Feature

Cash pooling
Cascading cost-efficiency and control
Louise Webb, Caroline Long, Matthew Padian and Rodger Burnett of
Baker & McKenzie LLP outline different types of cash pooling, explain
its increasing relevance, and examine the legal and practical issues
involved in its use.
Illustration: Getty Images

In any corporate group, the corporate

treasury department will be concerned
to manage the group’s liquidity effi-
ciently in order to ensure that the right
levels of cash resources are available in
the right place, in the right currency and
at the right time. If successful, this can
maximise the group’s return on surplus
cash and minimise the cost of financing
cash deficits. It can also mitigate interest
rate, currency and other financial risks.

There are broadly three elements to this

process: cash flow management; funds
management; and risk management. Al-
though the recent economic crisis has in-
creased the focus on all three, this article
concentrates on cash flow management
strategies and, in particular, cash pool-
ing. It:

• Describes the different types of cash

pooling.
• Examines why cash pooling has be-
come increasingly relevant.
• Considers the legal and practical is-
sues involved in cash pooling.
• Discusses some specific European di-
mensions to cash pooling.
TYPES OF CASH POOLING
STRUCTURES
Cash flow management involves the use
of tax-efficient intra-group cash trans-
mission techniques in order to control
the working capital requirements of each
entity and the group as a whole, and to
manage the group’s requirements for
bank overdraft facilities and access to
short-term money markets. Group “cash
pooling” structures represent a common
cash flow management technique. Most
common among these are cash sweeping
and notional cash pooling.
Cash sweeping
Cash sweeping involves the physical
movement of money between the bank
accounts of group companies partici-
pating in a cash pool. Cash sweeping
programmes come in many different
forms. Most commonly, transfers be-
tween the pool accounts will be made at
the same time each day, by reference to
the balance at that time. The amount
transferred will depend on the parame-
ters established for the scheme, as agreed
between the customer group and the
bank providing the sweeping services.
Zero balancing. Zero balancing de-
scribes a cash sweeping scheme where, at
the close of business on any day, a partic-
ular bank account (a “source account”)
will be swept to create a zero balance.
There will typically be several source ac-
counts in the pool, each held by a differ-

PLC November 2009 www.practicallaw.com 25

Feature

ent operating company within a corpo-

rate group. Zero balancing in practice
To achieve zero balancing, the credit bal- Balances before close of business
ances of each source account are swept
Concentration
to a linked account (the “concentration Interest account X €0
account
account”). The concentration account is
generally held by the treasury entity €0
within the group (the “pool leader”). In
addition to sweeping positive balances Source account A Source account B Source account C
on the source accounts up to the concen-
tration account, debit balances on any €500 CR €1,000 CR €250 DR
source accounts are cancelled by means
of a sweep from the concentration ac- Sweep credit balances into concentration account
count (see box “Zero balancing in prac-
€ 500 CR
tice”). Interest Account X
Concentration
Account €1,000 CR
€1,500 CR
In each sweep (assuming the linked ac- €0
counts are held by different companies),
each movement of money creates two Source account A Source account B Source account C
transactions: an intercompany loan,
with the affiliate becoming a creditor (or €0 €0 €250 DR
debtor) of the pool leader; and a deposit.
In addition, interest earned on the bal- Cover debit balances by sweeping from concentration account
ance standing to the credit of the con-
centration account at the end of each Concentration €1,500 CR
Interest Account X € 250 DR
day will typically be paid down to the Account
€1,250 CR + accrual
pool members on a pro rata basis. €0

