EACT Regulatory framework, legal and tax constraints for centralized cash management Guides ECHNICAL

December 2008

EACTRegulatory framework,legal and tax constraints for centralized cash management

GuidesECHNICAL

Marc

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Austria - Belgium - BrazilChina - Czech Republic

Denmark - France - GermanyIndia - Ireland - Italy

Japan - LuxembourgMauritius - Mexico

The Netherlands - PolandPortugal - South Africa

Spain - SwitzerlandUnited Kingdom

United States of America

Price : 100 € (including VAT)

The information presented in this present document may under no circumstances be construed to be advice or legal assistance,as defined by the French Law no 90-1259, dated December, 31st, 1990.

DÉPOT LEGAL n° 13353

EACT – the European Association of Corporate Treasurers – includes 18 associations of corporate treasurers of 17 countries of the EuropeanUnion. It brings together about 8,100 members representing 4,600 groups/companies located in the EU.

HistoryWhen it was formally set-up in May 2002, EACT wasnamed the Euro Associations of Corporate Treasurersand was restricted to associations of corporatetreasurers of the euro area.In October 2004, EACT became the EuropeanAssociations of Corporate Treasurers and is open toany association of corporate treasurers and financeprofessionals of the European Union.

MissionsThe European Association of Corporate Treasurers(EACT) is a grouping of national associationsrepresenting treasury and finance professionals.Speaking with a united voice, the EACT creates agreater impact than the sum of its individualcomponent actions. This gives prominence to theissues faced by treasury and finance professionalsacross Europe with the European authorities,national governments, regulators and standard-setters.Together we promote the value of treasury skillsthrough best practice and education. We ensure thatthe treasury role continues to evolve as an essentialcomponent within a dynamic financial environment.

Technical CommissionsThe Board of Directors selects the topics on whichEACT will work as well as the general objectives. TheEACT Board member in charge will in most casesset-up a Commission headed by a Chairman andwith members in several EACT associations.

They are:- Means of payment and SEPA: Gianfranco Tabasso- Transfer pricing in treasury: Luc Vlaminck and

Bruno Resseguier- International accounting standards:

François Masquelier and Mark Kirkland- Rating agencies: John Grout and Patrice Tourlière- Compliance and codes of conduct:

Charles-Henri Taufflieb- CAST: Gianfranco Tabasso.

Current EACT MembersEACT includes 18 associations of 17 countries of the European Union representing about 4,600 companies/groups and 8,100 corporatetreasurers and finance professionals.

The 18 associations are:- ACT, The Association of Corporate Treasurers (UK)- AFTE, Association Française des Trésoriers

d’Entreprise- AITI, Associazione Italiana Tesorieri d’Impresa- ASSET, Asociacion Espanola de Financieros y

Tesoreros de Empresa- ATEB, Association of Corporate Treasurers in

Belgium- ATEL, Association des Trésoriers d’Entreprise au

Luxembourg- CAT, Czech Association of Treasury- DACT, Dutch Association of Corporate Treasurers- FACT, Finnish Association of Corporate Treasurers- GEFIU, German Financial Executives Institute

(Gesellschaft fûr Finanzwirtschaft in der Unternehmensführung e.V.)

- HTC, Hungarian Treasury Club- IACT, Irish Association of Corporate Treasurers- ÖPWZ, Forum Finanzen (Austria)- PCTA, Polish Corporate Treasurers Association- SACT, Swedish Association of Corporate

Treasurers- SAF, Slovak Association of Finance and Treasury- SCTA, Slovenian Corporate Treasurers Association- VDT, Verband Deutscher Treasurer.

For further information, you may visit EACT websitewww.eact.eu

or send an email [email protected]

Phone: +33 (0)1 42 81 53 98

or write to EACT, 20 rue d’Athènes, F 75 009 Paris

EGULATORY FRAMEWORK, LEGAL AND TAX CONSTRAINTSFOR CENTRALIZED CASH MANAGEMENT

March 2009

RSUMMARY

CONTRIBUTORS 3

INTRODUCTION 5

CASH MANAGEMENT IMPLEMENTATION:

ISSUES TO BE CONSIDERED 7

CASH MANAGEMENT IN: Austria 9Belgium 23Brazil 37China 47Czech Republic 67Denmark 79France 89Germany 111India 125Ireland 137Italy 147Japan 165Luxembourg 177Mauritius 191Mexico 205The Netherlands 217Poland 229Portugal 247South Africa 261Spain 277Switzerland 291United Kingdom 303United States of America 317

REGULATORY FRAMEWORK, LEGAL AND TAX CONSTRAINTSFOR CENTRALIZED CASH MANAGEMENT

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March 2009

Technical guides EACT

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CONTRIBUTORSThis publication has been drawn up by:

AUSTRIA * Stefan Tiefenthaler - Klemens Keferböck Binder Grösswang Rechtsanwälte OEG

BELGIUM * Benoit Feron - Frédéric Heremans - Benoit Malvaux NautaDutilh

BRAZIL Robert E Williams - Alexandre Leander Delgado Noronha Advogados

CHINA Charles Qin Llinks Law Offices

CZECH REPUBLIC * Josef Otcenasek Havel & Holasek s.r.o., Advokátní kancelářDita Sulcova - Věra Pastikova Tacoma Tax Consulting s.r.o.

DENMARK Claus Molbech Bendtsen - Ricki Boye Lett

FRANCE * Jean-François Adelle - Joel Lambert Jeantet Associés

GERMANY * Georg Edelmann - Sebastian Bock Nörr Stiefenhofer Lutz

INDIA Shivendra Kundra - Rama Kant Rai Kundra & Bansal

IRELAND * William Johnston - Niamh Caffrey Arthur Cox

ITALY * Goffredo Guerra DLA PiperGilberto Comi Carnelutti Studio Legale Associato

JAPAN Hiromasa Ogawa - Hitomi Sakai Kojima Law Offices

LUXEMBOURG * Jean-Marc Delcour Loyens & loeff

MAURITIUS Iqbal Rajahbalee - Joel Lambert BLC

MEXICO Jorge A. Sánchez Dávila - Rosario Huet Covarrubias Goodrich, Riquelme y Asociados

THE NETHERLANDS * R.L.S. Verjans - S.W.A. Deckers - S. den Boer Simmons & SimmonsC.W.Plugge - C. Scholten Simmons & Simmons

POLAND * Łukasz Szegda - Michał Bernat Wardynski & Partners

PORTUGAL Antonio de Mendonça Raimundo - Rute Martins Santos Albuquerque & Associados

SOUTH AFRICA Clinton van Loggerenberg - Kefiloe Kgomo Deneys Reitz Attorneys

SPAIN * Pere Kirchner Baliu Cuatrecasas

SWITZERLAND Martin Hess - Simone Hofbauer Wengerlaw RechtsanwâlteRegula Grunder - Remy Bärlocher Wengerlaw Rechtsanwâlte

UNITED KINGDOM * Gwendoline Godfrey DMH Stallard LLPGeorge Hardy Ernst & Young

UNITED STATES Elizabeth Leckie Allen & OveryBill Satchell O’Melveny & Myers

EACT thanks all participants and specially Jean-François Adelle, partner Jeantet Associés,for their contribution to this publication.

* EACT member"Any copy or reproduction, in whole or in part, of this document made without the authorisation of the author(s) or the persons possessing the legal right thereto, or their heirs, is forbidden by the Law of March 11th 1997, paragraph 1 of article 40. Any copy or reproduction, by any means whatsoever, would represent a forgery and as such could be sanctioned in accordance with articles 425 and seq of the French Penal Code. The Law of March 11th 1957 only authorises, in accordance with paragraphs 2 and 3 of article 41, copies or reproductions that are strictly reserved for the private usage of the person copying the document and not for general usage, or for short quotations and analyses."

© 2009 European Association of Corporate Treasurers (EACT)

March 2009


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INTRODUCTION

Cash management includes all forms of management and allocation of financial resources within agroup of companies. It includes intra-group cash pooling, which consists in centralizing cash surplusesand cash needs, and payments and debt collection arrangements.

Centralizing cash management fulfils several objectives. Redistribution of available cash enables abetter use of resources and reduces the need for more costly banking facilities. Centralizedmanagement also allows the group signature on debt instruments markets to be concentrated at oneplace within the group. As a result it allows each member company to obtain better conditions.Centralized cash management also enables a better forecast and management of financial risks.

Surplus cash of member entities is routed through the centralizing company to the other memberentities having cash needs, and any group surplus remaining is invested. The centralizing company andthe centralized participant companies each maintain accounts, respectively the “central account” andthe “secondary accounts”. The centralizing company is, often in practice, the parent company. Cashpooling is usually performed by regular transfers from secondary accounts into the central account(zero balance account). These transfers are executed by the depository with which the accounts wereopened. Centralization of cash management therefore implies effective cash transfers between theaccounts of participating companies.

Cash pooling can sometimes take the form of a simple pooling of interest, without movement offunds, called notional pooling. In such case, each company holds an account with the same depositoryinstitution. This depository agrees either to charge interest, commissions and fees or allocate rebateson a net basis, as if all accounts were merged into one single account, giving rise to “intellectual”netting among the participating companies.

In cash management of payments and debt collection schemes, internal payment transactions aremade by debiting or crediting the relevant company’s clearing accounts, maintained by the centralizingentity. Payments due to external third parties are made by the centralization structure out of thecentralization bank account on behalf of a centralized participant and are settled internally by debitingthe clearing account maintained by the relevant participating companies. Likewise, payments receivedby the centralizing entity on behalf of a participant are credited to the relevant group-internal clearingaccounts.

The development of centralized cash management arrangements, in recent years, has been fuelled bya search for greater profitability. Centralization has often followed restructuring transactions.Centralized cash management has taken a unique role in groups having member companies in multipleEuropean countries, due to the lifting of tax impediments on the flow of interest, to the taxcompetition intended to attract centralizing companies, and to the changeover to the Euro. The singleEuropean currency facilitates centralized management between companies situated in differentcountries of the monetary union, both because the circulating capital is denominated in the samecurrency, and because the banking conditions have been made substantially more comparable. Inaddition, having eliminated the need to change currency, the Euro has greatly simplified thetransactions necessary for centralized cash management. Centralized cash management is alsodeveloping outside of the context of the Euro and the European Union, most notably in the Dollar zoneand emerging countries.


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Centralized cash management raises tax and legal issues which one needs to identify and understandin order to safely execute and implement agreements. Such issues mostly relate to constraints underbanking regulation, company laws, tax law, mandatory reporting to central banks, and specific aspectslinked to the use of the internet.

The activities of the centralizing company, particularly the reception and the remuneration of deposits,the granting of credit and the management of payments and debt collection, are generally classifiedas banking or investment services operations, and as such may fall under the ambit ofbanking/investment services monopoly. Accordingly, it is necessary to determine whether theseactivities require a banking license (or equivalent), or whether they benefit from an exemption whencarried out exclusively within a group of companies. Other issues include notional pooling, monopolyof investment services and banking secrecy aspects.

Company law aspects primarily relate to whether the cash management agreement conforms to thecorporate benefit of the participating companies, so as to preclude the possibility of invalidly orreassessment of the agreement, protect the directors and/or shareholders against liability and avoidpropagation of insolvency procedures within the centralization perimeter. Prevention of conflict-of-interest procedures also needs to be considered. As regards tax legislations, several questions will haveto be considered: mainly VAT treatment of the financial operations, issues relating to withholdingtax/limitations on the deductions of interest paid and availability of favourable tax regime.

In the context of groups operating in more than one country, familiarity with the relevant domesticlaws of each country is imperative in order to maximize the choice of law, select the most adequateform for the centralizing company and assess the appropriateness of the contemplated remunerationterms. Within the European Union itself, despite principles held in common by the laws of the involvedcountries, there exist important differences.

Prepared under the auspices of the European Associations of Corporate Treasurers (EACT), thisTechnical Guide updates the 2004 edition by expanding it both geographically (new to this edition areBrazil, India, China and several countries from Latin America, Africa, Eastern Europe and South East Asia)and thematically (it newly covers management of payments and debt collections, foreign exchangeand rates).

The aim of this Technical Guide is to furnish an outline of the legal, regulatory and tax constraintsinvolved in the setting up of a cash management program. It is aimed at those who wish to put in placecentralized cash management involving different countries. It is not intended as a substitute forappropriate legal advice, which should take into consideration the specific nature of an actual group,the situation of each participating company, the goals to be met and the allocated resources. All errorsand omissions are exclusively the responsibility of the individual author. Any legal developmentsfollowing 30 June 2008 have not been taken into account.

Richard RAEBURN Olivier BRISSAUD Jean-François ADELLEEACT Chairman EACT Board Member Partner

European Affairs Jeantet Associés

March 2009


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CASH MANAGEMENT IMPLEMENTATION:ISSUES TO BE CONSIDERED

CASH MANAGEMENT STRUCTURE

IV.CENTRAL BANKING REPORTING

• Balance of payments

III. TAX ISSUES• Operations subject to VAT

• Taxation of interest

• Withholding tax on interest paid

• Deductibility of interest

• Transfer price issues

II. COMPANY LAW• Regulated agreements

• Corporate benefit of the participatingcompanies

• Liabilities of directors and shareholders

• Bankruptcy

• Centralizing company form

I. BANKING LAW• Banking / investment services monopoly?

• Exemptions for cash management activities within a group:- Concept of effective control- Authorized operations

• Limitations to remuneration of cash deposited and to notional pooling of current accounts?

