The cash pooling agreement is a ‘non-standard’ form of financial management applied by entities belonging to capital groups or having a multi-partitional organisational structure. Cash-pooling is a different consolidation of bank accounts in order to optimize the costs incurred by individual entities.
The primary economic advantage resulting from the conclusion of cash pooling agreements by the entities is the possibility to benefit from the same interest rates fixed for the balance resulting from the main account, which are generally determined at a higher level as they relate to the calculation from the higher value of the accumulated cash (all Participants).
zero – Balancing and near — zero - Ballancing Cash pooling, unlike national Cash pooling, provides for physical cash transfers between the accounts of the companies involved in cash pool settlements.
Entities whose accounts show negative balances shall not bear overdraft interest costs as in fact Pool Leader calculates interest only on the cumulative balance.
Entities whose accounts show negative balances shall not bear overdraft interest costs as in fact Pool Leader calculates interest only on the cumulative balance.
Of course, it can happen that even such a cumulative balance of all cash flows to the main account will be negative and in such a case will be subject to interest rates as for the overdraft. Furthermore, in the settlements between the Participants there is a possibility to establish a certain interest rate on the debit account, i.e.
on the funds held by the Company and which are owned by other Participants of the Cash Pooling Agreement or Pool Leader.
At the same time, the Cash Pooling Agreement shows that the managing entity – Pool Leader, controls cash and interest flows and the operation of the main account.
Cash type determination – pooling.
Construction contract cash pooling can take several forms
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national cash pooling;
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zero-balancing cash pooling;
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near-zero-Balancing cash pooling.
All these issues will be discussed at the conference "Tax Planning 2015"
Notional cash pooling is characterized by a lack of physical transfer of funds. The funds shall only be transferred on paper. Balances which are subject to deduction (debit and credit) shall be physically left to their own account of the participants in the system (possibly converted into ancillary sub-accounts to the participants' accounts in amounts that ensure the zeroing of the negative balances) and interest shall be calculated on the net amount of the accumulated balances.
Unlike the national cash pooling, zero-Balancing cash pooling is performed as a result of the physical transfer of funds between participants' accounts (or possibly-specially separated participants' subaccounts) and the group's main account.
Surplus (i.e. positive balances) are transferred from participant accounts to main account and deficits (i.e. negative balances) on participants' accounts shall be covered by the main account. The transfer is made as a standard at the end of each accounting day, and at the beginning of the next day - the funds are reimbursed to participants' accounts. Interest shall be calculated on the balance collected on the main account and transferred to that account.
third form of cash pooling – near-zero - Balancing cash pooling is different from zero-Balancing cash pooling only because there is a pre-set balance (not zero) in the participants' accounts at the end of each day. Consequently, transfers - also made physically - to the main account do not lead to zeroing of the Participants' accounts, but to establishing a certain positive balance.
Foreign exchange restrictions
In accordance with the provisions of the Foreign Exchange Law, a capital company established in Poland may, without an individual foreign exchange permit, establish a bank account in a bank located in another European Union country (hereinafter: EU).
The Polish entity is also entitled to conduct foreign exchange settlements (e.g. foreign currency transfers) through the specified bank account with other entities established in the European Union.
Consequently, it should be pointed out that a Polish company may enter into a cash pooling agreement concluded with a foreign company concerning a transaction Cash pooling, including a bank based in Germany.
According to Polish foreign exchange law, only a regulation of the Council of Ministers applies to international cash pooling accounts 1 , which imposes on residents settling with non-residents under multilateral settlement agreements within the group, the obligation to report to the National Bank of Poland on the conclusion of such contracts and the obligation to report quarterly on such transactions.
However, it should be pointed out that the provisions of the Regulation requiring Polish entities to report on both netting and cash pooling transactions do not include in the annexes boxes to document the value of cash pooling accounts.
Provisions of banking law
According to Article 93a(1) The Bank’s rights, the Polish bank may conclude an agreement with companies belonging to the tax group consisting in applying a consolidated interest rate on the funds collected by the individual companies in their bank accounts and loans granted to them.
A question which may arise is the power of the Polish bank to conclude such agreements with other entities not mentioned in this article. However, the restriction contained under Article 93a Banking law does not mean that the Polish bank cannot conclude a so-called cash pooling agreement with other entities.
Classification of the real-life cash pooling contract against civil law
Civil law does not contain provisions relating directly to the cash pooling agreement, hence the cash pooling agreement remains under Polish law an unnamed contract, regardless of its kind.
