1. What Is Debt Forgiveness Under French Law?
Under French law, debt forgiveness (“remise de dette”) is defined as the contract by which a creditor releases the debtor from all or part of their obligation. Article 1350 of the French Civil Code provides a clear definition:
“Debt forgiveness is the contract by which the creditor releases the debtor from their obligation.”
This mechanism allows a creditor to waive payment of a debt, in whole or in part, without receiving consideration in return. Unlike other amicable settlement tools, debt forgiveness is unilateral in its economic effect: the debtor makes no concession, while the creditor deliberately accepts a loss.
Debt forgiveness is governed by Articles 1350 to 1350-2 of the French Civil Code and may be used both between unrelated commercial partners and within corporate groups.
2. Debt Forgiveness vs Transaction: A Fundamental Distinction
Debt forgiveness must be clearly distinguished from a settlement agreement (“transaction”).
A transaction necessarily involves reciprocal concessions. Each party gives up something to end a dispute or prevent litigation. By contrast, debt forgiveness does not involve negotiation or balance. The creditor simply releases the debtor from the obligation, either immediately or subject to conditions.
This distinction is essential in practice. Courts will not recharacterise a genuine debt forgiveness as a transaction unless reciprocal obligations can be clearly identified. From an evidentiary and tax perspective, correctly qualifying the operation is critical.
3. Scope and Modalities of Debt Forgiveness
Debt forgiveness may take several forms.
First, it may be total or partial. A creditor may waive only part of the outstanding debt, leaving the remainder payable.
Second, it may be immediate or deferred. The creditor can provide that forgiveness will take effect at a later date.
Third, it may be conditional. The most common condition is a clause of return to better fortune (“clause de retour à meilleure fortune”), which allows the creditor to recover the forgiven amount if the debtor’s financial situation improves.
These modalities make debt forgiveness a flexible legal tool, particularly in restructuring situations or long-term commercial relationships.
4. Acceptance and Withdrawal of the Offer
Although debt forgiveness is favourable to the debtor, it still requires acceptance. As a result, the creditor may withdraw their offer as long as it has not been accepted.
However, caution is required. Withdrawal must not be abusive or disloyal. If the creditor allows the debtor time to reflect, or if circumstances show that acceptance was tacit, withdrawal may no longer be possible.
French case law also recognises tacit acceptance. Silence combined with conduct consistent with acceptance may suffice, particularly where the debtor acts on the basis of the forgiveness.
5. Proof and Practical Importance of Written Evidence
Between commercial entities, no specific form is required for debt forgiveness. A written agreement is not legally mandatory.
In practice, however, written evidence is essential. The party invoking debt forgiveness bears the burden of proof. Without a written instrument, disputes may arise regarding the existence, scope or conditions of the forgiveness.
For this reason, a carefully drafted document is strongly recommended.
6. Model Debt Forgiveness Agreement (Partial Forgiveness)
DEBT FORGIVENESS AGREEMENT
Between the undersigned:
Company A, a simplified joint-stock company (SAS), with registered office at [address], registered with the Trade and Companies Register of [city] under number [●], represented by its President, [name],
and
Company B, a limited liability company (SARL), with registered office at [address], registered with the Trade and Companies Register of [city] under number [●], represented by its Managing Director, [name].
It is hereby recalled and agreed as follows:
Company A holds a claim against Company B in the amount of EUR 7,000, corresponding to invoice no. [●] dated [●].
Despite the agreed payment deadline, Company B has not settled the outstanding amount.
In consideration of the long-standing business relationship between the parties, Company A grants Company B, which accepts, a partial debt forgiveness in the amount of EUR 2,500.
This forgiveness is expressly conditional upon payment by Company B, no later than [date], of the remaining balance of EUR 4,500.
Executed in two originals at [place], on [date].
Signatures
7. Debt Forgiveness with a Return-to-Better-Fortune Clause
A creditor may condition forgiveness on the debtor’s future financial recovery. This mechanism is widely used between parent companies and subsidiaries but may also apply between independent commercial partners.
The clause typically provides that if the debtor generates sufficient profits or restores its equity, the forgiven debt becomes payable again.
Importantly, if such a clause is not time-limited, the creditor may still declare the claim in insolvency proceedings, since recovery remains theoretically possible.
8. Model Abandon of Claim with Return-to-Better-Fortune Clause
ABANDON OF CLAIM WITH RETURN-TO-BETTER-FORTUNE CLAUSE
Between:
Company X, SARL, share capital EUR [●], registered office at [address], registered with the Trade and Companies Register of [city] under number [●],
and
Company Y, public limited company (SA), share capital EUR [●], registered office at [address], registered with the Trade and Companies Register of [city] under number [●].
Company Y holds a claim against Company X in the amount of EUR [●], arising from [unpaid invoices / shareholder advances].
Company Y hereby agrees to abandon part of this claim in the amount of EUR [●], subject to a return to better fortune by Company X.
Return to better fortune shall be deemed to occur upon the recognition of a taxable net profit.
In order to enable verification, Company X undertakes to provide Company Y with certified copies of its annual financial statements as soon as they are established.
This agreement shall expire upon full repayment of the abandoned amount in the event of return to better fortune, or failing such return, on [date].
Executed in two originals at [place], on [date].
Signatures
9. Delivery of the Original Title of the Debt
Even in the absence of a written agreement, the debtor is presumed released if the creditor voluntarily hands over the original instrument evidencing the debt.
This presumption applies only if the original document is delivered voluntarily and in full. If multiple originals exist, all must be delivered. The presumption does not apply if the creditor holds another enforceable title of equal value.
10. Effects on Co-Debtors and Guarantees
When a creditor forgives the debt of one joint and several debtor, the other co-debtors are released only to the extent of that debtor’s share.
By contrast, forgiveness granted to the principal debtor releases all guarantors, including joint guarantors. This rule reflects the accessory nature of guarantees under French law.
11. Tax Treatment of Debt Forgiveness
From a tax perspective, debt forgiveness may have significant consequences.
Commercial debt forgiveness is generally deductible for the creditor if it constitutes a normal act of management and is not linked to the acquisition cost of a shareholding.
Financial debt forgiveness is deductible only in limited cases, notably when granted in the context of conciliation, safeguard, restructuring or liquidation proceedings.
For the debtor, debt forgiveness is generally treated as taxable income, subject to specific exceptions where the creditor is a parent company and certain capital increase commitments are made.
The presence of a return-to-better-fortune clause does not, in itself, justify deductibility. Tax authorities analyse the economic substance of the operation.
12. VAT Treatment
Debt forgiveness is not subject to VAT where it does not constitute consideration for a service or an adjustment of the price of a taxable transaction.
Recovery of VAT previously invoiced is generally possible only where the forgiveness occurs within formal insolvency or restructuring proceedings.
Conclusion
Debt forgiveness under French law is a powerful but sensitive legal tool. Properly used, it allows creditors to preserve commercial relationships, facilitate restructurings and manage risk. Poorly drafted, it exposes the creditor to evidentiary, fiscal and strategic risks.
In practice, precise drafting and legal supervision are essential, particularly when forgiveness is conditional or granted in a financially distressed context.