• Banking secrecy

VI. CONTRACTUAL ENVIRONMENT• E-cash management: data security aspects

• Legal qualifications

V. EXCHANGE CONTROL• Exchange control issues


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March 2009


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Austria

REGULATORY, LEGAL AND TAX FRAMEWORK FOR INTERNATIONAL CASH MANAGEMENT

UNDER AUSTRIAN LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Austria. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Binder Grösswang Rechtsanwälte OEG

Sterngasse 131010 Vienna, Austria

Dr. Stefan Tiefenthaler LL.M. PartnerBanking & Finance

T +43 1 534 80-310F +43 1 534 [email protected]

Dr. Klemens Keferböck LL.M. Senior AssociateBanking & Finance

T +43 1 534 80-464F +43 1 534 [email protected]


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1. BANKING/FINANCIAL REGULATION

1.1 Banking authorities’ approval or exemption

1.1.1 ZBA cash pooling

Do loans/advances to other group entities require banking authorities’ approval for thecentralized entities or the centralizing entity? Is a distinction to be made between short term,mid term and long-term loans/advances?

The granting of loans in Austria may constitute banking business under the Austrian BankingAct (Bankwesengesetz) and consequently requires the centralizing entity to obtain a bankinglicense, if carried out on a commercial basis (gewerblich). According to the leading authority,dealings are carried out on a commercial basis if they occur (i) repeatedly (wiederholt) or withthe intention to be repeated (mit Wiederholungsabsicht) and (ii) are aimed at the realizationof proceeds (Einnahmenerzielungsabsicht). In this respect, the Austrian Banking Act does notdifferentiate between short term, mid term and long term loans.

Generally, a case by case approach is to be adopted when determining if the granting of loansis carried out on a commercial basis in the meaning of the Austrian Banking Act.Unfortunately, no guidelines or decisions of the competent Austrian Financial MarketAuthority exist for such determination in relation to cash pooling arrangements and, thus,uncertainties prevail.

However, it is often argued that in relation to intragroup loans and loans granted inconnection with cash pooling arrangements (assuming that the account management isconducted by a bank) the standard to be applied in relation to such determination is lenientand, thus, such loans regularly do not qualify as banking business requiring a banking license.

In practice, the Austrian Financial Market Authority (FMA) does currently not qualifyintragroup loans and loans granted in connection with cash pooling arrangements (assumingthat the account management is conducted by a bank) as banking business requiring abanking license.

Do investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized entities require banking authorities’ approval forthe centralized entities or the centralizing entity? Is an exemption available in groupcompanies?

Investing in financial instruments in Austria on behalf of the centralized entities may requirethe centralizing entity to obtain the banking authorities’ approval (i.e. a license), if carried outon a commercial basis (gewerblich; please see above for further details with respect to thisrequirement). In relation to cash pooling schemes, such activity most likely would be carriedout on a commercial basis in the meaning of the applicable laws and, thus, would require alicense.

In this respect, there are no specific exemptions under the Austrian Banking Act relating togroup companies.

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In both cases, is there an exemption available for operations within groups of companies? Whatare the sanctions, if any, for breaching this requirement? There are no specific exemptions under the Austrian Banking Act with respect to operationswithin groups of companies.Principally, a breach of the requirement to obtain a banking license may result in a fine of upto EUR 50,000. Further, the lender is not entitled to receive any remuneration (e.g. interest)for the loan granted.

1.1.2 Notional pooling Is there any prohibition/restriction on banks/participating entities implementing notionalpooling (i) by way of bank margins reductions, (ii) by way of merging current account balancesof the centralizing and centralized entities in order to create a single balance, or (iii) by way ofcalculating interest payable to each account based on merged scales of interest? Do banksrequire cross guarantees from participating entities? Can such guarantees be capped?In Austria, there are no specific banking regulatory prohibitions/restrictions in respect ofnotional pooling schemes (i.e. pooling arrangements which do not provide for an “actual” butmerely for a “notional” merging of current account balances).There are no specific banking regulatory provisions requiring banks in any case to obtain crossguarantees in relation to notional pooling schemes.

1.1.3 Centralized management of exchange rates and risksDoes the arrangement whereby a centralized entity agrees to buy from and sell to thecentralizing entity all its foreign currencies require banking authorities’ approval or consent?Buying and selling foreign currencies in Austria may constitute banking business under theAustrian Banking Act and consequently requires the centralizing entity to obtain a bankinglicense, if carried out on a commercial basis (gewerblich; please see above for further detailswith respect to this requirement). In relation to cash pooling schemes, such activity mostlikely would be carried out on a commercial basis in the meaning of the applicable laws and,thus, would require a license.

1.1.4 Centralized management of payments and debt collectionsAre the centralizing entity’s activities as the operator of a management of payments/collectiveprogram subject to approval requirements under any applicable banking regulatory laws? The activities usually conducted by the centralizing entity in relation to managing an effectivecash pooling scheme may constitute banking business under the Austrian Banking Act andconsequently requires the centralizing entity to obtain a banking license, if carried out on acommercial basis (gewerblich). We refer to our elaborations above.

1.2 Banks duty of confidentialityCan the centralizing entity obtain from banks holding the accounts of centralized entitiesinformation on such accounts?Austrian law expressly recognises and protects a bank’s duty of confidentiality (sometimesreferred to as “banking secrecy”) with respect to information received by or relating to its


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customers. According to these rules of banking secrecy banks may also, generally said, notdisclose information on accounts of centralized entities. However, the banks are not bound tosuch banking secrecy and therefore may transfer information on accounts to centralizingentities to the extent the centralized entities expressly and in writing waived their respectedright and assented to such transfer.

1.3 Other regulatory requirements Are there specific requirements in regulated financial activities (e.g. insurance industry, assetmanagement etc.)?In Austria, there are no specific requirements for financial activities conducted with respect tocash pooling. However, there are numerous general requirements which can be relevant withrespect to financial services as provided by the insurance and asset management industry, such as requirements set forth in the Austrian Banking Act (Bankwesengesetz), in the Austrian Commerce Regulation Act (Gewerbeordnung), the Austrian SecuritiesSupervision Act (Wertpapieraufsichtsgesetz) and the Austrian Insurance Supervision Act(Versicherungsaufsichtsgesetz).

Is there a requirement that the global effective rate be stated in the centralization agreement? There is no specific requirement to state the global effective rate in the centralizationagreement(s) between the centralizing entity and the centralized entities.

Are there specific requirements in connection with the opening of bank accounts (KYC,language…)?In order to fulfill Austria’s obligations under European and international law to fight moneylaundering and terrorism the Banking Act provides for various KYC requirements.In particular, credit and financial institutions shall register the identity of a customer

(i) when entering into a permanent business relationship (this includes the opening of bank accounts for a new customer); and

(ii) in all transactions not falling within the scope of an ongoing business relationship and involving a sum amounting to at least 15,000 Euros or an equivalent value in Euros (irrespective of whether the transaction is carried out in a single operation or in several operations which are obviously closely linked).

The banks have to determine the identity of a corporation’s authorized representatives byphoto identification. Under certain circumstances, the representatives are not obliged toappear in person for the purpose of such identification. Further, the identity of a corporationand the representatives’ authority to act on behalf of it is to be determined by the banks byappropriate documents available in the jurisdiction of the corporation’s incorporation.

1.4 OutsourcingCan the cash pooling function be entrusted in whole or in part to an agent that is not memberof the group? In general, Austrian law does not prevent entities not being member of a group to act as agentin relation to cash pooling schemes. Of course, the conduct of such activities in Austria mostlikely requires a banking license.

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2. CORPORATE LAW

2.1 Form of participating entities

Are there restrictions as regards the form of entities that can participate in cash poolingarrangements, either as a centralized or centralizing entities (certain forms of entities,groupings, partnerships…) and/or the form or the nationality of shareholders (state ownedentities, foreign shareholders…)?

We do not see any such restrictions as regards the form of entities under Austrian law.

2.2 Corporate purpose

Do the activities carried out in cash pooling arrangement need to be expressly contemplated inthe bylaws?

The activities carried out in a cash pooling arrangement do not need to be expresslycontemplated in the bylaws of an Austrian corporation.

2.3 Corporate benefit

How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup?

Under Austrian law it is illegal for a corporation to grant a financial assistance (corporatebenefit) to its (direct or indirect) shareholders (or affiliates of such shareholders) other thanin the course of a distribution of dividends or a formal reduction of the share capital.Therefore, the entering into any kind of agreement by a corporation with its parent (or sister)company is, generally, only licit to the extent such corporation receives an adequate economicbenefit and would also enter into such agreement with a third, not affiliated party on thesame terms and conditions (arm’s length principle). In this respect, no distinction is madebetween direct and indirect shareholdings or different group members. Generally, thisprinciple also applies to limited partnerships (Kommanditgesellschaft), where no naturalperson is fully liable for the partnerships’ debts.

Are there restrictions on the participation of certain entities due to their financial structure(ratios, etc.)?

We are not aware of any specific restrictions on the participation of corporations in cashpooling schemes due to the corporations’ corporate or financial structure and the structure ofthe corporate group intending to take part in a cash pooling scheme.

Of course, the entering into a cash pooling arrangement by a company may infringe theAustrian rules of financial assistance if such arrangement entails, for example, financial risksdue to the low credit rating of (up-stream or cross-stream) affiliated companies.

Is there an obligation to offer all participating entities equivalent terms and conditions?

Principally, according to the rules on financial assistance, there (only) is an obligation to enterinto agreements with affiliated companies on arm’s length terms. Therefore, it might be licitto offer different terms and conditions, provided, however, that those different terms areeconomically justified (e.g. different interest rates due to different ratings). Yet, the standards


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to be applied in this respect are to be very strict. In many cases, different terms and conditionsmay indicate that an arrangement is not entered into on arm’s length terms.

Are there restrictions on the type of operations that the centralizing entity may undertake withthe cash of the centralized entities?

We are not aware of any specific restrictions in this respect. Certainly, any agreement betweena corporation and an affiliated company on the type of operations to be conducted isprincipally to be made on arm’s length terms.

Is there an obligation to offer the participating entities market financial conditions (i.e. the“arm’s length principle”)?

Principally, there is an obligation for a corporation to enter into agreements with affiliatedcompanies on arm’s length terms.

What are the liabilities and sanctions in case of violation of the corporate benefit of aparticipating entity (cancellation of the agreement, management liability, extension ofbankruptcy proceedings etc.)? Do they apply to directors, officers and shareholders?

Agreements entered into in violation of the Austrian rules on financial assistance are void(potentially triggering a repayment claim) and a company’s management may be heldpersonally liable for concluding such agreements.

2.4 Remuneration of the centralizing entity

Are there any prescriptions as to the remuneration of the centralizing entity difference oflending/borrowing rates, lump sum fee…)?

There are no such specific prescriptions. Of course, any remuneration scheme is to be inaccordance with the rules on financial assistance briefly set out above.

2.5 Investment of excess cash by the centralizing entity

Are there prudential investment rules?

There are no such specific rules for companies. Under general corporate law, however, anymanagement decision is to be taken with reasonable care.

2.6 Approval of cash pooling arrangement

Does the cash pooling arrangement need to be approved by the management board /supervisory board or the shareholders?

Stock corporation: Most likely, the management board of a stock corporation requires prior approval of thesupervisory board prior entering into an effective cash pooling arrangement. The entering intoa notional cash pooling arrangement, however, not necessarily requires the managementboard to obtain prior supervisory board approval. Of course, the stock corporation’s supervisory board itself or the corporation’s bylaws maystipulate a requirement for the management board to seek prior approval from thesupervisory board before entering into any kind of cash pooling scheme.

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Limited liability company:

In any case, the management board of a limited liability company requires prior approval ofthe company’s shareholders prior entering into an effective cash pooling arrangement. Theentering into a notional cash pooling arrangement, however, might not necessarily require themanagement board to obtain prior approval. Yet, it would be prudent for a management toobtain a shareholder approval also in relation to notional cash pooling schemes.

In case a supervisory board exists, the same rules as described above in relation to stockcorporations apply.

Of course, the limited liability company’s bylaws may stipulate a requirement for themanagement board to seek prior approval (from any corporate body) before entering into anykind of cash pooling scheme.

2.7 Specific aspects relating to acquisition financing exit

Are there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement modify the rules? Does anycompany law restriction prevent the centralizing entity from exercising its contractual right toterminate the agreement?

In relation to stock corporations, Austrian law explicitly prohibits the use of monies of a targetor the target’s subsidiaries (other than received as dividends or in the course of a formaldecrease of the statutory capital) in order to finance an acquisition. Therefore, the setting upof a cash pooling arrangement with a target (or a target’s subsidiary) aiming to finance itsacquisition is illicit under Austrian law. It is sometimes argued (although also disputed) inliterature that the same applies to other companies, such as limited liability companies. In anycase, any such cash pooling arrangement would most likely also violate Austrian capitalmaintenance (financial assistance) rules (please see above).

3. BANKRUPTCYWhat are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)?

Principally, arrangements enabling the set-off of receivables between participating entitiesmay be invalid in relation to an insolvent participating entity, if by means of such set-off acredit balance attributable to such insolvent entity is set-off against a debit balance ofanother participating entity. Any such prior set-off may also be subject to a right to avoidanceunder the Austrian avoidance for preference rules.

