Poland: Cross-Border Cash Pooling

In the years since 1989, when Poland transformed from being a socialist state to a capitalist one, the country has retained a legacy of specific, complicated and, therefore, unfriendly foreign exchange (FX) and tax regulations. Instruments such as cash pooling were not recognized by Polish legislation and any type of liquidity management solution (local or cross-border) was either virtually impossible or at least bore substantial (mostly fiscal) risks.

Poland is one of the few countries in Europe (together with Austria, Portugal or Greece, for example) in which the concept of stamp duty taxation remains in force. Several years ago, the old stamp duty taxes were divided into the ‘proper’ stamp duty tax (related to particular actions performed by public institutions for natural persons, enterprises or other entities) and the new Civil Law Activities Tax (CLAT) related to particular civil law activities (as defined in the Civil Law Code), such as non-banking lending or real-estate purchase. The very idea of this specific, separate type of tax (generally not applied to activities subject to value added tax) has not been abolished.

The CLAT on inter-company lending, coupled with various restrictions or obligations still present in Polish foreign exchange law, have contributed to a long-lasting impression that the Polish regulatory environment is particularly difficult or risky for any cash pooling efforts.

Before Poland joined the EU on 1 May 2004, any automated cross-border cash pooling was almost impossible in the country’s regulatory environment. However, the situation changed dramatically with EU accession due to several developments within the Polish legal system.

Why Implement Cash Pooling between Germany and Poland?

The close economic relationships and the fast growing Polish economy are two main factors for the development of corporate business between Germany and Poland. The large market for goods and the lower level of qualified labour wages are reasonable bases for establishing sales or production units of multinational companies in Poland (including large German companies). The need for optimizing intra-group corporate liquidity demands the inclusion of Polish group accounts into the existing cross-border cash pool or the implementation of a new cross-border cash pooling structure. However, before implementing such cash pooling structures, all circumstances have to be carefully analyzed.

Current Tax and Legal Circumstances

Polish law has so far not explicitly recognized cash pooling, especially its cross-border version, or any structure similar to cash pooling. Therefore, it is possible that whenever a transfer of funds from/to a Polish company to/from a foreign company takes place, it will be interpreted – within the framework of civil law activities recognized by the local law – as inter-company lending, aimed at providing financing and thus bearing (according to a general rule) CLAT of 2 per cent at each transaction, payable by the Polish participant(s) of the transaction. However, since 2004, there have been several exclusions to this general rule. These exclusions apply in particular to cases of fund transfers, which often take place in cross-border cash pooling.

Although there are no specific obstacles for cross-border funds transfers anymore, the Polish FX law still requires particular payment titles to be declared by the payer. Even if these payment titles are to be declared for the purposes of central bank reporting statistics, they can also be verified by tax authorities in case of applying the proper tax duty.

However, no other feature of EU accession has made such a huge contribution to the taxation of cash pooling operations as the sixth EU Directive. The Directive, together with the accompanying European jurisdiction, has changed the approach to taxation of cash pooling in Poland dramatically.

These new legal developments have created a solid foundation for effective cross-border cash pooling between accounts held in Polish and German banks.

Case Study: How a Multinational Set up a Cross-border Cash Pool

Although the new Polish legislation has made cross-border cash pooling less risky than it has been in the past, establishing a cash-pooling structure is still not entirely straightforward. The legal and tax considerations have given rise to a specific structure of accounts and have helped to define the proper funds sweeping/topping schemes. There are also commercial, as well as technical, conditions to be met.

One multinational paper goods company set up a cash concentration structure between its Polish subsidiary and its German parent company’s treasury centre. The structure was applicable between the company’s bank in Poland and branches of the bank in Germany. The main currency of the pooling structure was euro and all operations related to the sweeping/topping had to take place at the end and at the beginning of each business day to avoid loss of valuable date for the customers.

Sweeps are being effected not only from Poland (e.g. to import excess cash from the Polish subsidiary to the German treasury centre) but also to Poland (e.g. to repay the existing overdraft balance of the Polish subsidiary), if and when required. The scheme also allowed for triggered or targeted sweeps (whereby a certain balance in the Polish company’s account initiates a cash pooling transfer or the transfers would result in a particular balance in the Polish company’s account).

Possible Technical Solutions

For cross-border cash-pooling structures used by banks that do not share the same global operational system, there are generally two simple mechanisms that can be applied:

• The first is the one carried out by MT101 ‘request for transfer’ messages exchanged between the banks involved. The amounts transferred would be calculated on the basis of MT940 generated for the day preceding the execution of the payment. To achieve better results, intra-day account information based on MT942s could be used. Various parameters, such as minimum transfers, rounding amounts, base amounts or maximum transfer limits, can be set up individually for specific account structures and periods. Since transfers are carried out up to one day later than the balance reported there is a loss (or ‘friction’) of up to one value day. However, the use of MT101 messages to effect funds transfers allows the sweeping/topping of local currencies (e.g. Polish zloty) in an easy manner.
• The second solution is automated, physical cross-border zero balancing, which is carried out with the same-day value. To set up this mechanism, the banks involved have to work together very closely, since the funds have to be ‘swept’ or ‘topped’ bilaterally – through mutual corresponding accounts of the banks which maintain customers’ participating accounts. The sweeping or topping has to take place overnight, with the value date of the execution day (pre-end of day balances are therefore ‘swept’ or ‘topped’). Obviously, the whole cash pooling structure may be much more complicated from the customers’ point of view, covering, for example, several countries. Nevertheless, in this case only the ‘Polish leg’ or the ‘German leg’ (depending on the viewpoint) of the whole structure is considered.

Cash Pooling Structure

The figure below places the two schemes under the required main book entries. The figure focuses mainly on the exchange of messages and banks’ corresponding accounts.

In the case of several local cash pooling participants, the consolidation of the local balances of all the participants within the cash-pooling scheme (in the account of one local representative or a local ‘master company’) is recommended. Local physical cash pooling is not easy in Poland, but it is possible.

The automated, gradual consolidation of balances firstly through local physical cash pooling, then by cross-border physical cash pooling, is the most efficient way of consolidating the group’s cash position. This is recommended if local positions are kept – especially in local currencies – on more than one account.

Companies can also use the same physical cash pooling structure as they already do for their existing euro cash pool. The funds have to be either swept from the Polish participating account to the German master account or the Polish participating account has to be topped from the German master account. Companies deciding which cash-pooling structure to choose should bear in mind the following considerations:

• Polish and German legal and fiscal frameworks.
• Polish judicial evolution.
• Participants and the shareholding relationship between them.
• Directions of cross-border transfers effected under the cross-border cash pooling.
• Proper accounts structure.
• Fulfillment of obligations under the Polish FX law.
• Contracts between the banks and the customers.
• Choice of law and place of the contracts.
• Transfer limits to be set up for each participating company.
• Pooling structures available at participating banks.
• Exchange of information.
• Additional contractual arrangements between the companies, especially inter-company contracts.

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