The specificity of non-named contracts is that such contracts are created in order to meet certain individualised or new needs and to take account of the economic situation for which the catalogue of contracts named does not provide appropriate arrangements.
Lack of regulation of cash pooling in Polish law makes it necessary to shape it based on Article 353¹ The Civil Code, which establishes the principle of contract freedom. According to it, the parties may shape the content of the contract and also select a counterparty at their discretion, unless the content of the legal relationship or its purpose opposes the properties (nature) of the relationship, the prohibitions contained in the law or the principles of social intercourse.
Tax effects of cash – real pooling under the Corporate Income Tax Act
The following are the tax implications and possible corporate tax risks that may arise in relation to the documents presented by the Company concerning the physical transfers of total funds collected in the individual accounts of participants to the main account for consolidation purposes under the so-called Cash pooling real.
Non-recognition of cash – real pooling as loan agreement
The nature of the loan agreement shows that the loan granting agreement undertakes to transfer to the borrower a certain amount of money or belongings only to the species and the borrower undertakes to return the same amount of money or the same amount of property of the same species and quality. Therefore, the relevant elements of the relevant loan agreements are:
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- the obligation of the lender to transfer to the borrower a certain amount of money or goods designated as species;
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The borrower's obligation to return the same amount of money or the same kind of things and the same amount.
In the case of typical real cash pooling (if the contract contains pooling transactions in its content) there is an obligation to reimburse the same amount of money, but there is no element of the obligation to transfer a certain amount of money to the entity specified in the contract.
Furthermore, in the cash pooling agreement, there is no free disposal of money, which is an element of the necessary loan. Agent Pool Leader, however, has no possibility of having the financial surpluses received from the participants of the pooling agreement as the owner, in particular they cannot dispose of them in any way other than the use of them under the pooling agreement to compensate for the financial shortages of other participants in the Cash-pooling agreement.
It is difficult to identify the funding that exists under the pooling agreement with the granting of loans. In other words, cash-pooling transactions are not exhaustive the characteristics of the loan agreement, provided that the pooling agreement actually indicates the pooling transactions.
If the cash pooling structure deviates from the basic characteristics of the cash pooling institution, there is a tax risk that tax authorities recognise group settlements as lending transactions in question under Article 720 kc.
Interest paid by the Company on the negative account balance
Under the cash pooling agreement, at the end of the month (interest settlement period) Pool Leader provides the Company with information showing the interest due for the settlement period and the corresponding invoice.
According to the regulations the Corporate Income Tax Act, the cost of obtaining revenue (hereinafter: ‘CUP’) shall not be considered as accrued but not paid or decommitted interest. Only in case of payment of interest, the Company will be entitled to their inclusion in the CUP.
The interest tax costs will arise at the time of their actual outflow from the participant's account (depending on the contractual provisions - either at a separate time, as to the amount, the transfer of interest, or at the time of the transfer of the nearest positive balance from which the interest is deducted).
Furthermore, if the settlements between the parties to the interest agreement are made through mutual compensation (without physical cash flow), it should be remembered that, from a legal point of view, the compensation is treated as payment.
From a practical point of view, it is also recommended to distribute the transfer titles in detail, with a clear distinction between interest and other transfers. In the absence of such records, it will not be possible to correctly determine the cost and revenue for tax purposes.
Insufficient capitalisation
Thin capitalisation occurs in two in cases, i.e. if the loans are granted by direct shareholders (shareholder) or if the loans are granted by sister companies (company) (these are companies in which the same entity holds shares or shares).
Taxation of interest paid by the Company for the contract concluded
Subject to Article 3(2) the Corporate Income Tax Act tax payers, if they do not have their registered office or management in the territory of the Republic of Poland (hereinafter: the Republic of Poland) are subject to tax on income that they earn in the territory of the Republic of Poland.
Such an obligation to tax revenue generated by an entity in the territory of the Republic of Poland also applies to revenue generated by interest paid to it (Article 21(1)(1) the Corporate Income Tax Act).
According to Article 26 the Corporate Income Tax Act legal persons and organisational units not having legal personality and who are traders natural persons who pay claims from the titles listed under Article 21(1) the Corporate Income Tax Act and Article 22(1) the Corporate Income Tax Act are charged as payers to collect a flat-rate tax on these payments (hereinafter: withholding tax).
