Cash Management in Central and Eastern Europe
The presence of corporate customers in Europe has rapidly grown during the past 10 years with a high market increase in central and eastern Europe (CEE). Based on tax benefits, low real estates prices and a comparatively low wage level compared to western countries, many corporate customers have founded new subsidiaries or production centres, mainly in the eastern regions of Europe.
When establishing a new company in CEE, corporate customers need to choose the most appropriate legal structure for them. Tax and legal regulations are often the key factor in selecting the legal structure, especially if companies can receive tax privileges or financial aids. The selected legal structure can also have consequences on the available bank services within each country, as some services are only available to residents.
Focusing on the connection of the new locations and the existing treasury system, companies have to integrate their new accounts into their cash management system or electronic banking solution. Active cash management is becoming increasingly important, either driven by legislation such as the Sarbanes-Oxley Act, EU regulations or Basel II, or due to the pressure of sustaining enough liquidity to be solvent at any time. Multinational and international mid-size corporates in particular tend to concentrate on administrative accounting and establishing payment factories and they therefore need to access all their accounts in the respective countries.
There are two major goals of active cash management: being able to provide enough liquidity and optimising the interest yield. For this reason companies should avoid debit- and credit balances at the same time on the different accounts in various countries – provided there is no interest optimisation in place – and check their interest rates on all accounts in order to minimise the difference of interest rates.
In order to follow up these goals there are several preconditions:
Based on increasing global alignment, a centrally managed liquidity and treasury management is becoming more important. Companies therefore often take advantage of a variety of cash pooling instruments. They can choose from the following types:
In a national cash pooling solution, only accounts within the same country can be integrated, whereas in an international solution, external accounts can also be incorporated. Depending on enterprise size and turnover in the respective countries, a manual solution can be as useful as an automated one.
Multi-bank cash pooling solutions have a major advantage compared to mono-bank solutions, because subsidiaries may keep their established relationship with their banks, thus saving a lot of money and time changing bank connections. Virtual solutions are often used in countries with legal restrictions or foreign currency regulations. The German corporate Bosch und Siemens Hausgeräte (BSH) recently implemented a multi-bank cross-border zero balancing solution and, according to the company’s treasury manager, Kai Schrickel, one important aspect in selecting your banks is a large network in various markets. He says: “When we selected our major banks, in many cases we could rely on the existing relationships of our foreign branches at various international banks. In addition to that we set up cross-border zero balancing with banks who are not present in all countries with their own branches but cooperate with partner-banks such as the banks of the IBOS organisation. For us this was an important criterion since we could maintain a number of our already existing relationships in the various markets.”
Effective automated cash pooling falls into two categories: target balancing and zero balancing. With zero balancing, the pooling sub-accounts will be set to a value dated and ledger balance of zero and transfers will be made with same-day value. This is done by sweeping or topping the pooling sub-accounts into the master account. Zero balancing is used as domestic or cross-border pooling. As a value-added service corporate customers can be provided with third-party interest calculations in order to fulfil regulations such as the arm’s length principle.1 The basic prerequisite for using zero balancing is an agreement between the participating banks.
With target balancing a value dated account balance is calculated based on the electronic statements of account. Back values are being processed with value date equal booking day. Pre-dated value dates are taken into account and processed on the respective day. With the destination value balance provided by the corporate, combined with parameters such as minimum or maximum amounts and rounding, transactions will be calculated and executed. This kind of pooling is used for domestic and cross border pooling for local or foreign currency accounts. Banks can provide various kinds of transaction reports as well as the opportunity to manually interfere with the transactions and modify them if required. This can be very useful if the corporate has knowledge of incoming and outgoing funds that have not yet been booked on the accounts. The basic prerequisites for using target balancing are the possibility of the involved banks to deliver the electronic statements of account (MT940) and to receive or execute an international payment order (MT101).
Banks can advise on which legal and tax aspects are important for a cash pool. At the same time, we aim to provide our customers with information about relevant regulatory and tax issues for their own investigations and examination. By this means, critical questions can often be clarified in advance.