Further, upon the opening of insolvency proceedings with respect to a participating entity anypayments made to or securities granted in favor of a creditor by such entity may be subjectto a right to avoidance if, in particular, (i) within the preceding twelve months, making suchpayments or granting such securities constituted (compared to other creditors) a preferentialtreatment of the respective creditor in the meaning of the applicable law or (ii) within thepreceding six months, the beneficiary of such payments or security was aware of theinsolvency of the entity.


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Moreover, in case of an o pening of insolvency proceedings with respect to a participatingentity, any rights to securities or other rights acquired by enforcement proceedings within 60 days prior to such date will immediately cease to exist.Generally said, the above mentioned consequences would be applicable for both ZBA andnotional cash pooling (albeit those in relation to actual payments made should not berelevant with respect to notional cash pooling schemes). Lastly, if loans are granted to a participating entity being insolvent, over-indebted or fulfillingcertain reorganization requirements by a (direct or indirect) shareholder having a controllinginfluence on such entity (or, upon such shareholder's instruction, by an affiliated entity), suchloans may be qualified as substitute for equity. Consequently, receivables arising from suchloans may be subordinated in relation to other creditors' receivables. Further, any securitygranted by such participating entity to secure such loans will cease to exist upon the openingof insolvency proceedings.

Would this limit the centralizing entity’s ability to exercise its contractual right to terminate theAgreement?

Generally, the commencement of insolvency proceedings with respect to a participatingentity will not limit the centralizing entity’s ability to exercise its contractual right toterminate the Agreement. Please note that enforcement action against an insolventparticipating entity may be significantly limited (see previous question). A contractual right to termination based upon the commencement of insolvency proceedingswill – except for applicable exemptions (e.g. with respect to employment contracts) – be validunder Austrian law. Please note, however, that a right to termination merely due to thecommencement of composition or reorganization proceedings may be invalid.

Are there any risks that bankruptcy proceedings issued against the centralizing entity or acentralized entity could be extended to other participating group entities?

If insolvency proceedings have been commenced with respect to the centralizing entity or acentralized entity, the remedies available in such case (as described above) may result incertain monetary claims against other participating entities. This may cause a furtherreduction of liquidity of the participating entities and, consequently, could eventually resultin other participating entities being subject to insolvency proceedings.

4. TAX ISSUESOur answers in relation to the tax issues are based on the following assumptions:

(i) The Austrian entity is not a bank;(ii) The Austrian entity is a corporation (either a limited liability company

(Gesellschaft mit beschränkter Haftung – GmbH) or a joint stock corporation (Aktiengesellschaft – AG);

(iii) The foreign entities resemble a corporation under Austrian law (GmbH/AG);(iv) The foreign companies do not maintain a permanent establishment in Austria;(v) The loans granted according to the cash pooling agreement are not secured by

mortgages on domestic (i.e. Austrian) real property.

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4.1 Value added tax (VAT)

Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?

Austrian VAT legislation is based on the 6. EC-VAT Directive and therefore generally conformswith VAT legislation in other EU member states.In general, according to Austrian VAT law, a 20% VAT is imposed on services rendered inAustria.In general, financial services are performed where the customer has established its businessor has a fixed establishment to which the service is supplied. Financial transactions (e.g. thegranting of loans) in general are exempt from VAT. Consequently, no Austrian VAT falls dueon interest charged with respect to loans granted by or to any foreign entity.If any input VAT incurred is connected to specific services such as finance transactions thatare exempt from VAT, a refund of input VAT will not be possible for the centralizing entity.Hence, if an Austrian entity pays VAT for goods or services, it may not deduct such VAT if thesegoods or services are connected with its interest income deriving from the cash poolingarrangement.

4.2 Taxation of interest

At what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?

In principle, income from interest on loans (granted in accordance with the cash poolingarrangement) earned by an Austrian entity constitutes taxable income of the Austrian entity.Corporations are taxed on their net profit and are subject to Corporate Income Tax with a flattax rate of 25%.Income of foreign entities resulting from loans granted to an Austrian entity will, in general,not be taxable in Austria. Pursuant to sec 1 (3) Corporate Income Tax Act, corporations whichdo neither have their place of management nor their seat in Austria are subject to limited taxliability only. Sec 21 CITA stipulates that persons subject to limited tax liability are taxable in Austria onlywith income listed in Sec 98 Income Tax Act (“ITA” – "Einkommensteuergesetz"). With regardto loans, sec 98 ITA provides that interest income is taxable only if the loan is secured bymortgages on domestic, i.e. Austrian, real property or ships registered with a domestic shipregister or if the loan is granted by an Austrian permanent establishment of the foreign entity.Therefore, income of a foreign entity from loans granted to an Austrian entity is not taxablein Austria. In this respect, also no withholding tax will fall due.

Is there a withholding tax on interest paid to a foreign entity?

As mentioned above, income of a foreign entity from loans granted to an Austrian entity isnot taxable in Austria and therefore not subject to Austrian withholding tax. In addition, please note that income from interest on loans (granted in accordance with thecash pooling arrangement) earned by the Austrian entity will be taxable income of theAustrian entity, however, not being subject to withholding tax but rather to regular corporateincome tax.


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Austria

4.3 Stamp duty

Do cash pooling operations raise any stamp duty?

The Austrian Stamp Duty Act provides that certain legal transactions, including loanagreements or credit agreements (which are commonly part of any cash poolingarrangement) are subject to a stamp duty assessed on the value of the transaction. The taxrate is 0.8% of the loan/credit facility granted. However, revolving credit facilities with aduration of more than five years are subject to a stamp duty of 1.5%.

Stamp duties fall due if written agreements are executed in or brought into Austria. However,not only written agreements, but also other documentations trigger stamp duties, e.g. awritten acceptance of an oral offer, a documented oral acceptance of an offer, minutes on anagreement signed by one party to the agreement, certified copies of the agreement etc.

Even if no qualifying documentation has been produced, stamp duty will fall due in case ofshareholder’s loans. In this case, stamp duties fall due at the time when the loan/credit facilityis entered into the books of the Austrian borrower (i.e. the Austrian entity). This provisionwould not be applicable to loans granted by the Austrian entity to a foreign entity.

In order to avoid any stamp duties in connection with cash pooling schemes, it should bearranged that no foreign entity which grants a loan to an Austrian entity does directly hold ashare in the Austrian entity. No qualifying documentation on the cash pooling arrangementshall be executed in or brought into Austria. In addition, no party shall be entitled or obligedto receive performance of/perform an obligation with respect to the cash pooling agreementin Austria. Ultimately, high deliberateness must apply regarding any written correspondencebetween the foreign entities and an Austrian entity with respect to the cash poolingagreement in order to avoid the trigger of Austrian stamp duty.

4.4 Deductibility of interest

Are there limitations to the deductibility of interest paid by the centralized or the centralizingentity (such as a thin capitalization rule - debt / equity capital ratio)?

In general, interest payments made by the Austrian entity are tax deductible businessexpenses.

Austrian tax law does not contain specific thin-capitalization rules. As a rule, according to thepractice of Austrian tax authorities, an equity ratio of 20% should be sufficient. In the practiceof Austrian tax authorities, a shareholder loan constitutes hidden equity if it is granted as asubstitute for the shareholder equity. It is to be shown, however, that a supply of equity wouldclearly have been necessary at the time the loan was granted (to the Austrian entity) and thatthe loan is a substitute for the required entity. Hidden equity is not assumed if the company’sequity ratio is in accordance with general commercial practice.

In general, interest payments by an Austrian entity must comply with the arm’s lengthprinciple. Failure to comply with the arm’s length principle may result that inter-companyinterest rates which have been applied by the parties are adjusted for corporate income taxpurposes (please see 3.6. below). Consequently, inadequate high interest rates to be paid bythe Austrian entity to group companies would constitute a hidden distribution of profits (suchhidden distribution is also illicit financial assistance – please see above).

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Austria

Is it possible to obtain a ruling from the tax authorities as to the deductibility of interest? If so,at what conditions may it be obtained?

In a particular case, it is possible to obtain a ruling from the competent tax office based onspecific facts. In complicated cash pooling or transfer pricing issues, there remains a risk thata tax inspector may in a later tax audit easily come to the conclusion that not all the factshad been properly disclosed. Consequently, the ruling issued previously is not longer bindingin the very case. In our experience, a binding ruling concerning the spread will take a quite long time becausethe competent tax office usually forwards such request to the tax audit department forassistance.

4.5 Tax havens

Are there specific provisions as to the interest accrued in tax havens?

There are no specific Austrian provisions with respect to interest accrued in tax heavens.

4.6 Favorable tax regime

Is there a favorable tax regime for (i) corporate tax of centralizing entities, (ii) taxation of cashpooling operations (VAT, interest)?

With reference to Austrian tax law, there is no favorable tax regime on these matters.

4.7 Transfer price issues

Do cash pooling operations raise transfer-pricing issues?

In general, if loans are granted to affiliated companies, the terms and conditions of the loan,in particular the interest rate, have to comply with the principle of dealing at arm’s length.Interest payments are considered not to comply with this principle if the interest rates agreedbetween related parties deviate from those that would have been agreed upon betweenunrelated parties. Accordingly, from an Austria tax law perspective, inadequate high interestrates to be paid by the Austrian entity to a foreign entity will have the followingconsequences:

(i) the profits/losses of the Austrian entity will be readjusted; and(ii) the interest payments will be deemed a hidden distribution of profits from the

Austrian entity.Inadequate low interest rates to be paid to the Austrian entity by a foreign entity will also bereadjusted (e.g. increasing profits/reducing losses of the Austrian entity).

5. CENTRAL BANK REPORTINGAre there central bank reporting obligations (balance of payments), bearing upon thecentralizing entity / each centralized entity / the banks?

We are not aware of any particular reporting obligations with regard to cash pooling schemesunder Austrian law. However, any entity (bank, financial institution) within the scope of theAustrian Banking Act has numerous reporting requirements. Further, other laws such as the


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Austria

Austrian Foreign Exchange Act (Devisengesetz) and the relating Reporting Regulation(Meldeverordnung) provide for certain obligations of banks, financial institutions and otherpersons to report to the Austrian Central Bank (Österreichischen Nationalbank) with regardsto matters involving foreign accounts and foreign exchange. Banks and financial institutionsare subject to comprehensive reporting requirements, such as reports on movements on theirforeign accounts and accounts of foreigners in Austria or the sale and purchase of any foreignexchange. Some reporting requirements concern persons which are neither banks nor financialinstitutions and might therefore also involve the centralizing entity or each centralized entityin the course of participation in a cash pooling system (such as specific reportingrequirements on foreign accounts, account balances, set-off of receivables and financialobligations, and collective money transfers to or via a paying agent).

6. EXCHANGE CONTROL REGULATIONSAre there any restrictions to the transfer of cash to foreign entities of the same group or theconversion of the local currency in other currencies?

The Austrian National Bank (Österreichische Nationalbank) is authorised to regulate, interalia, legal transactions concerning or acts disposing of foreign currency or (in case of non-Austrian entities) domestic currency in order to meet obligations arising from the Treaty onthe European Community or certain international obligations or in order to protect nationalor foreign interests. Current restrictions on money and capital flows concern measures againstterrorist organisations and groups and certain members thereof.Apart from these restrictions, we are not aware of any other restrictions to the transfer of cashto foreign entities or the conversion of local currency into other currencies.

7. ACCOUNTANCY OBLIGATIONS AND STANDARDSWhat if any are the specific accountancy obligations and standards for entities participating ina cash pooling arrangement?

We are not aware of any specific accountancy obligations and standards under Austrian lawfor entities participating in cash pooling arrangements. However, irrespective of any cashpooling arrangements entered into, the applicable general accountancy obligations andstandards will have to be met by each of the participating entities.

8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?

Ideally, the extent of processing and transferring personal data in respect of the centralizingentity, the centralized entities and the banks should be agreed upon in the respective cashpooling agreement (i.e. each entity giving its consent to the processing of specified data fieldsand their transfer to specified entities). However, any processing and transferring of data

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Austria

(other than specific sensitive data) required to fulfil the respective cash pooling arrangementwhich has been entered into by the cash pooling entity on the one side and the dataprocessing entity (i.e. the centralizing entity or bank as “data controller”) on the other sideshould generally qualify as permitted data processing under the applicable Austrian DataProtection Act 2000.Please note that the data security measures set forth under the Austrian Data Protection Act2000 (or the respective applicable laws of another EU-member state) have to be met not onlyby “data controllers” but also by any “data processors” (such as IT service providers) which actfor or on behalf of “data controllers”. Lastly, notification and/or permission requirements maybe applicable in respect of the processing and/or transfer of personal data.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?We are not aware of any specific financial reporting, evaluation or control obligations requiredunder Austrian law in relation to cash pooling arrangements. However, also in the light of therules on financial assistance described above, cash pooling arrangements should include a setof reporting obligations in order to enable effective monitoring of the financial situation ofeach of the participating entities.


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Belgium


UNDER BELGIAN LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Belgium. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

NautaDutilh

Terhulpsesteenweg 177/6 Chaussée de la Hulpe1170 Brussels - Belgium

[email protected] - T +32 2 566 80 00 - F +32 2 566 80 01

Benoit FeronRegulatory & Legal

Frédéric HeremansRegulatory & Legal

Benoit MalvauxTax


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Belgium




Do loans/advances to other group entities require banking authorities’ approval for thecentralized entities or the centralizing entity? Is a distinction to be made between short-term,mid-term and long-term loans/advances?

