This solution is most often used in tax equity groups, in which some participants have financial surpluses. Thanks to these surpluses, it is possible to finance entities-members of capital groups that face shortages. The use of cash pooling eliminates the need to incur financial obligations with third-party companies, and thus reduces the cost of obtaining financing.
In other words: cash pooling is an alternative to credit, taking advantage of financial differences between companies, which are participants in capital groups, for financing purposes.
How does cash pooling work?
The cash commingling service involves covering the financial shortfalls of one company using the surpluses of another. In practice, however, this cannot be done in the form of transfers from Company A’s bank account to Company B’s account. Such an action would qualify as a loan and be taxed, which would put the legitimacy of cash pooling in great question.
Under cash pooling, Company A sends the accumulated surpluses (or rather, a fixed portion of them) to a joint account of the capital group. This account is managed by a so-called pool leader. The role of the managing entity is usually played by a bank, another company that is part of the capital group (for example, the parent company) or another external entity.
Important!
Even if the function of pool leader is assumed by a non-bank company, it is necessary to use bank accounts, and therefore access to the appropriate infrastructure. In other words: a pool leader must at least work closely with a banking institution.
The Pool leader distributes the resources in its possession so that they are able to cover the emerging shortfalls in the accounts of group participants. Only when this stage is complete can the aforementioned Company B withdraw resources to make up the shortfall.
However, this is only one variant of the service. Often other methods are used instead of cash flow – for example, assignment of receivables or subrogation.
Types of cash pooling
There are two main types of cash pooling – virtual and real.
Virtual cash pooling
This option means that no funds are actually transferred between company accounts. Account balances are consolidated only virtually, for calculation purposes, and later – based on the total balance of the participating entities – interest is calculated.
This type of service makes it possible:
- to have a positive impact on the group’s bottom line,
- preserving the financial autonomy of enterprises participating in the PGK,
- Reducing the cost of overdrafts.
Important!
You may also encounter other names for this method:
- national cash pooling,
- interest netting.
Cash pooling actual
In this case, there is a physical consolidation of account balances belonging to the companies that make up the tax capital group. Thanks to the actual pooling, the group can effectively manage the liquidity of the associated companies on an ongoing basis. The designated leader has the task of using the pooled funds as efficiently as possible.
This form of service makes it possible:
- Full automation of transfers between accounts,
- reducing the role of external capital in financing companies,
- reduction in the use of the overdraft facility,
- Achieving more interest income (thanks to the consolidated balance).
Important!
You may also encounter other names for this method:
- concentration/consolidation of funds in the account,
- zero balancing cash pooling.
Is this a tax-neutral method?
The cash pooling service is often advertised as tax-neutral. This is made possible by the use of proper titles for flows of funds (virtual or real) between members of a capital group. The main concern is to ensure that these flows do not give rise to CIT gains. To this end, the aforementioned subrogation and assignment of receivables are used.
Nevertheless, cash pooling raises questions – especially in the context of withholding tax, VAT and PCC tax. We will discuss each of these elements.
Cross-border cash pooling
The cross-border variety of commingling occurs when entities based in different countries participate. In such a situation, it is crucial to determine the beneficial owner of the interest.
This beneficiary may be the pool leader, but in special circumstances it may also be the participants in the capital group. The resolution of this issue answers the question of whether and who should pay withholding tax. It also affects the determination of which tax exemptions can be used and whether reduced tax rates, resulting from double tax treaties, apply.
Cash pooling vs. loan
If an entity makes a loan or a donation to another company, it generally involves the payment of a tax on civil law transactions. However, the cash pooling agreement is constructed in such a way as to make it difficult to clearly determine whether a loan has been made. Since there is no fixed “formula” for cash pooling (after all, it is one of the multilateral unnamed agreements), special attention should be paid to it.
However, practice shows that under contract:
- specific amounts are not set,
- no return of funds is declared,
- The destination of the funds is not reported,
- the origin of the funds is not reported.
These four elements ensure that a well-structured cash pooling service does not bear the hallmarks of a loan and does not qualify for payment of PCC.
Cash pooling and VAT
So, since the companies won’t pay CIT, PCC or WHT, perhaps VAT will have to be paid? After all, VAT is also paid on the provision of financial services.
The thing is, however, that in this case it is not quite possible to talk about the provision of a financial service. Of all the parties involved in the commingling of funds, only the pool leader is a service provider – it settles the funds, transfers them between accounts, and manages them. However, this qualifies as financial intermediation. This, in turn, is exempt from VAT under Article 43 of the VAT Law.
Cash pooling agreement in Polish law
What about the other regulations? As we have already mentioned, cash pooling belongs to unnamed contracts, and it qualifies as a type of service contract, containing features of a bank account and a loan.
The cash pooling system may be of interest due to the anti-money laundering and counter-terrorist financing regime. This is because the bank establishes cooperation not with a single entity, but with a group of entities, within which there may be a fairly free flow of funds. For this reason, it is necessary to control the origin and flow of the aforementioned funds – especially if there are links also with foreign companies.
The regulations with which banks providing a cash pooling service are burdened are more numerous and complex. For this reason, the function of pool leader is rarely covered by an entity other than a bank.
However, participants in a group of companies must be aware of the provisions on acting to the detriment of the company. A situation in which an agreement is structured solely so that funds flow one way – to one entity – can be interpreted as an intentional act to cause financial damage. One reason for this is that cash pooling does not require or declare the necessity of returning the funds received, as we mentioned earlier.
Summary
Cash pooling is a complex, sophisticated financial solution. It can bring tangible benefits in the context of the entire capital group, however, it must be prepared with extreme care.
Errors of a structural nature can result in additional taxes and even criminal liability for group affiliates. Nonetheless, it remains a favorable method of liquidity management that allows group companies to maximize profits derived from interest.