The rate of withholding tax on interest is 20%. Provisions the Corporate Income Tax Act, on withholding tax shall apply, but taking into account the provisions of the double taxation agreements concluded by the Republic of Poland with other countries (hereinafter: the UPO Agreement). The UPO Agreement will modify the withholding tax rate for interest payments.
Where a national entity is obliged to pay interest to a participant in the Cash Agreement, which is located outside the territory of the Republic of Poland, there may be a problem with which interest is actually due. The majority of UPO contracts concluded by the Polish Republic – in relation to passive income – contain a benefit clause, i.e. the beneficial owner of the interest.
The status of authorised beneficial owner shall be held by an economic owner who:
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It has capital, which is subject to interest, e.g. a loan agreement, or
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It has the right to use interest.
The change in the interest creditor does not in principle alter the status of the rightholder. Entity third the acquirer of only the right to receive interest does not automatically become a entitled person. Therefore, the transfer of the surplus resulting from the cash pooling contract (the source of interest receivables) to participants in the account through Pool Leader's target account does not result in Pool Leader being credited as an entity entitled to those interest.
The holder of the surplus in the account (the source of the receivables) remains the entity (cash pooling participant) that transfers the surplus. The mere fact of physical cash flow between the cash pooling contract participants' accounts and Pool Leader's target account does not make Pool Leader an eligible person.
Due to the multi-directional settlements made under cash pooling, it is in principle not possible to determine directly how surpluses are balanced against shortages and thus to what extent one Contract participants shall finance the others.
Therefore, two key problems related to:
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Obligation to hold a residence certificate for all Group companies
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The determination of which entity the specified cash actually originated.
Conditions for benefiting from the preferential rate of withholding tax on interest payments
Under the Corporate Income Tax Act it is possible to apply the rate laid down in the UPO agreement provided that the place of residence of the beneficial owner is documented in the form of a residence certificate issued for tax purposes by the competent tax administration.
In addition, from the sound Article 21(3) the Corporate Income Tax Act results in a preferential withholding tax rate. In order to benefit from this tax rate, the following conditions must be met in total:
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- The paying company is a Polish company which is a taxpayer of income tax in Poland,
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- The profit-making company is a company subject to an unlimited tax obligation in another EU Member State,
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- The company paying the claim or the company receiving the claim has in capital second companies not less than 25% shares,
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Holding of a share of capital occurs continuously over the period 2 years, which may expire after the company has obtained interest income.
It should be pointed out that, given the expiry of the transitional period, on 1 July 2013 the company may not be required to collect withholding tax at all.
Cash – pooling and tax revenue
According to Article 12(1)(1) the Corporate Income Tax Act, revenue is in particular the money received. The question therefore arises whether receiving cash under the Cash Agreement – pooling constitutes tax revenue?
Cash pooling agreements are characterised by the returnability of cash transfers made between participants in the contract. However, the jurisprudence held that only those values which are characterised by a definite increase in the taxpayer's assets could be regarded as tax revenue.
Consequently, those under Article 12(1) the Corporate Income Tax Act examples of normative categories, in order to be considered as tax revenues, should meet certain conditions, among which the premise of definitive delivery is leading.
As long as the money received does not have a definite character, in particular it will be a return, it will not represent revenue for purposes the Corporate Income Tax Act Thus, the claim that the money received in each case constitutes tax revenue — unless the Corporate Income Tax Act is otherwise not justified.
In the case of cash pooling agreements, it should be considered that possible transfers made within these structures should not be included in the tax accounts of individual participants due to the lack of a definitive delivery/expenditure on their side.
Interest received by the Company on the positive balance and tax revenue
According to Article 12(4)(2) the Corporate Income Tax Act Tax revenue shall not include, inter alia, amounts accrued but not received interest on receivables, including loans granted.
Interest income resulting from the participation in the cash pooling system should therefore be considered as tax revenue at the time of their impact on the participant's account.
Income from unpaid benefit
The main benefit of cash-pooling is the ability to concentrate the funds of several entities and compensate for surpluses identified by some entities with shortages of other entities belonging to the group.
As a potential tax risk to the Company, the possibility for the tax authority to estimate the revenue from the free or partially paid benefit in the absence of a reservation in a pooling agreement or a reservation below the level of market interest applied by commercial institutions. In the assessment of the tax authorities, such contractual arrangements may generate income for the recipient in the form of free or partially paid benefits.
