Recent shifts in French corporate law have drastically changed how companies manage their accounting profits. If you are a business owner or a shareholder, understanding the latest legal rulings on dividend distribution from retained earnings is crucial to avoid corporate compliance risks. Here is everything you need to know about the February 2025 Court of Cassation decision.
Understanding Accounting Profit Appropriation
At the end of a financial year, if there is an accounting profit, shareholders have a number of options:
- Either the immediate distribution of the accounting profit as dividends paid to the shareholders,
- Or recognition of a “carryforward” pending appropriation of the accounting profit,
- Or placement in “free reserves”.
This appropriation is decided by the company’s shareholders at the general meeting which must be held to approve the annual financial statements, at the latest in June of the following year for companies with a reporting date at 31 December.
The Common Practice of Extraordinary Distributions
It is common practice when no distribution is made to appropriate the accounting profit to the “carryforward” account. Then, at an extraordinary general meeting, the company’s shareholders will decide to distribute the profit carried forward in its entirety.
This practice has been accepted by the statutory auditing bodies.
The Initial Support from the Court of Appeal
Furthermore, this practice was also confirmed by the Court of Appeal of Paris (CA Paris, Pole 5, Ch. 9, 30 Jan. 2025, no. 22/17478), which considered that there was nothing to prevent a decision being made to pay dividends out of the carryforward account and free reserves outside of the general meeting approving the financial statements.
The 2025 Court of Cassation Ruling: A Legal Turning Point
However, in a decision dated 12 February 2025, the Court of Cassation (Ct. Cass., Comm Div., 12 February 2025, no. 23-11.410) ruled that it follows from the legal provisions that only the ordinary general meeting approving the financial statements for the financial year may decide to distribute the sums carried forward.
The decision of a general meeting other than that approving the financial statements for the financial year to distribute a dividend taken from the carryforward from a previous year is liable to be rendered null and void.
Why Cannot Retained Earnings Be Distributed Immediately?
Indeed, the Court of Cassation considers that profits carried forward are automatically allocated to the profit/loss of the following financial year and therefore may not be distributed.
This distribution will be possible at the general meeting approving the financial statements for the following financial year ended 31 December (N+1), in the June of the year after that (N+2).
Strategic Advice for Shareholders and Businesses
Thus, when approving the financial statements, careful choices must be made concerning the appropriation of the accounting profit, in particular if it is intended to pay dividends. Otherwise, there will be a risk of having to wait an extra year to be able to make the distribution if the accounting profit is appropriated to the carryforward account.
Although the question of an exceptional distribution from the free reserves decided at an extraordinary general meeting remains open to discussion and seems to be accepted by a majority of experts, we nevertheless urge shareholders to exercise caution, given that from an accounting point of view, free reserves and the carryforward account have the same characteristics.
To ensure your dividend distribution from retained earnings strategy fully complies with the latest French case law, proactive legal and accounting advice is highly recommended. Do not let outdated practices expose your corporate decisions to legal nullification.
Cofimé International, affiliated with the Cofimé Group
