Navigating Unchartered Waters: Cash Pooling in Poland
“… and we’d like to include our Polish subsidiaries into our cash pool set-up…” – is what corporate banks in Poland often hear from their international customers…
In their efforts to set up efficient liquidity solutions for the entire group many treasurers choose banks that have the widest geographical coverage and that are in a position to offer unified cash management structures throughout countries, among others a unified cash pool set-up. While this would be easy in a perfect environment, the reality usually turns out to be more complicated. Thus, understanding and addressing local requirements is the first step to take before implementing any cash pool solution.
Expectations of companies seeking to set-up a cash pooling solution usually vary. Some of them consider improvement of the group’s net interest position being of highest importance. In this case, notional pooling appears to be enough of a suitable tool.
Others want to improve the group’s net interest position, and, apart from that, to concentrate the group’s liquidity, to reduce its needs for external financing and to reduce its balance sheet. These companies will have to choose among different cash concentration techniques available on the market.
The below graph depicts various forms of cash pool available in the European countries.
Independently of the form chosen, cash pooling helps to optimize the interest results within a group of companies or in the accounts of a multi-branch company. It greatly improves the group’s result on interest when compared to separately investing of surpluses and paying the costs of financing by individual account holders within the system.
From the banks’ perspective cash pool is rather a ‘non-profit’ product. One could even argue that pooling hurts banks’ revenues, as it decreases the margins both on deposits and on loans. However, offering cash pool is a way to keep customers happy and should be seen as a part of a package deal between the bank and the customer.
The concept of cash pooling is not mentioned in the current Polish legislation. Thus, cash pool contracts can be concluded under the provisions of the general part of the Civil Code regarding obligations. Banks offer different legal solutions that potentially allow common liquidity management. However, there is still a considerable legal uncertainty. A number of legal and tax issues have to be taken into account when deciding upon a cash pool implementation in Poland. The most important of them are described below.
In understanding of the Polish legal and tax regulations, common accounts owned by more than one legal entity do not exist. Consequently, cash pool solutions assuming that balances are concentrated on the group account/or top account/or master account are not permitted, and any form of pooling adjusted to Polish conditions will result in transfers between accounts belonging to separate legal entities.
Transfer of funds between accounts participating in a cash pool structure can be regarded as inter-company lending, thus subject to tax (stamp duty, also called ‘Tax on Civil Acts’) which is currently 2 per cent. Clearly, the necessity to pay the stamp duty would undermine the whole economic sense of pooling.
Intra-company loans have to observe thin capitalization requirements, that have been set to prevent companies avoiding tax liabilities when they fund their subsidiaries.
Transfer pricing is another factor that needs to be considered. The way the benefits from the cash pool are allocated across participants can create a tax liability. To be able to treat the payments among cash pool participants as interest for tax purposes, companies will need to show that the transfers are made at arm’s length pricing, i.e. in fact, the same which would have been charged directly by a bank.
The Foreign Exchange controls prevents the widespread usage of cross-border cash pooling arrangements in the form popular in other European countries.
By the end of each month the banks are obliged to compute the mandatory provisions on the basis of the total amount of positive balances (deposits) of all customers. Balance decrease resulting from the usage of a cash pool means a decrease of the mandatory provisions computing basis. Thus, the cash pool structure to be implemented has to be confirmed by the Polish Central Bank.
The legal and tax obstacles described earlier do not mean that no form of cash pooling can be implemented in Poland. They do mean that the forms popular in other European countries have to be adjusted to the local legal landscape. The banks in Poland have been quite ‘creative’ in this respect and have managed to work out at least one cash concentration technique observing the local legal constraints and at least one form of notional pooling.
Following the first possible scenario, benefits resulting from the usage of a cash concentration pooling can be achieved subject to establishing a legal basis for fund flows. This means that the cash pool structure has to be designed in a way to avoid the stamp duty liability.
Such cash concentration technique can be based on assignments (and re-assignments) of credit claims concluded daily between the bank and the cash pool participants. In order to enable effective pooling of balances each cash pool participant shall have an account held with the same bank and a credit limit in current account /overdraft/, that can be traded between the bank and cash pool participants (legal title for fund flows). To perform daily assignment and re-assignment operations and any settlements connected herewith, all cash pool participants shall grant the bank an irrevocable power of attorney.
The cash pool structure based on assignments (and re-assignment) of credit claims is displayed on the picture below:
Following the second possible scenario, the local accounts belonging to various subsidiaries of a group can be combined with a notional pooling solution called Interest Enhancement (available even as cross-border, cross-currency structure). This model is based on a reduction in the interest margin relative to the group’s overall cash position vis-à-vis the bank. In other words, the solution offers the customer compensation of already paid interest on debit balances and extra interest on credit balances.
Banks recommend this solution (also in countries where the legal cash pool-related constraints have been solved), as traditional balance-netting and zero-balancing cash pools appear to be rather inexpedient in terms of cross-border and cross-currency solutions. This applies to, for instance, the conversion of currency positions, differences in the possible reporting requirements of the various countries’ central banks and cross-border intra group loans.
The Interest Enhancement set-up gives the group netting of interest calculation on a per-currency basis and a further compensation on the interest margins on a cross-currency basis. Firstly, it does not result in any intra-group loans. Secondly, the interest compensation is distributed proportionally to the participants. Interests are booked on division account level or on the sub-accounts depending on the country.
Even if the banks offering the above cash pool structures will have obtained a general legal opinion confirming that the solutions do not violate any current regulations a certain amount of risk still exists. Before deciding upon any of the structures corporates have to seek legal and tax advice, as the potential risk connected with cash pool remains at their side.
Banks in Poland have been actively trying to promote law changes in the direction of cash pool regulation. Discussions with the Ministry of Finance driven by the Polish Cash Management Board has led to first amendments to the current regulations. These have made it possible for so called ‘fiscal groups’ to use cash pool in order to manage the group’s liquidity efficiently. However, even if positive, this first step toward cash pool regulation was not what corporates and banks in Poland were waiting for.
Polish companies have been allowed to form groups for tax purposes since 1 January 1996. To do this, the parent company must hold 95 per cent of the capital in the other member(s) of the group and the group must achieve profitability of at least 6 per cent of the gross revenue. The regulations concerning fiscal groups are not flexible and in practice they actually limit the development of this form of business operation. As a result, very few fiscal groups currently exist in Poland, which in turn means that there is a very limited number of corporates that can benefit from the legal changes allowing for usage of cash pool.
In their discussions with the Ministry of Finance, the Polish Cash Management Board has been arguing that cash pooling remains neutral as seen from the State Treasury’s perspective. As long as transfers of funds between accounts participating in a cash pool are considered as inter-company lending (and thus, subject to tax), corporates will not use cash pool, which means that they will not pay stamp duty, anyway. In other words, regulating the cash pool issue in Poland by amending the current law should not significantly hurt the public budget. Assuming this the market keeps waiting for legal changes that will clearly define the fiscal aspects of pooling. Before this becomes a fact, tax and legal advice should be sought before implementing any form of cash pool in Poland.