A zero balancing pooling structure can
serve a number of useful functions, in-
cluding eliminating interest charges on
debit balances, and allowing active man-
agement of positive cash balances by
carefully selecting the jurisdiction in
which the concentration account is lo-
cated. This allows the group to obtain
favourable returns on any surplus.
Target (or flexible) balancing. A varia-
tion on zero balancing is to set a particu-
lar amount (a cap and/or a floor), rather
than zero, as the “target” balance for lo-
cal source accounts to achieve at the end
of the day. Whether the target balance is
a credit, or even a debit, in any source ac-
count, the surplus funds will be pooled
in the concentration account, with
funds redistributed as necessary to the
various source accounts in order to
achieve the target balance.
Alternative structures. A cash sweep
programme can be developed to suit the
particular requirements of a corporate
group (for example, where are there are
tax complications) (see “Tax issues” be-
Source account A Source account B
€0
low). For this reason, a pool leader will
often open accounts in each jurisdiction
where the source accounts of local affili-
ates are held. In this way, intercompany
loan accounts can be held in one juris-
diction (see box “Cross-border cash
pooling”).
Notional cash pooling
Unlike cash sweeping, notional cash
pooling (NCP) does not involve the
physical transfer of monies between ac-
counts held by pool members. Instead, a
bank will notionally combine the bal-
ances across several accounts and pay or
charge interest on the combined balance
only (see box “Notional cash pooling in
practice”). NCP is frequently employed
by groups to maximise the return on sur-
plus cash balances and minimise group
overdraft charges.
While there are potentially many varia-
tions of an NCP programme, the basic
Source account C
€0 €0
single currency version is intended to
operate as follows:
• All positive and negative balances in
accounts of the same currency held
by each pool member with the same
bank entity are notionally aggregated
on a regular basis, to produce an ag-
gregate positive or negative notional
balance.
• The bank calculates notional interest
by reference to the positive or nega-
tive notional balance at the same
rates as those applied to each pool
member’s individual account.
• The difference between the notional
interest amount and the aggregate
net amount of interest actually paid
by or to the bank in respect of all pool
members’ accounts is then allocated
to each such account (for example, on
a proportional basis by reference to

26 PLC November 2009 www.practicallaw.com

 Feature

Cross-border cash pooling

European master Pool leader bank account

account
Account in name of pool
Country reference
leader held with Bank X
accounts
in Country Y re Country A
Account in name of pool
Country master
leader held with Bank X
accounts
in Country A
Immediate
with Bank X in Country Y
cash sweep to
concentration
account of
Account in name of pool Account in name of pool pool leader
leader held with Bank X leader held with Bank X
in Country Y re Country B in Country Y re Country C
Immediate
cross-border
cash sweep
Account in name of pool Account in name of pool
leader held with Bank X leader held with Bank X
in Country B in Country C

Intercompany loan Zero balance

Country A Country B Country C

Country affiliate Subsidiary account in Subsidiary account in Subsidiary account in
accounts name of local affiliate name of local affiliate name of local affiliate
(Credit) (Debit) (Credit)

the account balances of each pool
member at the end of each month), or
can be credited to a separate interest
account.
Cross-guarantees. When establishing an
NCP programme in the UK, the bank ad-
ministering the pool will often require
cross-guarantees between the pool mem-
bers. This then permits the bank offering
the NCP service to offset credit and debit
balances in the various accounts of pool
members. A cross-guarantee clause of
this nature is quite common in UK
banks’ NCP documentation. In particu-
lar the Prudential sourcebook for Banks,
Building Societies and Investment Firms
(BIPRU) of the Financial Services Au-
thority (FSA) Handbook [house style –
we call it FSA Handbook rather than
FSA’s Handbook] acknowledges that
cross-guarantees help to create mutual-
ity of debts between a group of closely re-
lated counterparties, permitting a bank
to report transactions on a net basis. This
can have a significant impact on a bank’s
capital adequacy requirements (and so
facilitate reduced rates for the NCP serv-
ices a bank provides).
Resident and non-resident accounts. In
various EU member states, different
rules apply to accounts held by resident
as opposed to non-resident entities. This
may make the use of NCP impracticable
or even uneconomic. One possible solu-
tion is to sweep surplus cash (often using
zero balancing) to a country where NCP
is commonly used (for example, the UK)
and establish a notional pool there (see
“Cash sweeping” above). The alterna-
tive is to establish a permanent, taxable,
presence in the jurisdiction in question.
Intercompany loans. While an actual
sweep between different affiliates cre-
ates an intercompany loan balance, the
legal position is less certain with NCP,
and varies from country to country. Ac-
cordingly, and because the bank offering
the customer the NCP “solution” will
often require an indemnity to protect it-
self against the risk of any element of a
structure being found to be illegal or to
create a tax liability in the hands of the
bank, tax advice should be taken before
entering into NCP documentation.
INCREASING RELEVANCE
Cash pooling has become increasingly
relevant for a number of reasons. Since
the onset of the credit crunch in 2008,
debt finance provided by banks has be-
come less readily available. The restric-
tion of access to cheap external funding
has increased groups’ need to maintain
tighter internal controls over liquidity in
order to allow them to continue to fund
their operations without recourse to ex-
ternal funding, where possible.
In addition, in the current economic cli-
mate there has been a general trend for
groups to move away from riskier short-
term investments in favour of pooling
cash balances which remain within the
exclusive control of the group.
And even before the downturn of 2008,
there was a prevailing trend towards cen-
tralisation, standardisation and au-
tomation of groups’ treasury manage-
ment processes, with a view to achieving
cost efficiencies and improving control
over cash flow.
Finally, cash pooling as part of a coher-
ent cash management system allows a
group to know its cash position at any
given time both at a group and entity
level. It also enables a group to under-
stand its own risks (for example, coun-
terparty solvency, funding, interest, for-
eign exchange). Current market condi-
tions have increased companies’
sensitivity not only to their own liquid-
ity, but also to that of counterparties. In-
creasingly, companies rely on an analysis
of a prospective counterparty’s liquidity