The Act of 22 March 1993 on the legal status and supervision of credit institutions (the"Banking Act") sets forth (among other rules) the conditions governing the provision ofbanking services in Belgium by credit institutions governed by the laws of another EU MemberState (“EU credit institutions”). A credit institution is defined by Article 1 of the Banking Actas "any Belgian or foreign undertaking whose business is to receive deposits or otherrepayable funds from the public and to grant credit for its own account". Activities which onlyconsist in lending or cash management, but do not include the receipt of deposits or fundsfrom the public, are not as such subject to the approval to the Banking, Finance and InsuranceCommission (the "CBFA") or any prior notification in Belgium. In addition, Article 9 of the Royal Decree of 7 July 1999 on the public status of financialtransaction provides that a company which receives deposits and funds of affiliatedcompanies for its own purpose or for the purpose of these affiliated companies, is not deemedto receive deposits or other repayable funds from the public.Finally, cash management is defined as an accessory financial service by Article 46.2° of theAct of 6 April 1995 on secondary markets, on the legal status and supervision of investmentfirms (the “Investment Firm Act”). Article 45.3° of the Investment Firm Act, however, providesthat the Act is not applicable to companies which provide financial services exclusively to theirparent company, their subsidiaries or to subsidiaries of their parent company.

Do investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized entities require banking authorities’ approval forthe centralized entities or the centralizing entity? Is an exemption available in groupcompanies?Pursuant to Article 45.3° of the Investment Firm Act, investments in financial instrumentscarried out by a centralizing entity on behalf of other group companies does not require anyprior approval.

In both cases, is there an exemption available for operations within groups of companies? Whatare the sanctions, if any, for breaching this requirement?

Exemption is indeed available (see above).

1.1.2 Notional pooling

Is there any prohibition/restriction on banks/participating entities implementing notionalpooling (i) by way of bank margins reductions, (ii) by way of merging current account balancesof the centralizing and centralized entities in order to create a single balance, or (iii) by way ofcalculating interest payable to each account based on merged scales of interest? Do banks

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Belgium

require cross guarantees from participating entities? Can such guarantees be capped?

1. Restrictions on notional pooling:Belgian law does not impose any specific restrictions on the banks regarding the possiblemerger of current accounts or calculation of interest. Parties are free to determine the termsand conditions of the cash pooling (in accordance with Article 1134 of the Civil Code andsubject to the provisions generally applicable to all kind of credits). The CBFA however issued a Circular 97/9 dated 18 December 1997 regarding practices andmechanisms that may encourage tax fraud by third parties. This Circular identifies thepractice where members of a same group open several accounts with the same creditinstitution which function as one sole account for the purpose of calculating the interest ofthe accounts as a mechanism which may encourage tax fraud. The Circular provides that:

- the statement giving the breakdown of interest of these accounts must make a reference to the agreement existing at the group level;

- any statement regarding any sub-account must make a reference to the account to which it is linked; in addition, the annual account statement calculating the interest applicable on the account must contain the balance of all related accounts,

failing which the practice may be considered as contrary to the Banking Act.

2. Cross guarantees from participating entities:The banks usually require a cross guarantee from all participating entities to the cash pooling.As far as guarantees are granted by Belgian entities, these guarantees are usually capped inorder to comply with their corporate interest (see 2.3. below).

1.1.3 Centralized management of exchange rates and risks

Does the arrangement whereby a centralized entity agrees to buy from and sell to thecentralizing entity all its foreign currencies, require banking authorities’ approval or consent?

No, as long as the centralizing entity does not receive deposits or other repayable funds fromthe public and that the cash management arrangements are entered into between affiliatedcompanies (see 1.1.1. above).

1.1.4 Centralized management of payments and debt collections

Are the centralizing entity’s activities as the operator of a management of payments/collectiveprogram subject to approval requirements under any applicable banking regulatory laws?

No, as long as the centralizing entity does not receive deposits or other repayable funds fromthe public and that the cash management arrangements are entered into between affiliatedcompanies (see 1.1.1. above).

1.2 Banks duty of confidentiality

Can the centralizing entity obtain from banks holding the accounts of centralized entitiesinformation on such accounts?

The centralizing entity may be contractually authorized to obtain information about theaccounts of the centralized entities.


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Belgium

Can/must the banks disclose the account statements of centralized entities to the anti-moneylaundering agency?The Act of 11 January 1993 on the prevention of the use of the financial system for purposesof money laundering (the "Money laundering Act") provides for (i) identification obligationsfor various professionals of the financial sector, such as - among others - credit institutions,EU credit institutions operating in Belgium through a branch, investment companies orentities issuing or managing credit cards; (ii) disclosure obligations to the Financial IntelligenceProcessing Unit. In particular, the persons above must verify the identity of their clients by means of asupporting document at the time that they establish business relationship that will makethem regular clients. This same identification procedure is required when a client wishes toconduct a transaction involving EUR 10,000 or more, regardless of whether performed in asingle transaction or several seemingly related transactions. Identification is also requiredeven if the transaction involves less than EUR 10,000 whenever suspicion arises regarding thelaundering of money or the financing of terrorism.

Can/must a bank disclose account statements to the tax authorities? In general, any third party is obliged to provide the tax authorities, upon request, withinformation it avails about a taxpayer. However, tax authorities must respect the bank secrecyand may not request to disclose any account statements in view of taxing any of the banks'clients. Following a recent judgement of the Court of Cassation, the same applies to leasingcompanies.

1.3 Other regulatory requirements Are there specific requirements in regulated financial activities (e.g. insurance industry, assetmanagement etc.)? Is there a requirement that the global effective rate be stated in thecentralization agreement? Are there specific requirements in connection with the opening ofbank accounts (KYC, language…)?Cash management is defined as an accessory financial service by Article 46.2° of theInvestment Firm Act. However, Article 45.3° provides that the Act is not applicable tocompanies which provide financial services exclusively to their parent company, theirsubsidiaries or to subsidiaries of their parent company (see 1.1.1 above).In addition, the opening of a bank account is subject to the Money Laundering Act (see 1.2.above) which contains KYC requirements.

1.4 OutsourcingCan the cash pooling function be entrusted in whole or in part to an agent that is not a memberof the group? Belgian law does not prevent an entity which is not a member of the group from beingentrusted with the cash management of such group.However the outsourcing of the cash management to a person or an entity outside the groupmay lead to the application of the Banking Act and/or the Investment Firm Act (see 1.1.1.above), in which case such activity would have to be approved by the CBFA or require a priornotification in Belgium.

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Belgium

2. CORPORATE LAW



Belgian law does not contain restrictions as regards the form or the nationality of the entities(or their shareholders) which participate in cash pooling arrangements.



The articles of association of the centralizing company must provide that the company isentitled to carry out lending and cash management activities for affiliated companies.

Violation of the corporate purpose has different effects, depending on the form of the companyinvolved:

- For legal entities incorporated under the form of a SPRL//BVBA, SA/NV, SCA/CVA and SCRL/CVBA: Any transaction entered into by the competent organ of a company will bind the company even though such transaction exceeds the company's corporate purpose, unless the company proves that the third party was aware or could under the circumstancesnot have been unaware that the transaction exceeded the company's corporate purpose.Moreover, any transaction entered into in excess of the company’s corporate purpose couldengage the liability of the directors towards the company as well as towards third parties.

- For the other forms of legal entities: the company is not bound by the transaction entered into by its competent organ which exceeds its corporate purpose. In addition, the violation of the corporate purpose can be invoked by the third parties to refuse to perform the obligations under a transaction which violates the corporate purpose.


How is corporate benefit defined? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions?

Any transaction entered into by a Belgian company must be in the company’s corporateinterest. It is generally considered that the corporate interest prevails over the interest of thegroup to which the company belongs. However, respected legal authors also consider that theinterest of the group may justify sacrifices for the benefit of all the companies of the group.

Accordingly, a subsidiary can take part to an inter-company transaction provided that:

- this decision is not clearly detrimental to the corporate interest of the company; and

- the decision has some beneficial effects for the company, either directly or indirectly.


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In assessing this rule and identifying the corporate benefit to the company, the board ofdirectors must take care that the agreements to which it is a party:- are dictated by a common economical, social or financial interest assessed on the basis of a

strategy elaborated for the benefit of the group;- are not entered into without any consideration and do not disrupt the balance between the

different undertakings of the group companies; and- do not exceed the financial means of the Belgian company (so that the existence of the

company would be jeopardised).

When considering the obligations of a subsidiary within a group, the Belgian Courts usuallyapply a reasonable proportionality test between the net assets of the subsidiary and theliabilities that the subsidiary assumes in favour of the third party. That assessment is to bemade reasonably at the time of execution of the agreements involved. It is therefore prudentto insure that the obligations that a Belgian company assumes in favour of other companies ofthe group are not manifestly contrary to their own interests and do not exceed their financialmeans. This may require that (i) the obligations of the Belgian company be capped (e.g. by wayof a target-balancing which limits the participation of an entity so as to allow it to keep somefunds available and to ensure its own development) and/or (ii) the cash pooling agreementdetermines the conditions under which each entity of the group may use the proceedsresulting from cash management.

Are there restrictions on the type of operations that the centralizing entity may undertake withthe cash of the centralized entities? Is there an obligation to offer the participating entitiesmarket financial conditions (i.e. the “arm’s length principle")?

Article 629 of the Company Code prevents any illegal financial assistance (loan, advance orsecurity interest) by a Belgian company for the acquisition of its shares by a third party. Anybreach of the financial assistance provision may induce the annulment of the relatedtransaction. In addition, a breach of that provision constitutes a criminal offence. The cash ofthe Belgian companies centralised by the centralizing entity should therefore not be used tosecure the acquisition of the shares of these entities. In addition, the transaction between the parties should be made at arm’s length.


If a transaction entered into by a company is not in the company’s corporate interest, thecompany will nevertheless be bound by this transaction, unless it can be demonstrated thatthe third party was aware of that excess. In the latter case, the commitment of the companycould be declared void.Violation of the corporate interest may result in the liability of the directors and possibly, in thenullity of the transaction. However, by its very nature, the concept of corporate interest offersa broad discretion to the management of the Belgian company and does not permit to applymathematical measures insuring the validity of the obligations of that company. As aconsequence, the control of the corporate interest by the Court is only marginal and theviolation of the corporate interest should only be retained by the Court if the transaction ismanifestly contrary to the corporate interest of the company involved.

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2.4 Remuneration of the centralizing entityAre there any prescriptions as to the remuneration of the centralizing entity difference oflending/borrowing rates, lump sum fee…)?Belgian law does not contain any specific provisions. The centralizing entity should beremunerated for its services at arm’s length.

2.5 Investment of excess cash by the centralizing entityAre there prudential investment rules? Belgian law does not contain any specific provisions.

2.6 Approval of cash pooling arrangementDoes the cash pooling arrangement need to be approved by the management board /supervisory board or the shareholders? Under Belgian law, the cash pooling arrangement should be approved by the managementboard (unless otherwise stated in the articles of association of the company).As regards the representation of the company vis-à-vis third parties, most of the articles ofassociation of the Belgian company limited by shares (SA/NV) provide that the company isvalidly represented by two directors acting jointly. Such a provision is valid and anytransaction executed by two directors will bind the company.

2.7 Specific aspects relating to acquisition financing exitAre there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement involving the target,modify the rules? The use of cash of the target to repay an acquisition loan is prohibited by Article 629 of theCompany Code (see 2.3. above). It is however generally considered that the financialassistance prohibition must be interpreted restrictively and therefore only prohibits: (i) anyfinancial assistance (loan or security interest); (ii) provided by the company involved; (iii) forthe acquisition of its own shares; (iv) by a third party. On the contrary, that provision shouldnot prevent the financial assistance by other companies of the same group (includingsubsidiaries).

2.8 TerminationDoes any company law restriction prevent the centralizing entity from exercising itscontractual right to terminate the agreement?Termination clauses are usually determined freely by the parties.


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3. BANKRUPTCYWhat are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)? Would this limit the centralizingentity’s ability to exercise its contractual right to terminate the Agreement? A distinction must be made between the opening of (i) judicial composition betweencreditors and (ii) any other insolvency proceedings (including bankruptcy).Any termination claim in respect of the relevant agreement based solely on the opening of ajudicial composition between creditors will be held invalid. This will be the casenotwithstanding any provisions to the contrary in the relevant agreement. However, atermination claim brought by a party based on any other contractual ground (which arosebefore or after the opening of judicial composition proceedings) should be held valid. Conversely, a contractual term providing that the agreement will terminate upon the openingof a bankruptcy (or any insolvency proceedings other than the judicial composition betweencreditors) is valid.

Are there any risks that bankruptcy proceedings issued against the centralizing entity or acentralized entity could be extended to other participating group entities?Bankruptcy proceedings issued against the centralizing entity or a centralized entity will onlybe extended to another participating group entity if the conditions related to the bankruptcyproceedings are met.

4. TAX ISSUES

4.1 Value added tax (VAT)Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?Generally, cash management is a service for VAT purposes and thus subject to VAT.However, certain exemptions may apply, such as:- allocation and negotiation of credits, and the management of credits by the person

allocating the credits;- negotiation of guaranties, and management of guaranties on credits, accomplished by the

person allocating the credits;- certain activities, such as the negotiation concerning the deposits of cash, financial claims,

checks, with the exception of recovery of financial claims;- operations of payment, including the negotiation, with the exception of recovery of claims.These exemptions are in line with the European VAT Directive.To the extent that no exemption would be available, services are generally subject to the 21%rate.

