Cash Pooling in Central and Eastern Europe
After the fall of the communist regimes and harmonisation of the legislation framework in central and eastern Europe (CEE), foreign investment has been constantly rising in this region. Just as in western Europe, corporates are looking for optimal liquidity solutions in CEE by implementing pan-European cash management structures. Though legislation has become more harmonised, there are still some obstacles to be overcome while implementing a regional pooling solution. This article focusses on the current cash pooling capabilities in the CEE region.
A cash pool is a structure involving several related accounts whose balances have been aggregated for the purposes of optimising interest paid or received and improving liquidity management. The term ‘cash pooling’ applies to managing group liquidity using both notional pooling and physical cash concentration techniques, usually referred to as zero balancing, target balancing or sweeping.
The areas that need to be considered when trying to implement a cash concentration structure are:
Cross-border notional pooling structures might be easier to implement, since no inter-company loans are created and no physical foreign exchange transactions are necessary. Areas to take into consideration when implementing such structures are:
Hungary, the Czech Republic and Slovakia joined the EU in May 2004. After accession, local legislations were adjusted and harmonised in order to comply with the EU rules. There are no restrictions on residents holding foreign currency accounts both within and outside the countries. Non-resident accounts in either local or foreign currency are also permitted. There are no exchange controls in Hungary and very few exchange controls in the Czech Republic and Slovakia. Consequently, both cash concentration techniques and notional pooling are available in the three markets:
Central bank reporting is required, payment titles must be provided when transfers between resident and non-resident accounts take place.
Even after Poland’s accession to the EU, also in May 2004, the legislation framework in Poland was still restrictive. Cash pooling is not regulated within the Polish legislation and Poland is one of the few countries in Europe in which stamp duty taxation, known as the tax on civil law transactions, is still in place. This makes the implementation of the cash concentration techniques quite difficult. However, a few banks have created some cash concentration structures that can be implemented without negative stamp duty consequences.
Regarding notional pooling, genuine notional pooling is not allowed as the central bank reserve ratios imposed on banks are calculated on the gross positions. Instead of notional pooling, interest enhancement is available at the domestic level. This is relatively expensive to arrange and, therefore, not widely used. Consequently it is offered by only a few banks. The following cash pooling structures are available in Poland:
Poland imposes central bank reporting requirements when transfers between resident and non-resident accounts take place as well.
After a difficult start, the two countries transformed themselves into democratic market economies and joined the EU in January 2007. There are no restrictions on residents holding foreign currency accounts both within and outside Romania and Bulgaria. Non-resident accounts in local and foreign currency are also permitted. Although many restrictions have been lifted recently, Romania and Bulgaria retain some exchange controls.
Cash pooling is not regulated in Romania or Bulgaria. The structures that can be implemented for the time being in these two countries are:
Central bank reporting requirements are also imposed in both countries.
The legacy of the Soviet economy and its political system continues to affect Russia and Ukraine, nearly 16 years after the collapse of the Soviet Union. The transformation process has been extremely difficult, but both Russia and Ukraine remain engaged in reforming their economy and political systems.
Residents are permitted to hold foreign currency accounts both within and outside Russia and Ukraine. In both Russia and Ukraine, residents may hold foreign currency accounts abroad, as long as they have approval from the central banks. Non-residents are permitted to open foreign currency accounts in Russia. In Ukraine, central bank approval is necessary prior to opening foreign currency accounts by non-residents.
Due to the very restrictive legal and fiscal framework, domestic cash concentration techniques are not commonly used in either Russia or Ukraine. Resident and non-resident accounts cannot participate in the same cash concentration structure. For the time being, Russian and Ukrainian companies are not allowed to participate in a cross-border cash concentration structure. Given the very restrictive foreign exchange controls, notional pooling is not offered in either Russia or Ukraine.
The use of local currencies is another factor that brings complexity when trying to implement a cash pooling structure. The following graph shows further harmonisation in this area as well, when several countries will adopt the euro.
The adoption of the euro in all the accession countries will help in simplifying the process; the future local euro accounts will be integrated in the structures and local foreign exchange transactions will disappear.
As can be seen, the implementation of cash pooling is difficult, but not impossible in most countries in the CEE region. It is, however, very important that fiscal and legal advice is requested before implementing a cash pooling structure. Though many of the restrictions have been lifted in the past few years, the issues that need to be considered when implementing a cash pooling structure are complex.