Pool Leader should receive appropriate, market-defined, remuneration for carrying out certain activities. Failure to determine the remuneration for this result generates a tax risk associated with the receipt by the Participant of an unpaid or partially paid benefit. Cash – Pooling should also regulate this issue.
Exchange rate differences
According to the Corporate Income Tax Act, revenue and costs incurred in foreign currency shall be converted into gold at the average rates of the National Bank of Poland (hereinafter: NBP) on the day preceding the receipt of income / cost. Where different exchange rates exist between the date of receipt of the income and the date of actual receipt of the income (or between the date of receipt of the cost and the date of actual payment of the cost), revenue shall be increased by positive exchange rates and the cost of obtaining the income shall be increased by negative exchange rates.
In the case of the Company, there are real cash flows of certain cash expressed in EUR from the Participant's account to the account indicated by Pool Leader. Thus, there may be doubts as to when income is obtained (in the case of a positive balance on the account) and when the cost of obtaining income (in the case of a negative balance).
The income/accounting of the tax cost should be achieved on the date of receipt of the settlement from Pool Leader and the exchange rate difference should be established between the date of the transfer/ receipt of the cash and their settlement.
Transfer prices
If as a result of a defined relationship under Article 11 the Corporate Income Tax Act (the related parties) have been established non-marketable terms of the transaction which affect the income not reported by the Polish entity or the presentation of income less than could be expected if these links did not occur, the tax authorities shall determine the entity's income and the tax due without taking into account those links.
A national entity is required to provide specific tax documentation (including specific tax records) at the request of the tax authorities under Article 9a the Corporate Income Tax Act elements. Failure to submit this dossier within the time limit 7 days result in a penalty rate 50% the possible difference between the income shown by the taxpayer and the income estimated by the tax authorities.
In view of these transfer pricing restrictions, it is appropriate to indicate the following elements of cash pooling transactions, which should in particular be characterised by market conditions:
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- the amount of interest rate on positive and negative balances;
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- rules on interest payments;
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- the amount of the Pool Leader commission,
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- the possible collateral used in the transaction and the contractual default fees.
The tax risk is linked to the assumption that the conditions laid down between the holders of participating bank accounts should not deviate from market conditions. However, account should be taken of the nature and purpose of the cash pooling agreement, i.e. the assumption that the concluded cash-pooling contract assumes a reduction in financial costs and allows for a favourable interest rate on its cash.
In the light of transfer pricing rules, the cash pooling transaction is carried out between pool leader and the clearing entity (there is no transaction between the clearing entities).
Tax effects of cash – real pooling under the Goods and Services Tax Act.
According to the tax authorities’ interpretations, the cash-pooling agreement, whatever its nature, constitutes under the Goods and Services Tax Act (hereinafter: the VAT Act) a comprehensive financial intermediation service . According to Article 43(1) the VAT Act Cash-pooling services are exempt from VAT.
Transactions carried out under the Cash-pooling system should be considered in the constellation: Pool Leader – a participant in the agreement.
The contractual provisions should precisely regulate the mutual settlement of the participants in the agreement. This is very important because of the correct determination of the time when the tax revenue and cost were created and the correct recognition of the time when the VAT obligation was created.
In the event that the Polish entity is incorporated into the Cash - pooling structure concluded between foreign entities, the possible consequences of VAT will concern showing the place of provision of financial intermediation services.
According to the provisions of the contract near - zero – Cash Pooling balance sheet and information obtained from the Company, the financial clearing agent with the Cash Pooling participant will be Pool Leader.
Tax effects of cash – real pooling under civil law tax
There are many doubts raised by taxpayers about the taxing of cash pooling with a tax on civil law, in particular in terms of cash pooling.
Under Article 1(1)(1) upcc included a closed directory of taxable activities. Among the taxed activities, the legislator indicated a loan agreement. In contrast, the Cash Pooling Agreement, as an unnamed agreement, is not, in our opinion, covered by the above catalogue.
The tax authorities have taken a similar position in their interpretations
The provision on the ‘loans agreement’ cannot be interpreted in an extensive manner.
It is also important that when transfers between cash poolers are classified as loans, they will not be taxed either way.
Provision Article 2(4) upcc provides that civil activities are not subject to this tax, if at least one of the parties for the performance of this activity shall be taxed on or exempt from goods and services. These services, as indicated above, are exempt from VAT and therefore clearly remain neutral for PCC accounts.