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4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity, taxed? Isthere a different rate for fixed term loans and current account advances?Belgian source interest or interest received through a Belgian intermediary is generally subjectto a 15% interest withholding tax. There is no different rate for fixed term loans and currentaccount advances.However, several domestic exemptions may apply. Exemptions will mainly depend on thetype of beneficiary (non-resident, Belgian company, bank, etc.). The most relevant exemptionsin the context of cash management, and with respect to interest owed by the centralizingentity, are the following:

1. The X/N clearing exemption: this exemption applies only to fixed-income securities(bonds, commercial paper) that are held through the X/N clearing system operated by theNational Bank of Belgium and provided that the lender is eligible for an X (exempt) accountin that system. Generally speaking, only Belgian individuals or legal entities (other thancompanies) are not eligible for an X account. (They must hold a non-exempt or N account.)Certain formalities apply.

2. The foreign bank exemption: this exemption applies only to straight-forward loans, andprovided the lender is a foreign credit institution resident in the EU or in a country withwhich Belgium has concluded a bilateral tax treaty.

3. The "alternative" coordination centre exemption: this exemption applies to (inter alia)Belgian companies (i) that belong to a group of affiliated companies (within the meaningof the Code of Companies), (ii) that exercise their activities exclusively for the benefit ofthe companies of the group, (iii) that exclusively or predominantly render financial services,(iv) that seek financing exclusively with Belgian or foreign companies or legal entities withthe sole purpose of financing their own or the affiliated companies' transactions, and (v)which do not own stock the acquisition value of which exceeds 10% of their fiscal netvalue. The exemption applies to both straight-forward loans as bonds or CP, and providedthe lender is a non-resident. Certain formalities apply.

4. The registered bond exemption: this exemption applies only to registered bonds andprovided the lender is a non-resident. Specific conditions apply, such as the non-transferability between interest payment dates. Certain formalities apply.

5. The intra-group exemption: this exemption applies to both straight-forward loans as bondsand provided the lender is an EU-resident affiliated company. Certain formalities apply.

To the extent that interest is due by a Belgian resident company or intermediary, interestowed to the centralizing entity is generally exempt.Aside from the domestic exemptions (inclusive of the implementations of EU Directives),treaty exemptions may apply.


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Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?The below chart does not take into account the exemptions that may apply pursuant todomestic law (see above), but is limited to the treaty rates.

4.3 Stamp duty


No stamp taxes should be due pursuant to cash pooling operations. Nominal stamp taxesmay be due pursuant to credit agreements concluded with credit institutions.



There are various limitations to the deductibility of interest.

1. Non-arm's length interestInterest paid at non-arm's length terms is not deductible. Such interest may even berecharacterized into dividends, if payment is made to an individual shareholder or a corporate

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 15% N/A 10

1

/15% 10% 10% 02

/10% No treaty 15% 04

/15% 03

/10% 03

/15% 101

/15% 15% 15% 10%

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 0

5

/15% 101

/15% 05

/10% 01

/5% 15% 01

/10% 10% 03

/10% 02

/10% 03

/10% 01

/10% 10% 15% 0%

Notes: 1. banks, etc2. banks, bank deposits, etc.3. current accounts, interbank payments4. unaffiliated enterprises, etc.5. company, bank, etc.

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Belgium

shareholder holding a director or liquidator mandate in the paying entity. The measure doesnot apply with respect to interest on publicly issued bonds or loans from Belgian companies.

Non-arm's length interest may further be added to the taxable basis of the company (i.e., inaddition to the non-deductibility), if such interest is paid to a foreign affiliated or lowly taxedindividual / company (or establishment), or to a foreign individual / company sharing acommon interest with an aforementioned individual or company.

2. Tax haven interestInterest paid to non-taxed or lowly taxed non-resident companies is not deductible, unlessthe taxpayer can justify by any legal means that the interest corresponds with a true and fairtransaction and is made at arm's length terms.

3. Thin-cap interestInterest paid to non-taxed or lowly taxed (resident or non-resident) companies is notdeductible, to the extent such interest relates to debt exceeding the 7:1 debt-to-equity ratio.The deductibility limitation applies only to the amount in excess of the threshold. Thecentralizing entity cannot prevent the deductibility limitation by demonstrating that thetransaction is realised at fair market conditions.

Furthermore, interest paid to (i) an individual shareholder or director (whether or not togetherwith their close relatives) or (ii) a company holding a director or liquidator mandate is notdeductible and is recharacterized into a dividend, to the extent such interest relates to debtexceeding the 1:1 debt-to-equity ratio. The measure applies only to the amount in excess ofthe threshold. The measure does not apply with respect to interest on publicly issued bondsor loans from Belgian companies.


It is possible to obtain rulings from the tax authorities as to the deductibility of interest.Generally, in the context of cash pooling activities, ruling request also include the transferpricing issues (see below, no. 4.7). No application fee applies. The law provides that a rulingshould be rendered within three months as of the request filing date, but no sanction isforeseen if such period is not met. In practice, however, this term is generally respected. Aruling is valid for up to 5 years, but specific circumstances may allow a longer period.

The conditions for applying for a ruling are mainly that the situation or transaction for whicha ruling has been requested, has not yet had any tax consequences. Furthermore, the requestmust contain, inter alia, a detailed description of the transaction or situation and the identityof the parties involved. It is thus not possible to file a request on a no name's basis. Prefilingmeetings, however, may occur without disclosing any identities.

4.5 Tax havens


The only specific provisions as to the interest accrued in tax havens relate to the non-deductibility thereof (see 4.3. above).


34

Belgium

4.6 Favourable tax regime

Is there a favourable tax regime for (i) corporate tax of centralizing entities, (ii) taxation of cashpooling operations (VAT, interest)?

Certain measures have been taken to maintain the cash pooling activities of the Belgiancoordination centres, that status of which will be lost at the latest on 31 December 2010 (tothe extent the recognition decrees have not expired earlier).

As regards the corporate taxation, Belgian government introduced the notional interestdeduction (NID), which is a deduction of a fictitious interest computed over the company'snet equity. This deduction generally allows to set off any interest income received pursuantto the cash pooling activities, thus substantially reducing the tax burden (possibly to 0%). Fortax year 2009 (income year 2008) the applicable rate for the NID amounts to 4,307% (or4,807% for small or medium-sized companies).

As regards the taxation of cash pooling operations, a so-called coordination centre exemptionfor interest paid by centralizing entities has been introduced (see 4.2. above), in order toalleviate the withholding tax burden that would more generally exist if interest were paid bya regular company.



All cash pooling operations must occur at arm's length standards. Non-arm's length transferpricing may indeed give rise to certain issues, going from non-deductibility of interest toincrease of taxable basis.

1. Abnormal or gratuitous advantages grantedAbnormal or gratuitous advantages granted by a Belgian entity are added to its taxable basis,unless such advantage is taxable in the hands of the recipient. However, the advantage isadded to the taxable basis in any event, if the recipient is a foreign affiliated or lowly taxedindividual / company (or establishment), or if he is foreign individual / company sharing acommon interest with an aforementioned individual or company.

Any enrichment without an equivalent consideration must be considered an advantage. Anabnormal advantage is assessed by comparison to a similar type of transaction concluded onan "arm's length" basis. In other words, an abnormal or gratuitous advantage does not onlyinclude a non-arm's length payment, but also arm's length payments in non-arm's length (orincomparable) situations.

2. Abnormal or gratuitous advantages receivedSeveral deductions (setoff of losses carried-forward, dividends-received deduction, notionalinterest deduction, investment deduction) are disallowed to the extent that abnormal orgratuitous benefits are received. In practice, however, to the extent that the company is in aloss position, the advantage so received will constitute a minimum taxable income.

3. Non-arm's length interest paymentsReferring to section 4.4 above, non-arm's length interest is not deductible. Such interest mayeven be recharacterized into dividends, if the payment is made to an individual shareholder

March 2009


35

Belgium

or a corporate shareholder holding a director or liquidator mandate in the paying entity. Themeasure does not apply with respect to interest on publicly issued bonds or loans fromBelgian companies.

Non-arm's length interest may further be added to the taxable basis of the company (i.e., inaddition to the non-deductibility), if such interest is paid to a foreign affiliated or lowly taxedindividual / company (or establishment), or to a foreign individual / company sharing acommon interest with an aforementioned individual or company.


Belgian entities taking part to the cash management arrangements are not subject to anyparticular reporting requirement. Any Belgian entity is held to deposit its annual accounts (asthe case may be consolidated) with the National Bank of Belgium.

Credit institutions are held to provide regular and specific information to the National Bankof Belgium and to the supervisory authority, i.e. the CBFA.


Currency conversion transactions constitute an accessory financial service pursuant to Article46.2° of the Investment Firm Act, if they are connected to other financial services. However,Article 45.3° provides that the Act is not applicable to companies which provide financialservices exclusively to their parent company, their subsidiaries or to subsidiaries of theirparent company (see 1.1.1 above).

Currency and exchange transactions are regulated by the Investment Firm Act and the Act of2 August 2002 on the supervision of the financial sector and on financial services.Furthermore, the CBFA has issued several circulars relating to money and foreign exchangemarkets to be complied with by the credit institutions (circulars D 2001/10 and 96/4 to creditinstitutions, circulars B90/1 and 92/5 to banks).


Belgian GAAP does not provide for specific obligations or standards for entities participatingin a cash pooling arrangement.


36

Belgium

8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?Terms and conditions of the cash pooling arrangements are determined by the parties. Thecash pooling agreement between the parties should ensure that procedures are in place whichsafeguard data integrity and data storage.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?Belgian law does not provide for specific reporting or control requirements. The Agreementbetween the parties must ensure that each of them is able to control and assess its rights andobligations hereunder.Credit institutions are held to comply with the Belgian legislation and CBFA’s circulars relatingto money and foreign exchange markets (circulars D 2001/10 and 96/4 to credit institutions,circulars B90/1 and 92/5 to banks).

March 2009


37

Brazil


UNDER BRAZILIAN LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Brazil. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

NORONHA ADVOGADOSRua Alexandre Dumas, 1630 - 04717-004 - São Paulo - SP-BrazilTelephone: +55 11 5188 8090 - Facsimile: +455 11 5184 0097

E-mail: [email protected] - Internet: www.noronhaadvogados.com.br

Robert E Williams is a partner of the InternationalTax Department of NoronhaAdvogados based in São Paulo.

[email protected]

Alexandre Leander Delgado is a director of the Capital Markets,Insurance and Re-InsuranceDepartment of NoronhaAdvogados based in São Paulo.

[email protected]


38

Brazil





The Zero Balance Account (“ZBA”) cash pooling is a product offered by certain Brazilian banksas a cash management tool for Brazilian companies and groups of companies permitting thatthe resources of various bank accounts are automatically transferred to a master account ona daily basis.

As will be seen further below the practice is only suitable for bank accounts maintained inBrazil and in Brazilian currency.

Note that in the banking regulatory system in Brazil, there is no particular law, rule or bankingregulation that deals specifically with cash pooling in general. Therefore, the carrying out ofoperations of ZBA, for instance, must comply with the general rules and principles applying tothe opening and maintenance of bank accounts and the law governing banking contracts.

Considering that the movement of funds between companies of the same group wouldrepresent an inter-company loan, the question arises as to whether any form of bankingauthority approval is required in relation to such loans.

Where such loan is between parties resident in Brazil no authorisation is required from theBrazilian banking authorities. In such instance therefore there is no distinction between short,mid-term or long-term loans/advances.

In relation to loans from entities resident outside Brazil however the situation is different.

Foreign credits are governed by the National Monetary Council (NMC) Resolution n. 2,770/00and Brazilian Central Bank (BACEN) Circular n. 3,027/01. According to these regulations, noformal prior authorization is required for a Brazilian private sector borrower to obtain a foreignloan. Nonetheless, in order to proceed with a foreign loan in favour of a debtor in Brazil, priorregistration of (i) the parties, (ii) the financial conditions and terms, and (iii) other informationrelated to the transaction, with the Registry of Financial Operations (ROF) of the ElectronicDeclaratory Registry (RDE) of the BACEN system (SISBACEN) is required (Circular BACEN n. 3,027/01).

Such registration with the RDE-ROF must be completed by the Brazilian borrower or its legalrepresentative prior to the remittance of the resources to Brazil. A registration number isprovided by ROF (RDE-ROF number) for the registration of any further information relatingto the respective transaction.

The obtaining of the RDE-ROF number is vital for the closing of the exchange agreementrelated to the inflow of resources into Brazil or remittance abroad.

Remittances of principal and interest may be effected by the simple presentation of thenumber of ROF issued by the Central Bank of Brazil to any Brazilian commercial bankauthorized to operate with foreign exchange transactions.

March 2009


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Brazil

Once the foreign funds have been remitted to Brazil they must be exchanged into Brazilcurrency through the closing of an exchange operation at a bank duly authorised to operatein the exchange market.

Additionally, the foreign lender is obliged under tax legislation to register with the Brazilianauthorities for a taxpayers number (CNPJ) and nominate a legal representative in Brazil.

In view of the above ZBA cash pooling is clearly not a treasury tool that can be adopted inBrazil in relation to international treasury operations.


This may be considered as funds management and as such the centralizing entity would needto be approved as a funds manager.


There is no exemption in Brazil.


Is there any prohibition/restriction on banks/participating entities implementing notionalpooling (i) by way of bank margins reductions, (ii) by way of merging current account balancesof the centralizing and centralized entities in order to create a single balance, or (iii) by way ofcalculating interest payable to each account based on merged scales of interest? Do banksrequire cross guarantees from participating entities? Can such guarantees be capped?