PLC November 2009 www.practicallaw.com 27

Feature
Notional cash pooling
Balances before close of business
Interest account X Notional account €0
€0
Source account A Source account B Source account C
€500 CR €1,000 CR €250 DR
Calculating the notional balances
€ 500 CR
€1,000 CR
Interest Account X Notional account € 250 DR
€1,250 CR + accrual (notional)
€0
Source account A Source account B Source account C
€0 €0 €250 DR
Posting accrued interest to interest account after end of agreed interest period
Interest Account X Notional account
Accrual
Source account A Source account B Source account C
before entering into commercial rela- such arrangements and, in doing so, pay
tionships. As there is a reluctance to close attention to ensure they are wear-
place heavy reliance on information pro- ing the correct “hat” for each of the in-
vided by rating agencies, as this tends to dividual companies for which they hold
be historic in nature, the counterparty office. A cash pool might be beneficial
will frequently, turn to its treasury de- for a group as a whole but potentially
partment to obtain a report on its own unfavourable for an individual affiliate,
liquidity as a means of providing com- particularly if the group’s financial for-
fort. tunes alter with time, such that a finan-
cially strong and viable entity may effec-
LEGAL AND PRACTICAL ISSUES tively end up supporting the weaker af-
There are a number of legal and practi- filiates.
cal issues that must be considered by any
group contemplating adopting cash In complying with these duties, and de-
pooling arrangements. termining whether a transaction bene-
fits a company, the directors of a com-
Corporate benefit pany are required to consider (and to
When considering the merits of enter- continue to consider) the benefit accru-
ing into a cash pool, it is all too easy for ing to that company alone (section
the directors of a group to consider the 172(1), Companies Act 2006) (2006 Act).
potential group-wide benefits only. However, where a benefit to the group as
However, directors (particularly those a whole, or to a key member of a group,
who hold common directorships across may indirectly benefit the company, this
several entities within a group, includ- may be taken into consideration (Char-
ing the treasury entity) should monitor terbridge Corp v Lloyds Bank Ltd [1970]
28
Ch 62). For example, the company may
benefit where entry into a transaction is
necessary to ensure continued funding
for the group, and either:
• Entering into the transaction is neces-
sary to maintain the solvency of the
holding company on which the entity
is reliant; or
• The group’s activities are so closely
interrelated and interdependent that
the failure of one group entity would
adversely affect all the others.
In light of the above, directors clearly
have to exercise their individual duties
with care when considering the merits of
committing each company for which
they hold office to a cash pool. In addi-
tion to complying with the existing well-
known common law duty to act in the
best interests of each such company (or
the company and its creditors as a whole
where its financial status is uncertain),
they should bear in mind that the Com-
panies Act 2006 now obliges company
directors to act in the way they consider,
in good faith, would be most likely to
promote the success of the company for
the benefit of its members as a whole
(section 172). (Although the 2006 Act
has codified the common law obliga-
tions of company directors, the com-
mon law continues to be of relevance, as
the general duties specified in sections
171 to 177 of the 2006 Act are to be inter-
preted and applied in the same way as
the common law rules or equitable prin-
ciples, and regard shall be had to the cor-
responding common law rules and equi-
table principles in interpreting and ap-
plying the general duties (section 170(4),
2006 Act)).
A failure by a director to comply with his
duties can result in personal liability
(section 178(1), 2006 Act). Alternatively,
in the event of a subsequent insolvency,
the directors (including actual, de facto
and shadow directors) run the risk of
personal liability for wrongful trading
(section 214, Insolvency Act 1986) (1986
Act) if the arrangement results in the
company’s assets being depleted or its li-
abilities increased (Re Produce Market-
ing [1989] BCLC 520).
PLC November 2009 www.practicallaw.com