Nevertheless, all customers should discuss legal and tax aspects of the cash pool with their own in-house or external tax advisor, legal counsel or accountant. Only these persons, with knowledge of all internal structures, are in a position to give sound advice about regulatory and tax effects. For example, in some countries, including Austria, Greece and Poland, companies are liable to pay stamp duty, a fee on legal transactions based on intra-group agreements on payment transfers between parent company and subsidiary. According to Kai Schrickel, treasury manager at BSH, the company requires a global concept for their cash pooling solutions which allows them to reduce workload and delivers an optimum daily cash position. He says: “These concepts have to work in practice and have to be delivered quickly, combined with a good service and good pricing.”
Many corporate customers are focussing their activities on countries in CEE when establishing new subsidiaries. The following passage elaborates on cash pooling in Poland, as there have been many implementations in the past.
Regarding Poland, a form of stamp duty, the Civil Law Activities Tax (CLAT) has to be considered, especially when integrating non-resident (non-Polish) companies into a cash pool structure. The CLAT is related to particular civil law activities as defined in the Civil Law Code, such as non-banking lending or real-estate purchases. Therefore, inter-company lending is related to the CLAT and its various restrictions or obligations. But there are cash pooling structures that allow setting up cash pools, although not easy to realise. Before implementing an automated cash pooling structure in Poland all individual basic conditions have to be checked and the structure has to be approved by the Polish tax authority.
In January 2007, there was a change to CLAT regulations – existing cash pools are further treated to the old regulations valid until end of 2006. Since 1 January 2007, loan agreements involving Polish companies are liable to pay CLAT. The single transactions between the involved parties are now relevant, rather than just the underlying transactions as had been the case before 1 January 2007. Furthermore, lending in both directions from subsidiary to parent company and vice versa are now CLAT-relevant. The origin of the money transfer no longer determines CLAT relevance, so it makes no difference if the transfer from subsidiary to parent company is in or outside Poland As the relationship between parent company and Polish subsidiary is now CLAT relevant, cash pooling structures should now keep in mind a new constellation. With a specific pooling structure from Poland to Germany, we have no direct relationship between subsidiary and parent company, which is the key element of our solution in order to avoid CLAT relevance. Finally, funds are pooled from/to the master account of the parent or finance company located outside Poland, e.g. in Germany.
Besides cash pooling, customers expect various services regarding the daily business in accounting and cash management. The services required vary from simple account opening in local or foreign currency to a central service for accessing and managing accounts in one or more countries in CEE. Where different electronic banking solutions for each single country were implemented in the past, customers can now revert to new individual technical solutions enabling the customer to access a whole range of services via one single system.
Another solution for managing monetary transactions offered by banks is the access to the SWIFT network itself. This service is especially for corporate customers doing business in more than one location that are searching for a system with the highest security, availability and no need of providing different country formats for each target country. With ‘SWIFTNet for corporate’ customers can use one platform to access their worldwide bank accounts concerning banking transactions. Account information and payment transactions can be transmitted over the SWIFT network as well. This service is very interesting for large multinationals with huge numbers of transactions, or specific security requirements regarding SOX, or a multitude of bank accounts all over the world.
With the introduction of the single euro payments area (SEPA) in 2008, centralised liquidity and treasury management is becoming increasingly important. As SEPA grants a universally valid legal framework in the participating countries and universally valid monetary transaction types, such as credit transfer and direct debit, a central cash and treasury management is further simplified. With the launch of SEPA approaching, corporate customers can consider central management of their whole monetary transactions within Europe with only one account. Thus corporate customers can realise vast cost advantages due to lapse of accounts in each country, simplification of processing, and centralisation of accounting in the corporate group. Consequently, corporate customers are using SEPA as a chance for setting up payment factories and centralising treasury and cash management.
1The arm’s length principle is used as a benchmark for inter-company cost allocation. This means that when fixing internal transfer prices it must be examined whether a third party would have concluded the same contract as the participating group companies did. For cash management, money and capital market rates may be used as a benchmark for this arm’s length comparison.