Notional pooling is not permitted in Brazil.


Does the arrangement whereby a centralized entity agree to buy from and sell to thecentralizing entity all its foreign currencies require banking authorities’ approval or consent?

As noted in item 1.1.1 above all foreign currency exchange operations in Brazil must beperformed through banks duly authorised to operate in the foreign exchange market.



No.



Unless such accounts have the centralizing entity as a joint holder, no specific information


40

Brazil

besides the result of the cash pooling can be disclosed by the bank in light of its duty ofconfidentiality.

1.3 Other regulatory requirements

Are there specific requirements in regulated financial activities (e.g. insurance industry, assetmanagement etc.)? Is there a requirement that the global effective rate be stated in thecentralization agreement? Are there specific requirements in connection with the opening ofbank accounts (KYC, language…)?

Regulated financial and non-financial institutions (banks, insurance companies, brokers etc.)are subject to specific regulations by the respective regulatory authority. As noted abovethere are no specific regulations in relation to cash pooling activities.

Both financial and non-financial institutions must comply with the Money Laundering Act of1998. In relation to banks specific regulations have been laid down by the Brazilian CentralBank (BACEN) to implement the provisions of this Act which include obligations as regards (i)maintaining updated records of customers; (ii) maintaining adequate internal controlprocedures (including KYC); (iii) identifying and reporting suspicious transactions.

1.4 Outsourcing

Can the cash pooling function be entrusted in whole or in part to an agent that is not memberof the group?

In theory yes but in practice such agent would probably be treated as a financial institutionand be regulated accordingly.

2. CORPORATE LAW



The matter is not specifically legislated in Brazil hence in principle there is no restriction onthe corporate form under which such activities may be carried out.



Brazilian corporate law adopts the “ultra vires” concept hence it must be understood from theobjects clause set out in the company’s by-laws that it is authorized to conduct suchactivities.

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Brazil


How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities? Is there an obligation to offer theparticipating entities market financial conditions (i.e. the “arm’s length principle")? What arethe liabilities and sanctions in case of violation of the corporate benefit of a participating entity(cancellation of the agreement, management liability, extension of bankruptcy proceedingsetc.)? Do they apply to directors, officers and shareholders?

As noted above cash pooling is not specifically defined or regulated under Brazilian law hencethere is no particular definition of corporate benefit or pertinent restrictions on or obligationsof centralized and centralizing entities. Directors of a company however owe a duty of careboth to the company itself and the company’s shareholders and may be held responsible ifthey do not act in the company’s best interests when dealing with cash pooling operations.



There are no special prescriptions as to the remuneration of the centralizing entity.



Prudential investment rules would apply in the event that the pooling arrangement was beingmanaged by a financial institution.



The question of whether management or shareholder approval will be required will begoverned the prevailing by-laws of the company.



No such specific restrictions exist.


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Brazil

3. BANKRUPTCYWhat are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)? Would this limit the centralizingentity’s ability to exercise its contractual right to terminate the Agreement? Are there any risksthat bankruptcy proceedings issued against the centralizing entity or a centralized entity couldbe extended to other participating group entities?

In principle the insolvency or bankruptcy of a participating entity would not limit thecentralizing entity’s ability to exercise its contractual rights to terminate the Agreement. Inthe event of bankruptcy of the centralizing entity amounts due to other entities would notrank as preferential creditors in the liquidation proceeding. It is possible that bankruptcyproceedings issued against one participating entity could be extended to other participatingentities, particularly if fraud or some other irregularity is alleged.

4. TAX ISSUES



ICMS (“tax on the circulation of merchandise and the provision of services - “Imposto sobreoperações relativas à circulação de mercadorias e sobre prestações de serviços”), a state formof value added tax, is not chargeable on financial income.

IOF (“tax on financial operations” - “imposto sobre operações financeiras”) is a federal taxlevied on credit, exchange, insurance and securities transactions, executed through financialinstitutions. The tax also applies to inter company loans. On loan transactions in Braziliancurrency, IOF is levied on the average daily balance or on a transaction basis, at 0.0041% aday when the lender is a legal entity, limited to a maximum of 1.5% on the loan proceeds fora loan maturing in 365 days. Currently the IOF rate is reduced to zero on most foreignexchange transactions.

CPMF (“Provisional Contribution on Financial Movements” - “Contribuição Provisória sobreMovimentação Financeira”) was a federal tax levied at the rate of 0.38% on funds debitedfrom Brazilian bank accounts. Transfers between current accounts and between depositaccounts belonging to the same account holder were not chargeable. As of 1 January 2008CPMF is no longer being levied.



Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?

Companies domiciled in Brazil are liable to Corporate Income Tax on income arising both in

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Brazil

Brazil and overseas. Brazilian branch offices, agencies or representative offices of companiesdomiciled abroad are subject to income tax on income arising in Brazil. The basic rate of Income Tax on corporate profits (including capital gains and financialincome), as adjusted for tax purposes, for the year 2007 is 15% with an additional surtax of10% on taxable profits exceeding R$240,000 (approximately US$ 120,000) per calendar year.In addition to the liability for income tax on profits, a company is liable to social contributiontax (“Contribuição social sobre o lucro” -“CSLL”) upon its profits, income and capital gains atthe rate of 9%. Interest, therefore, will be included in the taxable base for the calculation ofincome tax on corporate profits.Interest paid by a Brazilian borrower to a foreign entity is generally subject to withholding taxunder Brazilian domestic tax legislation at the rate of 15%. Where the recipient is resident ordomiciled in a so-called “tax haven” jurisdiction the withholding tax rate is 25%. Where alower rate is applicable under a prevailing tax treaty, the lower treaty rate can be applied. Thetable below sets out the applicable rate for certain specified jurisdictions. Brazilian withholding tax rates on interest paid:

Notes:

1. Considered by the Brazilian tax authorities as tax havens – defined as “countries or dependencies whichdo not tax income or which tax income at maximum rates less than 20% or whose corporatelegislation protects the disclosure of ownership of legal entities.”

2. Luxembourg 1929 Holding Companies are treated as tax haven entities and taxed at 25%, otherLuxembourg companies are taxed at 15%.

3. Countries with which Brazil has a double tax treaty currently in force.

Aus

tria

Belg

ium

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 15%

3

15%3

15%3

15%3

15%3

25%1

15% 15% 25%1

15%3

15%3

15% 15%3

12.5%3

Luxe

mbo

urg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 15/25% 15%

3

15%3

15% 15%3

15% 25%1

15%3

15%3

15%3

15% 15% 15% 15%2 - 3


44

Brazil

4.3 Stamp duty


There is no stamp duty in Brazil




There are no specific thin capitalization rules in Brazil and interest payable on inter-companyloans between Brazilian companies will normally be deductible as operating expenses of thepaying company.

In relation to interest payable on loan from related companies situated outside Brazil orcompanies located in so-called tax haven jurisdictions, where the loan operation is notregistered with the Brazilian Central Bank, interest can only be deducted up to the amountcalculated using the six-month LIBOR rate plus a spread of 3%. In practice, most loanoperations will be registered with the Central Bank and whilst no specific interest rate isdetermined by the legislation, in the event that rates are proposed in excess of market ratesthe Central Bank will not approve the loan operation.

4.5 Tax havens


See item 4.2. above.



There is no favorable tax regime in Brazil for cash pooling operations.



See item 4.4. above.


Funds entering Brazil whether as direct foreign investment or in the form of loans must bedeclared and registered under the Brazilian Central Bank (BACEN) system. Similarly, fundsleaving Brazil must be properly codified and registered in accordance with the prevailingnorms and regulations. No such considerations apply in relation to domestic transactions.

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Brazil

6. EXCHANGE CONTROL REGULATIONSAre there any restrictions to the transfer of cash to foreign entities of the same group or theconversion of the local currency in other currencies?As noted above, all foreign currency exchange operations must be conducted through banksduly authorized to operate in the exchange market. Additionally, save for rare exceptions, notapplicable to the present case, Brazilian entities are not permitted to open bank accounts inBrazil in foreign currency.

7. ACCOUNTANCY OBLIGATIONS AND STANDARDSWhat if any are the specific accountancy obligations and standards for entities participating ina cash pooling arrangement?There are no specific accounting standards in Brazil in relation to cash pooling operations.However there is a Brazilian accounting standard in relation to transactions between relatedparties which requires the disclosure in the accounts of transactions between related parties.In the context of loans arising from cash pooling operations this will require disclosure of thenames of the parties; amounts due to and from related parties; interest paid and received; andthe interest policy adopted in relation to inter-company loans.

8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?Issues of data protection, banking secrecy and regulations on electronic commerce wouldneed to be addressed.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?There are no such specific obligations per se for cash pooling arrangements.


46

March 2009


47

China


UNDER CHINESE LAW

This contribution does not constitute a legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in China. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Charles Qin Llinks Law OfficesE-mail: [email protected]

LLINKS LAW OFFICE19F, ONE LUJIAZUI, 68 Yin Cheng Road Middle, Shanghai 200120 PRC.


48

China






In both cases, is there an exemption available for operations within groups of companies?What are the sanctions, if any, for breaching this requirement?

In the People’s Republic of China (“PRC“ or “China“, excluding Hong Kong SpecialAdministrative Region, Macao Special Administrative Region, and Taiwan), according to the1996 General Rules of Lending promulgated by the People’s Bank of China (“PBOC“)1, inter-company loans are generally not permitted, that is, an entity/company is not allowed toprovide loans/advances to other entities directly. Any movement of funds among companiescan take place only if there are “actual transactions” between the companies that give rise tothe movement of funds. 2 “Actual transactions” would include transactions such as tradingactivities between the companies but another particular type of transaction permitted is themovement of funds between accounts opened by the relevant companies throughentrustment loan. Therefore, cash pooling in the PRC is usually carried out in the form ofentrustment loans in response to local regulations.

According to the 1996 and certain PRC Supreme Court’s judicial interpretations, anentrustment loan is a loan with the following factors:

i. the actual “lender” of the entrustment loan is a non-financial entity and suchnon-financial entity can be a government department, company, unincorporated entity or individual (“entrusting party”) whereby the funds under the loan is “provided” by such entrusting party by depositing the funds under the loan with a bank (i.e., entrusting the loan amount to the bank);

ii. the identity of the borrower, the amount of the loan, the purpose of the loan, the terms of the loan and the interest rate of the loan are all determined by the entrusting party;

iii. the bank entrusted with the loan amount shall on-lend the loan amount to the borrower on the terms and conditions provided in sub-section (ii) above, supervise the use of loan and assist in recovering the loan; and

iv. the bank may charge the entrusting party with commissions but does not assume any credit risk of any party in any manner.

1 See Article 61 of General Rules of Lending2 Please note that, in order to avoid these restrictions, some groups of companies in the PRC have restructured into one company with multiple branches as there

are no restrictions on transferring funds between branch accounts.

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China

Previously, an entrustment loan can be only denominated in RMB, but after China’s foreignexchange authority, the State Administration of Foreign Exchange (“SAFE“) issued the Noticeabout Some Issues Concerning the Management of Internal Operation of Foreign ExchangeFund of Multinational Companies (“2004 SAFE Notice”) on 18 October 2004, entrustmentloans could be denominated in foreign currencies in accordance with the 2004 SAFE Notice.It is noted that contrary to RMB denominated entrustment loans, any foreign currencydenominated entrustment loan is subject to the regulations regarding foreign exchange. Aqualified foreign multinational company must have at least three subsidiaries in China, whilea qualified Chinese multinational company must have at least three subsidiaries overseas.SAFE approval must also be obtained for every transaction3. Given the approval process,obviously the movement of foreign currency funds between the accounts of participatingentities, which refer to all companies with independent legal person status within amultinational company group and always featured by one company controlling the equityshares of others, may not be conducted on a daily and automatic basis, unless as a packagethe whole schedule can be approved by SAFE in advance. So it’s hard to create effectiveforeign currency pooling to some extent.

While some types of cash pooling seem highly regulated, recent changes to these regulationsare enabling companies operating in China to carry out a wider range of cash poolingactivities. In December 2005, SAFE issued the Notice about Some Issues Concerning theManagement of Foreign Exchange Fund of Multinational Companies in Pudong New Area(“2005 SAFE Notice”), establishing a number of relaxations in the regulations governingforeign currency pooling. The first of the 2005 SAFE Notice states that qualified companiesare allowed to conduct foreign currency pooling in the PRC taking the form of entrustmentloans with certain restrictions. 4 According to the second of the Pudong Nine Measures, it isalso now possible to set up a cross-border foreign currency pooling structure - an activitywhich was not previously permitted. A Chinese entity can now open an off-shore pool headeraccount in China in the name of the treasury centre or regional headquarters in order to jointhe group’s cross-border cash pool. However, like domestic foreign currency pooling, everycross-border foreign currency pooling arrangement must be pre-approved by SAFE. Similarly,the company in question must be a multinational company incorporated in Pudong Shanghai.In addition, there are certain restrictions on the amount of borrowing that is permitted andthe way in which funds can be used. For example, the movement of funds from/to a PRCcompany to/from its off-shore account is subject to SAFE’s pre-approval on a transactionbasis. The funds can only be used to finance its related companies. However, theseregulations are applicable only to companies with regional headquarters or a treasury centreregistered in Pudong Shanghai. While these opportunities may well eventually becomeavailable to a greater number of companies, it is likely that this will happen gradually.