Capacity and authorisation
Before a company enters into cash pool-
ing arrangements, its memorandum and
articles of association should be checked
to ensure that it has the corporate power
to enter into the transactions contem-
plated under the cash pooling arrange-
ments (for example, the granting and
taking of intercompany loans, and the
issuance of any required guarantees).
Guarantees
Pool members are commonly required
to guarantee the liabilities of every other
participant in a cash pool to the account
bank. Such guarantee arrangements are
typically required so that, if any group
company becomes insolvent, the bank
may set off the liability of another guar-
antor group company against the sums
due from the insolvent entity.
Such transactions involving the giving of
guarantees may be susceptible to chal-
lenge in the event that the guarantor
(with its centre of main interests in Eng-
land and Wales) subsequently enters in-
solvency. This may be because the trans-
action (that is, the cash pooling arrange-
ment or part of it) in relation to which
the guarantee is given is shown, to the
court’s satisfaction, to constitute a pref-
erence in favour of the bank or another
group entity (section 238, 1986 Act).
Whether these issues might arise in the
context of a cash pooling arrangement is
largely dependent on the facts in ques-
tion. However, it seems likely that the
English courts will take a pragmatic ap-
proach, as evidenced by the House of
Lords’ decision in Phillips v Brewin Dol-
phin Bell Lawrie Ltd ([1999] 2 ALL ER
844). In that case, the House of Lords de-
termined that when considering
whether there had been a transaction at
an undervalue, it was appropriate to
measure the consideration moving be-
tween the parties by reference to the ben-
efit derived from a number of group-
wide and entity-specific related transac-
tions. In a cash pooling context, this
might mean that it is appropriate, where
an individual pool member enters insol-
vency, to consider the cash pooling
transactions as a whole, rather than
cherry-picking one particular element
PLC November 2009 www.practicallaw.com
of the transactions only as potentially
falling foul of any insolvency rules.
Although it may be possible to stave off a
challenge using any of the available statu-
tory defences (in the case of transactions
at undervalue, that the transaction was
entered into in good faith, for the pur-
pose of carrying on its business and there
were reasonable grounds for believing
the transaction would benefit the com-
pany, or in the case of preferences, that
the entity in question was not influenced
by a desire to put the relevant person in a
better position than it would otherwise
have been on an insolvent liquidation of
the company), individual directors need
to pay careful attention to the ongoing
solvency of members of a cash pool and
to record the ongoing justification for the
arrangement. This is of paramount im-
portance where a group hits a period of
financial difficulty and one pool member
is effectively supporting the others.
Financial assistance and share capital
maintenance
Financial assistance is unlikely to be of
concern with cash pooling, because cash
pooling is rarely (if ever) undertaken
with a view to funding the acquisition of
shares in a company. Moreover, private
companies are, in any event, no longer
prohibited from giving financial assis-
tance for the acquisition of their own
shares or those of their (private) holding
company (section 1295 and Schedule 16,
2006 Act).
Existing common law rules relating to
the maintenance of share capital may be
relevant, however. By way of example, a
company may only declare a dividend
using profits legally available for distri-
bution, and should not use monies
sourced from a cash pool to declare a
dividend where it has insufficient dis-
tributable profits to make such distribu-
tion (section 830, 2006 Act).
FSMA
The Financial Services and Markets Act
2000 (FSMA) provides that no person
may accept deposits in the course of car-
rying on a deposit-taking business in the
UK unless so authorised or exempted
under FSMA (section 327).
Feature
To ensure that the borrowing of inter-
company loans by any company under
cash pooling arrangements will not con-
stitute the taking of deposits for the pur-
pose of FSMA and will fall outside the
ambit of the above restriction, the inter-
company loans should always be pro-
vided by an entity within the same cor-
porate group.
Deposit money
The inclusion in a cash pooling arrange-
ment of money that is on deposit can
raise significant issues.
Special purpose trusts. If a company
borrows money for a specific purpose
(other than under the cash pooling
arrangements), those monies should not
be transferred into the cash pool (Bar-
clays Bank Ltd v Quistclose Investments
Ltd [1970] AC 567). There may be a
number of consequences if they are; for
example:
• The lender may be able to trace those
monies into the pool and reclaim
them.
• The deposit may breach the terms of
the financing (that is, that the monies
be used only for the specific purpose),
and may therefore trigger the events
of default provision in the financing
documents. This could have a
“domino effect” if any of the relevant
operating company’s other agree-
ments contain cross-default provi-
sions.
• The terms of the cash pooling docu-
ments themselves may be breached,
which may trigger termination rights,
for example, on the part of the bank
operating the cash pool.
Fiduciary obligations. Any monies
which the relevant operating company
does not legally and beneficially own
should not be deposited to a cash pool-
ing account.
If it receives funds as a trustee, whether
by way of a formal trust arrangement or
an informal one (for example, where it
has assigned its right to the funds to an-
