel on its two documents. Both sets are filed with the registration update.

The arrêté de comptes: recording the loan before turning it into equity

The arrêté de comptes is the central document of the set-off operation. It serves three functions.

It fixes the claim's amount. The document states the amount of the shareholder's claim against the company at the date of the arrêté — fixed, with no later recalculation. In practice the shareholder acknowledges the figure, so both sides are locked to the same number as the basis of the set-off.

It evidences the claim's status. The document shows the claim as liquid, due, and recognised in the books. Where any element is doubtful, it is resolved before the document is drawn up — acceleration of the maturity, reconciliation of the amount, settlement of any contested portion.

It supports the registration filing. The document travels with the registration update and forms part of the operation's record. Future shareholders, creditors, and buyers of the shares can trace the set-off back to the documented claim.

The arrêté is drawn up by the president (or the body the bylaws authorise) — that attribution is the rule (C. com. Art. R 225-134). Where the company has a statutory auditor, the auditor certifies the arrêté exact, verifying the figure against the company's books; the certification is the protection against an inflated arrêté. Where the company has no auditor, the certification is dispensed — the point is settled by the practice bodies (ANSA, December 2008; CNCC, December 2009) — and the arrêté stands on the president's signature.

The arrêté should be dated as close as possible to the capital-increase decision. A stale document invites challenge — interest accrued since, partial repayments, movements on the current account. A document dated within days of the shareholder decision is the standard practice.

The two intervention points: auditor, notary, and the set-off

Two distinct intervention points structure the outside involvement in a loan-to-equity conversion — and they should not be confused.

Point one: the certification of the arrêté de comptes. Where the SAS has a statutory auditor, the auditor certifies the arrêté exact (C. com. Art. R 225-134). Where the SAS has no auditor, the certification is simply dispensed — the company does not appoint one for this: the obligation is read as incompatible with the SAS regime's optional-auditor design (ANSA, committee of 3 December 2008; CNCC bulletin 156, December 2009).

Point two: the certificate recording the payment-by-set-off. The libération of the new shares against the extinguished claim is recorded in a certificate issued by a notary or by a statutory auditor, standing in for the depositary's certificate (C. com. Art. L 225-146, al. 2). This step is required in every case. Where the SAS has an auditor, the same auditor typically handles both points. Where it has none, the company either routes the formality through a notary or designates an auditor specifically for this certificate — one of the few one-off auditor appointments the SAS regime still requires.

Foreign founders running French SAS below the audit thresholds therefore face a simple two-step path: no certification on the arrêté, and a notary or a one-off auditor for the set-off certificate. The path is well established and runs routinely in practice.

Compute the conversion: claim in, shares out

Enter the claim being capitalised, the issue price per share, and your current position — and see the shares issued, the residue left on the current account, and your stake after the conversion.

The libération mechanics: how the set-off pays up the shares

The libération rules sit differently on the two sides of a mixed raise.

The cash component follows the instalment rule. At a capital increase, cash-subscribed shares must be paid up at least one quarter of their par value on subscription — plus the entire premium — with the balance callable by the president within five years of the increase (C. com. Art. L 225-144).

The set-off component is liberated in one movement. The set-off is a payment method for a cash-type subscription: the claim offsets the subscription debt, and in practice the entire claim being capitalised is set off in one go — the shares issued against it are fully paid at once. There is no half-converted claim lingering between debt and equity: the arrêté fixes the amount, the certificate records the payment, and the extinction is complete for the capitalised portion. (A shareholder can of course choose to capitalise only part of the loan — the residue then simply stays on the current account as a continuing receivable.)

One genuine full-payment rule to keep in view. Shares subscribed partly in cash and partly by incorporation of reserves, profits, or premiums must be fully paid on subscription (C. com. Art. L 228-7). That rule concerns the cash-plus-reserves combination — it is worth knowing when a restructuring stacks several methods in one decision, but it is not a set-off rule.

The practical consequence for planning: a mixed raise can perfectly combine an investor paying a quarter of par now with a shareholder converting a current account in full — each component follows its own libération path, and the registration file documents each separately.

Tax considerations when turning shareholder loans into equity in a French SAS

The tax analysis of a loan-to-equity capitalisation runs on three layers.

The company's side. The extinction of the loan against new shares is a balance-sheet rebalancing, not a debt forgiveness: the debt falls, the equity rises, and the taxable income is in principle unchanged. The picture changes where the conversion values the claim below its face amount — the difference operates like a partial write-off (abandon de créance) and can generate taxable income for the company, depending on the configuration.

The shareholder's side. The shareholder gives up the receivable in exchange for shares; no cash is received and no gain is realised at that point. The value given up feeds the cost basis of the shares for a later disposal. For a foreign shareholder, the home jurisdiction's treatment of debt-to-equity conversions, the applicable treaty, and any holding-period rules all come into play — the cross-border analysis runs case by case with the shareholder's tax adviser.

Registration duty. The set-off-based increase follows the registration regime of capital increases generally — registered free of charge in the standard configurations, like its cash counterpart.

The tax analysis matters most for groups using the mechanism as a treasury tool. The choice between repayment plus fresh subscription (cash moves twice) and capitalisation (cash moves zero times) can produce different tax outcomes across the group; the analysis should run before the operation is structured.

Which conversion configuration fits your situation?

Pick the situation closest to yours and see the structure it calls for — and the point to settle before the decision is drafted.

Frequently asked questions about turning shareholder loans into equity in a French SAS

This article is for general information only and states French law as published in the sources available at the date shown above. It does not constitute legal advice. The right structure for capitalising a shareholder loan in a French SAS depends on the specific claim, the company's situation, and the cross-border tax dynamics. Always seek qualified legal advice before launching a loan-to-equity conversion in France.