As mentioned above, cash pooling in the PRC must be conducted on the basis of entrustmentloans due to the prohibition on direct inter-company loans. Therefore, regarding the otherthan PRC laws and regulations dealing with entrustment loans, foreign exchangemanagement and the interest rates and the 2005 SAFE Notice, to our knowledge, there arecurrently no express laws and regulations that specially deal with cash pooling business.

3 See Articles 2.2 and 3.2 of the 2004 SAFE Notice.4 The regulations of foreign currency pooling involving the foreign exchange will be further discussed below.


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China

In the PRC, in accordance with the Interim Measures for the Business Management ofDerivative Product Transactions of Financial Institutions published by the China BankingRegulatory Commission (“CBRC“) in 2004, non-financial institutions are not permitted to dealwith derivative products on behalf of other persons, only those qualified financial institutionsauthorized by CBRC are permitted to deal with derivative products. Accordingly, thecentralizing entity is not permitted to make investments in derivative products on behalf ofthe centralized entities.



In a notional pooling arrangement, no funds are actually moved. Instead, the bank offsets thedebit and credit balances of the participating accounts in order to calculate the pool’s netinterest position. As no actual cash flow takes place, notional pooling doesn’t generate inter-company loans; hence there is no restriction on it other than the interest rate regulations ofthe PRC. However, notional pooling may be prevented by China’s existing interest rateregulations, because the deposit rate and loan rate are regulated by PBOC. There will be aregulatory issue if the bank doesn’t charge or offset the overdraft interest rate. Therefore, inpractice few notional poolings are carried out in the PRC subject to interest rate regulations.



Under the PRC law, only those designated foreign exchange banks which are authorized byPBOC can deal with purchase and sale of foreign currencies. Any person in China shall buyfrom or sell to the designated foreign exchange banks the foreign currencies.5 As a result, thearrangement whereby a centralized entity agrees to buy from and sell to the centralizingentity all its foreign currencies is not permitted.



As mentioned above, cash pooling is realized in China through entrustment loans, so nofurther restrictions on specific activities in an entrustment loan by banking regulatory lawsexcept that the entrustment loan agreement between the entrusting lender and the borrowercomplies with the relevant interest rate regulations. It is notable that any entrustment loaninvolving foreign currencies is subject to the regulations of foreign exchange.6

5 See Regulations on the Administration of Settlement, Sales, and Payment of Foreign Exchange and the Interim Measures for the Administration of Foreign Exchange Settlement and Sales Operations by Designated Foreign Exchange Banks.

6 The issues regarding foreign exchange will be discussed in section 6.

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China



Banks are bound by a statutory duty of confidentiality. According to the 2003 PRCCommercial Banking Law, commercial banks shall have the right to refuse any inquiry aboutdeposits, except otherwise provided by laws and administrative regulations. It is also providedin the 2005 Guidelines of Electronic Payment that, (i) banks shall not use the client’sinformation and transaction records etc beyond the provisions of laws and regulations andthe scope of the client’s authorization; and (ii) banks shall keep confidential the client’sinformation and transaction records. Except otherwise provided by laws and administrativeregulations, banks shall refuse any inquiry other than the inquiry of the client itself.Nevertheless, the client may authorize in writing the banks to disclose its own information toits designated persons or entities.

Therefore, a centralized entity can waive the bank’s protection of its information andauthorize the bank to disclose its information to the centralizing entity, in which way, thecentralizing entity may get access to information relating to the accounts of the centralizedentity from the banks of the latter.



As for RMB pooling, no specific requirements exist in regulated financial activities. Withrespect to foreign exchange pooling, the 2004 SAFE Notice provides, the called multinationalcompanies do not include multinational financial institutions. It means multinationalfinancial institutions shall not use the entrustment loans to carry out cash pooling for them.

The rate in an entrustment loan can be agreed by the entrusting lender and the borrowerfreely in the reasonable extent in RMB pooling. The parties can set the rate below or abovethe rate mandated by PBOC. However, in order to avoid transfer pricing issues, the rate mustbe set at “arm’s length” - in other words, they must be set at levels that would have beenapplied to similar transactions with third parties. Article 1.4 of the 2004 SAFE Notice provides,“Where a member company of a multinational company lends foreign exchange fund toanother, both parties shall stipulate on the lending interest rate by reference to the rate ofcommercial loans of the same period in the international financial market. Such lendinginterest rate shall not be abnormally high or low.” It seems the rate in foreign currency poolingis managed a little stricter. However, there is no requirement of the global effective rate eitherin the RMB pooling or in the foreign currency pooling.

According to Article 3.1 of the 2004 SAFE Notice, the bank shall examine the qualifications ofcompanies applying for an entrustment loan in compliance with the provisions of the 2004SAFE Notice, before it signs a contract on foreign exchange entrustment loan with theentrusting lender and the borrower. In addition, the 2005 SAFE Notice requires that thecompany set up a header entrust loan account, into which the funds of group entities areconcentrated in order to carry out foreign currency pooling. Each participating entity must


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China

open at least two accounts: a settlement account or a capital account (from which paymentis made to the pool header account) and an entrustment loan account. Contrary to foreigncurrency pooling, participating entities in RMB pooling may only open a settlement accountfor the movement of funds.

According to the Measures for Administration of Client Identity Identification and Materialsand Transaction Recording of Financial Institutions issued in June 2007 jointly by PBOC,CBRC, the China Securities Regulatory Commission (“CSRC “), and the China InsuranceRegulatory Commission, financial institutions shall comply with the principle of Know YourClient (KYC) and take measures to collect necessary information about the clients, theirpurposes of transactions and the nature of transactions, as well as the natural persons whoactually control the clients and the actual beneficiaries of transactions in order to preventmoney laundering and terrorist financing activities. We understand that commercial banksshall check the client’s valid identity certification or other identity certification documents,register the basic identity information of the clients, and preserve one copy of the valididentity certification or other identity certification documents when providing the cashmanagement service to the clients in accordance with the relevant rules above.

1.4 Outsourcing


Generally in the China market cash pooling function is carried out by an external commercialbank on the basis of entrustment loans. The exception exists in the circumstances that cashpooling is carried out by an internal group finance company instead of a commercial bank.According to the Administrative Rules on Group Finance Companies promulgated by CBRC in2004, a group finance company may also conduct entrustment loans between memberentities of the same group.7

2. CORPORATE LAW


Are there restrictions as regards the form of entities that can participate in cash poolingarrangements, either as a centralized or centralizing entities (certain forms of entities,groupings, partnerships…) and/or the form or the nationality of shareholders (state ownedentities, foreign shareholders)?

There are no laws or regulations directly specifying the requirements of the formation of theentities participating the cash pooling management. We will make relevant analysis fromdifferent points of view.

First, in a cash pooling management, balances from a number of different bank accounts

7 Administrative Rules on Group Finance Companies provides, a group finance company means a non-bank financial institution which provides financial management services for the enterprise group member entities for the purpose of strengthening concentrated management of enterprise group funds and improving the efficiency of using the enterprise group funds. The establishment of a group finance company shall be subject to the approval by CBRC, and among others, the relevant group company which would like to set up a group finance company shall have registered capital with an amount not less than RMB 800,000,000; total assets of its subsidiaries to be calculated on a consolidation basis according to PRC laws and regulations shall be more than RMB 5,000,000,000.

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belonging to one or more entities of the same group are either physically concentrated ontoa single bank account or nationally netted against each other. The basic requirements for anyparticipant in cash pool management which may be either a centralized or centralizing entityis the capability to open an account with the bank. Article 13 of the Measures for theAdministration of Bank Accounts provides that any company, its internal unit with separatesettlement, public service unit, private enterprise, foreign institution in the PRC could applyfor the opening of a RMB bank account. In practice, any company could open bank accountsregardless of its nature, which may be a state-owned enterprise, foreign-invested enterpriseor even a corporate branch.

Further, the requirements for the formation of the participating entities may depend on thecurrency of the cash pool. In the event that the cash pool management in the PRC involvesforeign exchange, the centralized entity in charge of the internal operation of the foreignexchange is required to be a member which has independent legal personality and registeredin the PRC, as a subsidiary of a multinational group (other than financial institutions),according to Article 1 of Notice of the State Administration of Foreign Exchange about SomeIssues Concerning the Management of Internal Operation of Forex Fund of MultinationalCompanies. If the foreign exchange centralization and allocation are operated on-shore, thecentralized entity must apply with the opening bank for entrustment loan, if the foreignexchange will be allocated to other off-shore members, the relevant approval must beobtained from the local SAFE office.

Finally, physical sweeping in a cash pooling management is operated on the basis ofentrustment loans among the participating entities which are usually affiliates under thesame group. Pursuant to Article 1.2.2 of Notice Concerning Some Issues on Regulating theFunds between Listed Companies and Associated Parties and Listed Companies’ Provision ofGuaranty to Other Parties, a listed company is prohibited to provide entrustment loan to itsaffiliates through a bank or other financial institutions. In other words, the entity joining inthe cash pooling in the form of physical cash concentration must not be a listed companyestablished in the PRC.8



Whether and how to participate in cash pooling management belongs to the internalfinancial operations of each corporate, the PRC law does not compulsorily require it beexpressly contemplated in the bylaws. However, as stated in Article 25 of the PRC CompanyLaw, the matters must be incorporated into the bylaws of a limited liability company whendeemed necessary by the shareholders meeting. If the resolutions made by a shareholders’meeting require, the activities carried out in cash pooling arrangement need to be expresslycontemplated in the bylaws.

8 Any reference to the entity participating the cash pooling management in the form of physical sweeping in the below paragraphs will exclude listed companies registered in the PRC.


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2.3 Corporate benefit How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities? Is there an obligation to offer theparticipating entities market financial conditions (i.e. the “arm’s length principle")? What arethe liabilities and sanctions in case of violation of the corporate benefit of a participating entity(cancellation of the agreement, management liability, extension of bankruptcy proceedingsetc.)? Do they apply to directors, officers and shareholders?No direct definition or description to corporate interest could be found in the PRC law. Tounderstand the term, we need to distinguish the differences between individual corporateinterests, group interests, and shareholders’ interests. Article 3 of the PRC Company Law hasexpressed that “A company is an enterprise legal person, which has independent legal personproperty and enjoys the property right of the legal person.” Even the companies under thesame group may have their own interests. The aim of cash pooling management is to achievethe maximum of the efficiency and profitability of cash in the same group. In such process,certain entities may benefit more while other entities may benefit less or zero. To somedegree, the corporate benefits may be damaged though the group’s benefits may beimproved. It could be concluded that the corporate interests of different participating entitiesare distinct from the interests of other participating entities and the whole group as well.According to Article 5 of the PRC Company Law, the legitimate rights and interests of acompany shall be protected by laws and may not be infringed. We suppose that if thedirectors (including the shareholders who instruct the directors to act likewise) who approvethe cash pooling management which may actually have negative effect on the corporateinterests of the entity, they will be faced with relevant liabilities. The basis for any cash pooling management is the entrustment loan agreements signedamong the participating entities. Under the PRC Contract Law, any agreement must beentered into by the parties through equal negotiation. Under a cash pooling management, itis not required by law that (i) any participating entity (except for a listed company) mustenjoy the same terms and conditions in the entrustment loan or (ii) the terms and conditions(e.g. term and interest rate) must be on arm’s length basis. In practice, the terms andconditions will not depart from the market conditions, otherwise, it may lead to the followingproblems.First, it may be challenged by tax authority9 for potential price transfer among the membersof the same group if the terms and conditions are more favorable or disadvantageouscompared with the market conditions.Secondly, if the majority shareholder in a participating entity has procured the board ofdirectors to approve the cash pooling management with other affiliates (which may be alsounder its control) and such arrangement may have adverse effect on the corporate interestsof such entity while in favor of the whole group under its control. The minority shareholdersmay claim to the court for the damage caused by such management controlled by themajority shareholder. Under Article 21 of the PRC Company Law, “Neither the controlling

9 Details will be discussed in paragraph 4.5.

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shareholder, nor the actual controller, any of the directors, supervisors or senior managers ofthe company may injure the interests of the company by taking advantage of its connectionrelationship. Anyone who has caused any loss to the company due to violation of thepreceding paragraph shall be subject to liabilities to the company.” The minority shareholdersare entitled to take an action against the majority shareholder based on the rights granted bythe 2nd and 3rd paragraph of Article 152 of the PRC Company Law.If the terms and conditions on the entrustment loan are far away from the market conditions,the transaction thereunder may be revoked on the standing point that such arrangement hasdamaged the interests of creditors in the process of bankruptcy. Article 31 of the PRC Law onEnterprise Bankruptcy10 provided that “Within one year before the people's court accepts anapplication for bankruptcy, a bankruptcy administrator has the right to plead the court torevoke any act relating to the debtor's assets: (1) transferring the assets free of charge; (2)trading at an obviously unreasonable price; (3) providing asset guaranty to those debtswithout any asset guaranty; (4) paying off the undue debts in advance; or (5) giving up thecreditor's right.” Any favorable or unfavorable interest rate may be deemed as trading at anobviously unreasonable price by a competent court which may lead to the avoidance of theentrustment loan agreement in question. Also as provided in Article 128 of the PRC Law onEnterprise Bankruptcy, where a debtor has any act as prescribed in Article 31 by damaging theinterests of its creditors, the legal representative of the debtor or any other directly liableperson shall be subject to liabilities according to law. In our view, such responsible personnelmay include the senior managers (including but not limited to the legal representative) andeven the shareholders in violation of Article 31.11

The PRC law is silent on whether the security provided by the centralizing entity to thecentralized entity is necessary when the centralized entity offers the entrustment loan. UnderArticle 10 of the General Rules of Lending, except for entrustment loans, security must beprovided by the borrower under other forms of loan. We may infer from it that security maybe in the sole discretion of the participating parties.There is no criterion on the financial ratio of each participating entity.