other person), the company may breach
29
Feature
its fiduciary duties to the beneficiary of
those monies if it deposits the monies
into the cash pool.
A breach of fiduciary duties gives rise to
a number of rights in the beneficiary,
such as the right to force the trustee to
account for the monies (which may re-
quire the trustee to pay out monies from
its own funds if the trust monies cannot
be recovered) and a right to sue the
trustee for any damages suffered by the
beneficiary (Attorney General v Blake
[2001] 1 AC 268). If the trust arrange-
ment exists because of an assignment
(for example, of receivables by way of se-
curity), the deposit of the monies into
the cash pool may also breach the terms
of that assignment (which will likely
have its own additional consequences,
such as enabling the exercise of accelera-
tion and/or other enforcement rights un-
der the underlying agreements to which
the security assignment relates).
Existing contractual obligations
Cash pooling participants need to be
comfortable that their execution of any
documents relating to the pooling
arrangements will not conflict with any
other arrangements to which they are, or
may become, a party.
For example, a company may need to
obtain waivers and/or consents in order
to enter into the pooling arrangements
and the related documents if its financ-
ing documents contain provisions
which:
• Restrict the company from entering
into cash pooling or other cash man-
agement arrangements.
• Prohibit the company from granting
guarantees or set-off rights and/or
making or borrowing loans (whether
to or from a group company or other-
wise).
• Require a company to enter into
transactions with a group company
only on arm’s length terms.
Set-off rights
It is not uncommon for banks that offer
cash pooling services to require an as-
30
surance that, in the event of a pool mem-
ber with a debit balance entering insol-
vency, the bank shall have the right to
settle such debts using funds held in
other pool accounts. Contractual set-off
rights granted to “secure” the obliga-
tions of third parties (not in support of
the obligations of the grantor) may re-
quire registration at Companies House
(section 860, 2006 Act) (unless the
arrangement qualifies as a security fi-
nancial collateral arrangement under
regulation 4(4) of the Financial Collat-
eral Arrangements (No.2) Regulations
2003 (SI 2003/3226)[have omitted the
“as amended”, as we cite all SIs and
statutes on the assumption they’re the
most up-to-date iteration]).
Where different accounts are held by the
same entity, the ability for banks to off-
set a debit balance in one account with a
credit balance in another, or to combine
those accounts, is quite standard. How-
ever, difficulties may conceivably arise
where a bank purports to exercise set-off
rights with respect to accounts held by
different affiliates and located in differ-
ent jurisdictions, particularly where one
of those affiliates enters insolvency in a
jurisdiction which may not recognise the
underlying set-off right.
Payment services
Cash pooling services are often provided
by banks together with a range of other
cash-management services, which may
include electronic banking arrange-
ments and money transfer services. The
latter are likely to qualify as “payment
services”, which are subject to regula-
tion by the FSA from 1 November 2009
when the conduct of business obliga-
tions under the EU Payment Services Di-
rective (2007/64/EC) are implemented in
the UK through the Payment Services
Regulations 2009 (SI 2009/209) (2009
Regulations). There will also be an FSA
licensing obligation for providers of
payment services who are currently out-
side the scope of FSA regulation.
Under the 2009 Regulations, it is possi-
ble for the parties to “contract out” of
the majority of the conduct of business
requirements provided that the payment
service user is not a consumer, a micro-
enterprise (typically an enterprise
which, at the time a contract for the pro-
vision of payment services is entered
into, employs fewer than ten persons
and whose annual turnover does not ex-
ceed €2 million (EC Regulation of 6
May 2003 (2003/361/EC)), or a charity.
This effectively means that where a pay-
ment service provider deals with a cus-
tomer that is a corporate entity or a fi-
nancial institution, it will be possible to
contract out of the conduct of business
requirements contained in the 2009 Reg-
ulations.
However, some banks may wish to com-
ply with elements of the 2009 Regula-
tions even where it is possible to contract
out of certain obligations. This may be
case, for example, where banks seek to
comply with other voluntary codes of
practice, including, for example, the
FSA’s Treating Customers Fairly initia-
tive.
Other issues
There are many potential legal and prac-
tical issues in the context of cash pool-
ing, but other matters that merit partic-
ular consideration when reviewing cash
pooling documentation include the fol-
lowing:
• Data protection and confidentiality:
where personal data is processed by a
bank in the course of providing cash
pooling services (for example, infor-
mation such as contact names, email
addresses, telephone numbers and
addresses of directors of the pool
members), the Data Protection Act
1998 may impose certain restrictions
on the banks that use such informa-
tion.
• Currency control and other local li-
censing regulations: where a cross-
border pool is established, local
counsel’s advice should be sought on
whether any local currency or foreign
exchange rules, or licensing require-
ments, may apply. This advice should
consider the relevance of the location
of the pool accounts. For example, is
it necessary for cash physically to
move to or from an account in the rel-
evant jurisdiction, or can local cur-
PLC November 2009 www.practicallaw.com
 Feature

rency control/foreign exchange rules

apply even if there is no physical
movement of monies in the relevant
jurisdiction?
• Reporting obligations: steps need to
be taken to determine whether the ju-
risdiction in question has rules relat-
ing to the reporting of cross-border
financial transactions that apply to
cross-border pooling scenarios.
Spain is one such example (see “Euro-
pean issues” below).
TAX ISSUES
Depending on the type of cash pool cre-
ated, a range of tax issues will need to be
considered.
Withholding tax
The potential for withholding tax (see
Glossary) on interest payments between
pool members in respect of any inter-
company loans and the bank will be a
critical issue. Where withholding tax on
interest may be payable, consideration
should be given to whether relief may be
available under a double taxation treaty.
Glossary
Thin capitalisation. The situation where a company has a very low equity capital as
compared to the amount of debt it owes. In the UK (and in many other jurisdictions
throughout the world) the tax regime differentiates between dividends and interest.
Dividends are not tax deductible in computing the taxable income of a company,
whereas interest is. This influences the decision as to whether a company should be
provided with equity capital or debt. Many tax regimes have rules to ensure that com-
panies have a fair proportion of equity capital so that taxable profits cannot be min-
imised in this way. These may apply where the company has an inadequate debt: eq-
uity ratio or interest coverage.
Transfer pricing. Prices at which associated entities transfer goods, services and other
assets between each other, for example, between group companies. In the absence of
preventative legislation, connected companies would be able to manipulate transfer
prices to create tax advantages by, for example, setting them at a level which would en-
able them to move profits to a lower tax jurisdiction. Anti-avoidance legislation in
many jurisdictions (including the UK) permits the tax authorities to adjust the amount
of income earned or expense accrued on transactions between affiliates, including in-
tra-group debt and related interest, where it appears that the transaction was not at
arm’s length.
Witholding tax. The collection at source of income tax in respect of recurring payments
by requiring the payer to make a deduction on account of income tax before making
the payment. Witholding tax frequently applies to dividends (although not those paid
by UK companies), interest and royalties. This liability is often reduced or eliminated
under a double taxation treaty.

VAT
Any loans entered into by group compa-
nies in connection with a cash pool
should normally be treated as an exempt
supply for UK VAT purposes (Group 5,
Schedule 9 Value Added Taxes Act
1994). However, VAT costs may arise in
connection with other elements of the
cash pooling structure (for example,
service charges by the group treasury
company to pool members). It will be
important to identify these costs and to
determine the VAT recovery position of
the cash pool members in relation to
overheads.
Transfer pricing
The cash pool members which are in a
debtor position may have to consider
their thin capitalisation position under
local tax rules to ensure that their intra-
group interest payments are deductible
for tax purposes. The cash pool mem-
bers which are in a creditor position may
also have to ensure that their intra-group
interest income is at arm’s length, in or-
der to satisfy any transfer pricing issues.
It may also be appropriate for a group
treasury company to be paid an arm’s
length fee for any services that it pro-
vides to cash pool members, or for cash
pool members to be paid a fee for guar-
anteeing the obligations of other mem-
bers of the cash pool. The group may
have to ensure that appropriate transfer
pricing documentation is maintained to
support the cash pool members’ tax fil-
ing positions.
Permanent establishment
In certain jurisdictions, a cash pool
member might be deemed to have a per-
manent establishment by reason of
holding a pooling account in that juris-
diction or as a consequence of a group
treasury company’s activities on its be-
half in that jurisdiction. This may mean
the company is taxable in that jurisdic-
tion.
Stamp duty
Stamp duty would not be chargeable in
the UK on intercompany loans entered
into as part of a cash pool. However, it is
not unknown for stamp and capital du-
ties to be charged on intercompany
loans in certain jurisdictions, and this
may affect the costing of a multinational
pooling structure.
EUROPEAN ISSUES
Establishing a European cash pool can
be extremely complicated because of lo-
cal differences in the treatment of cash
pooling structures. The regimes in Ger-
many, France and Spain in particular
present a number of issues for groups
considering such a structure.
Germany
Recent German legal developments can
cause conflicts with many physical, cash
sweeping systems (see “Cash sweeping”
above).
Capital contributions. Problems with
capital contributions may arise where a
GmbH or AG vehicle is set up or where a
shareholder attempts to increase the reg-
istered share capital of any such German
entity. Capital contributions made in
cash (as opposed to in kind) must be

PLC November 2009 www.practicallaw.com 31

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Topics
Maintenance of capital and shareholder rights
Cross-border: finance
Cross-border: tax
Practice notes
Loan relationships
Thin capitalisation and transfer pricing
Financing multinational groups: tax issues
Witholding tax
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credited to a bank account that is man-
aged and controlled by the company’s
managing director(s). This poses an im-
mediate problem for many physical cash
pooling structures, which typically fea-
ture a concentration account to which
funds are automatically pooled and
which is administered by a finance com-
pany acting for an international group
of companies. If the proceeds of the cap-
ital increase are required by the cash
pool agreements to be paid directly into
the cash pool account, the contribution
will not be controlled by the managing
directors.
Germany’s Federal Court (Bundes-
gerichtshof) held in 2006 that a capital
increase payment initially made to the
company’s own account but subse-
quently transferred to the group’s cash
pool account did not suffice in order to
pay up the additional share capital. Ac-
cordingly, the shareholders were re-
quired to pay in the amount again to sat-
isfy the share capital requirements. The
court held that a company cannot be re-
leased from its statutory obligations
simply because it is part of a cash pool-
ing system (judgment dated 16 January
2006, II ZR 76/04 (Higher Regional
Court Dresden)).
Capital maintenance. German law pre-
scribes that the capital necessary to
maintain a company’s share capital,
such company being incorporated as a
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limited liability company (Gesellschaft
mit beschrankter Haftung: generally the
most popular legal form for companies
in Germany), must not be paid to its
shareholders (section 30 and following,
German act on Limited Liability Com-
panies). However, as part of a cash pool,
company accounts are regularly swept
up to a group-wide cash pool account
(which may be held by a shareholder of
such a German limited liability com-
pany).
Even though a pool member acquires a
claim against the pool recipient in
whose favour its account is swept, Ger-
many’s Federal Court has ruled that any
such payment to a shareholder of a Ger-
man limited liability company violates
German capital maintenance rules
(judgment dated 24 November 2003, II
ZR 171/01 (Higher Regional Court
Nürnberg)). The consequences of a vio-
lation of these capital maintenance
rules are:
• A requirement for immediate repay-
ment by the shareholder.
• Potential personal liability of the
managing directors of the German
company to its shareholders (which is
a very real risk in the event of the
company’s insolvency and in the
event that the recipient of such pay-
ment cannot repay such sum). In rare
cases, the directors of such a Ger-
many company may also incur crimi-
nal liability.
Overcoming the risks. In an effort to
overcome these issues, new legislation
has been introduced in Germany that in-
troduces cash pooling rules in the con-
text of wider corporate law changes.
Under the new regime, payments to a
cash pool account are explicitly permis-
sible provided that the paying company
has a full claim against the recipient for
repayment. However, the managing di-
rector remains personally obliged to en-
sure that such a claim exists and, in the
event of doubt, to immediately enforce
the company’s claim for repayment to
avoid incurring personal liability.
For this reason, a German pool mem-
ber’s managing directors need to be
given the right to terminate the German
entity’s participation in a cash pool by
notice. In addition, in order for a manag-
ing director to be able to monitor the fi-
nancial situation of the company’s
shareholders, he needs to have access to
certain information regarding the rele-
vant shareholders, and provisions to this
effect may also be included in the docu-
mentation.
France
France has traditionally been a difficult
country for cash pooling because differ-
ent regulations may apply to resident
and non-resident accounts (some of
which may not be interest-bearing). This
may make the use of a notional pool im-
practicable or even uneconomic (see
“Notional cash pooling” above). One
possible solution is to sweep the surplus
cash (probably using zero balancing) to
a country where NCP is permitted (for
example, the UK) and establish a no-
tional pool there.
Another option would be for the group’s
bank (based in a country with no legal
barrier to NCP) to consolidate the
group’s balances on the bank’s own
“nostro” accounts maintained with an-
other bank(s), thereby effectively creat-
ing a notional pool. An effective elec-
tronic banking system would enable the
customer to monitor its position on an
intra-day or real-time basis.
PLC November 2009 www.practicallaw.com

Spain
Spain is a good example of a jurisdiction
where cash pooling arrangements, al-
though not specifically regulated, can be
caught by detailed regulatory reporting
requirements.
The Bank of Spain regulations on for-
eign accounts and foreign loans may af-
fect cash pooling structures (and even if
the Spanish participant does not open
bank accounts abroad, the structure it-
self may qualify as a foreign account
structure), so the Bank of Spain should
be informed in advance of any cross-
border cash pooling agreements entered
into by companies organised or domi-
ciled in Spain.
For these purposes, a written notice de-
tailing the specific cash pooling operat-
ing procedure should be given to the
PLC November 2009 www.practicallaw.com
Bank of Spain, along with a Bank of
Spain DD-1 form on foreign accounts, at
least ten days before the implementation
of the cash pooling arrangements in or-
der to ascertain the formal declarations
required by the Bank of Spain for this
particular structure.
Once the Bank of Spain has reviewed the
explanatory note and form DD-1, it will
tell the Spanish-related company
whether any additional information or
reporting is required. These additional
information reporting requirements
may be triggered by (among other fac-
tors) any foreign loans, set-offs of re-
ceipts, and payments or intercompany
credits or debits exceeding certain
thresholds between the Spanish partici-
pant and any non-resident companies
(subject to the Bank of Spain’s specific
advice, as a general rule loans to or from
Feature
non-Spanish companies over €3 million
and set-offs with non-Spanish compa-
nies over €600,000 may give rise to addi-
tional reporting requirements).
Other reporting obligations may arise
during the life of the cash pooling
arrangements, depending on the
amounts periodically transferred to
and/or from the Spanish participant’s
source account to and/or from the for-
eign target account. Failure to provide
the Bank of Spain with the required noti-
fications could trigger administrative
sanctions, mainly in the form of fines
imposed on the Spanish participant.
Louise Webb and Caroline Long are
partners, and Matthew Padian and
Rodger Burnett are associates, at Baker
& McKenzie LLP.
33