2.4 Remuneration of the centralizing entityAre there any prescriptions as to the remuneration of the centralizing entity difference oflending/borrowing rates, lump sum fee)?In respect of the remuneration of the centralizing entity, there is no clear stipulation. In lightof the above mentioned issues when determining the terms and conditions of theentrustment loan agreement12 , it must comply with the principle of having adequateattraction to the parties without departing far away from the market interest rate. In practice,(i) when depositing funds to the centralized account, the rate will be properly higher than themarket deposit interest rate and (ii) when providing funds to the centralizing entities, the ratewill be reasonably lower than the market lending rate. However, whether the rate will beuniform in the same group may be determined freely. The remuneration may rely on themargin between the agreed interest rate and the market interest rate.

10 The law has come into force as of 1 June 2007.11 For more analysis please refer to paragraph 3. 12 Being deemed as a road to tax heaven, damage to the benefits of minority shareholders or creditors.


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In the China market, the centralizing entity, as a non-financial institution, is not allowed tomake investments on behalf of other participating entities. The commercial bank or groupfinance company involved will only act as agent lender. Therefore, the issue of prudentialinvestment rules will not be addressed herein.



Whether the cash pooling arrangement needs to be approved by the management board orthe supervisory board or the shareholders general meeting of a participating entity willdepend on the requirements of law and the bylaws. However, the PRC law usually sets higherrequirements for a listed company. If the participating entity is a listed company and theentrustment loan has exceeded the following standards stipulated by Article 9.3 of theGuidelines of Shanghai Stock Exchange for the Internal Control of Listed Companies 13, it mustbe submitted to the shareholders’ general meeting for approval: (i) amount accounting formore than 50% of the recently audited net asset, (ii) transaction amount accounting for 50%of net asset in the recent one year and exceeding RMB 50,000,000, (iii) incurred profitsaccounting for 50% of net asset in the recent one year and exceeding RMB 5,000,000, (iv) theprime operating revenue of transaction target accounting for 50% of the prime operatingrevenue of the listed company in the recent fiscal year and exceeding RMB 50,000,000; (v)the prime operating profits of transaction target accounting for 50% of the prime operatingprofits of the listed company in the recent fiscal year and exceeding RMB 5,000,00014.

According to Article 10.2.2 of the Guidelines of Shanghai Stock Exchange for the InternalControl of Listed Companies, when reviewing the related transactions, the relatedshareholders must obviate from voting. In light of the entrustment loan treated as a relatedtransaction among the participating entities under the same cash pooling arrangement, therelated shareholders must not take part in the voting.

According to Article 125 of the PRC Company Law, where any of the directors has anyrelationship with the enterprise involved in the matter to be discussed at the meeting of theboard of directors, he shall not vote on this resolution, nor may he vote on behalf of any otherperson. The meeting of the board of directors shall not be held unless more than half of theunrelated directors are present at the meeting. A resolution of the board of directors shall beadopted by more than half of the unrelated directors. If the number of unrelated directors inpresence is less than three persons, the matter shall be submitted to the shareholders'meeting of the listed company for discussion.

13 The same as the Listing Rules of Stock Listed on Shenzhen Stock Exchange.14 If the amount is negative, it shall be the absolute value.

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Are there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement of the purchaser involvingthe target modify the rules?

Generally, there is no stipulation on the use of the cash of the target or the target’ssubsidiaries to repay the acquisition loan. However, if the target is a listed company, the useof the target’s cash will be prohibited pursuant to Article 20 of the Guidance for the Articlesof Association of Listed Companies (Revised in 2006) which states that a listed company orits subsidiaries must not provide any financial assistance to any person proposed to purchaseshares of the company in the form of bestowal, security, indemnity or loan. If a listedcompany is a centralizing entity in the cash pool, when other participating entities desire touse the money in the pool to purchase the shares of the listed company, it may be challengedby CSRC.

2.8 Termination

Does any company law restriction prevent the centralizing entity from exercising itscontractual right to terminate the agreement?

The operation of the cash pooling relies on each individual agreement between or among thecentralized entity and each centralizing entity. When a party desires to quit from theagreement, the PRC law does not require the continuous performance of the agreement.However, any termination right must be exercised under the PRC Contract Law and pursuantto the individual agreement. The terminating party may assume correspondent liabilitiesunless being released in the agreement or being approved by the parties otherwise.

3. BANKRUPTCY

3.1 Legal consequences of a participating entity being insolvent or nearly insolvent on the operation the entity.

As inter-company lending is prohibited according to the General Rules of Lending, thecorporate has to use a bilateral entrustment loan structure to provide inter-corporatefinancing. Each member of the group constitutes an independent legal entity and thereforeundergoes an independent insolvency application and procedure.

Under the Law of the PRC on Enterprise Bankruptcy promulgated in 2006 (“Bankruptcy Law”),the application to and acceptance by people’s court shall result the legal effect of bankruptcy.In the event the People’s Court accepts an application for bankruptcy, the repayment of debtsmade by a participating party to any creditor individually shall be invalidated.

As cash pool arrangement in China is mainly conducted in the form of entrustment loansstructure, there usually exists an entrustment loans agreement among the centralized entity,centralizing entity and the bank. So the continuation of the entrustment loan agreement inthe event of insolvency proceedings is a key issue.


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According to the Bankruptcy Law, any undue creditor’s right under the entrustment loansshall be deemed as payable and the calculation of the interest of any creditor’s right shall bestopped when the relevant application for bankruptcy is accepted.

Furthermore, although it is prohibited that repayments of a participating entity to anycreditor individually when the application for bankruptcy is accepted by the People’s Court,there also exists exceptions of the prohibition.

According to Article 40 of the Bankruptcy Law, where a creditor is indebted with its debtorbefore an application for bankruptcy is accepted, it may claim for offsetting against thebankruptcy administrator. However, under any of the following circumstances, the relevantdebts shall not be offset:

(1) Where a debtor of the debtor obtains the creditor's right of any other party against thedebtor after the application for bankruptcy is accepted;

(2) Where a creditor learns that a debtor is incapable of paying off its due debts is in theprocess of applying for bankruptcy and if it is indebted with the debtor; with theexception, however, that the creditor assumes its liabilities according to the provisions oflaw or for any reason as incurred one year before the application for bankruptcy is filed;and

(3) Where a debtor of the debtor learns that the debtor is incapable of paying off its debtsor is in the process of applying for bankruptcy, and therefore obtains the creditor's rightfrom the debtor, except where the debtor's debtor obtains the creditor's right accordingto law or for any reason as incurred one year before the application for bankruptcy.

However, the right to offset shall not be fulfilled in the event when the two debts areconnected.

3.2 Centralizing entity’s ability to exercise its contractual right to terminate the agreement?

According to Article 18 of the Bankruptcy Law, the administrator of the participating entityhas the right to choose to terminate or to continue.

After the People's Court accepts an application for bankruptcy, the relevant bankruptcyadministrator shall decide to terminate or continue to perform a contract that has beenestablished before acceptance yet has not been fully performed by both parties concernedand notify the opposite party concerned of its decision. Where the bankruptcy administratorfails to inform the opposite party concerned within two months as of the day of acceptanceor to make any reply to an urge made by the opposite party concerned, it shall be deemed astermination of the entrustment loans agreement.

Where the bankruptcy administrator decides to continue a contract, the opposite partyconcerned shall continue the performance of the contract yet it has the right to request theadministrator to provide guaranty. Where the administrator does not provide any guaranty,it shall be deemed as termination of the contract.

3.3 Risk extended to other participating entity

Each of the centralized entity and centralizing entity in the cash pool scheme is anindependent entity, therefore the proceeding of bankruptcy shall not affect the other

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participating party. As the relationship of the cash pool scheme is constructed under theentrustment loans agreement which does not include any share of assets management, itdoes not assume any mismanagement liability that will incur any risk of the otherparticipating entity.

If the centralized entity as the shareholder of the centralizing entity has any conducts underArticles 31, 32 and 33 of the Bankruptcy Law which will be deemed as impair to thebankruptcy assets, a claims for damages will cause the liability of the centralized entityaccording to Article 128 of the Bankruptcy Law.

4. TAX ISSUE



Cash management operations are subject to business tax rather than value added tax in thePRC.

Since the cash management services in the PRC are generally carried out by way ofentrustment loans, the interest rate of the entrustment loans influences the business incometo a large extent. Although the interest rate of the entrustment loan shall be decided throughconsultation between the centralizing entity and the centralized entity, it is advisable for theenterprises to consult with the local taxation authorities for the interest rate of theentrustment loan in advance. The taxation authorities generally impose the business tax onthe interest income of the enterprises. As a result, if the interest rate of the entrustment loanis zero agreed by the centralizing entity and the centralized entity, it may not be recognizedby the taxation authorities.


Taxation cost of cash pooling in China is the taxation on interest which is a sort of businesstax on the interest of the entrustment loans. According to Article 11 of the ProvisionalRegulations of the PRC on Business Tax, the entrusted financial institutions shall be thewithholding agents and the business tax rate is 5% according to the Business Tax TaxableItems and Tax Rates Table.

If the company receiving the interest is located in China, the interest received qualifies asfinancial products and is therefore subject to corporate tax at an ordinary corporation tax rate(25%) according to the PRC Enterprise Income Tax Law which has come into effect as of 1January 2008. If the company receiving the interest is located abroad, the interest paid canbe subject to a withholding tax in the PRC, at a rate determined according to the bilateral taxtreaties.


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4.3 Stamp dutyStamp duty is payable against entrustment loan agreements. According to the InterimRegulations of the PRC on Stamp Duty promulgated in 1998, a one–off payment of 0.005%of the contract principal amount must be paid for each original copy of the agreement. Stampduty is payable by all parties involved in the cash pooling agreement: the entrusted bank, theconcentration leader and the participants. And the calculation of the stamp duty depends onthe actual highest outstanding amount of the entrustment loans. For example, if the grantingamount of entrustment loans from the centralized entity to the centralizing entity is RMB 1billion and the actual highest outstanding amount of the entrustment loans is RMB 100million, the base of the stamp duty is RMB 100 million.

4.4 Deductibility of interestFor the first time, the PRC Enterprise Income Tax Law introduces a thin capitalization rule forentities in the PRC. Specially, Article 46 states that the ratio of debt investments to equityinvestments from related parties must follow the “prescribed criteria“; otherwise the interestfrom the excess debt would be deemed to be non-deductible for tax purposes. And unlikemany other countries, these thin capitalization rules make reference to loans from relatedparties. According to Article 119 of the Implementation Regulations of the PRC Enterprise Income TaxLaw, “Debt investment” shall refer to financing directly or indirectly obtained by an enterprisefrom its related parties that requires repayment of principal and interest, or other forms ofcompensation with an interest element. “Equity investment” shall refer to investmentobtained by an enterprise without the need of the repayment of principal or interest, and theinvestors having the entitlement to the net assets of the enterprise. The “prescribed standard”

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15 Limited to banks or financial institutions according to the Notice of the State Taxation Administration on the Relevant Issues concerning the Implementation of the Interest Clauses in Tax Treaties (issued on 1 March 2006).

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shall be determined by the in-charge finance and tax departments of the State Councilthough the criterion of “prescribed standard” is not made by the authorities currently.

4.5 Tax havensAccording to the Article 3 of the PRC Enterprise Income Tax Law, a resident enterprise shallpay the enterprise in come tax on its incomes derived from both inside and outside China.One of the new measures to combat tax-avoidance is “controlled foreign corporation” rules(“CFC”) under which Chinese shareholders may be taxed on their portion of undistributedprofits as retained by CFCs in certain low-tax jurisdictions without valid business reasons.According to the second paragraph of Article 3 of the PRC Enterprise Income Tax Law, if a non-tax-resident enterprise has an establishment in China, it shall pay enterprise income tax onthe China-sourced income of its establishment and on its income derived abroad that isactually connected with its establishment. And according to the third paragraph of Article 3of the PRC Enterprise Income Tax Law, if a non-tax-resident enterprise does not have anestablishment in China, or if it has an establishment in China but its income is not actuallyconnected with such establishment, it shall pay Enterprise income tax on that of its incomesourced in China. We understand for a non-tax-resident enterprise established in the a taxhaven, it shall also pay enterprise income tax on that of its income sourced in China, no matterit has an establishment in China or it does not have an establishment in China.

4.6 Favorable tax regimeExcept for foreign exchange department, during the business of foreign exchange reserve,entrusting financial institution to grant foreign exchange loans, there isn’t any favorable taxregime to the business tax on interests under PRC laws and regulations.

4.7 Transfer price issuesAs most cash pool scheme in the PRC is conducted in the form of entrustment loans, theentrustment loans between the centralized entity and the centralizing entity may be deemedas an affiliate relationship under the PRC Company Law. And the entrustment loans betweenaffiliates may be deemed as an affiliated transaction.According to the Article 41 of the PRC Enterprise Income Tax Law, with regard to a transactionbetween an enterprise and its affiliate, if the taxable revenue or income of the enterprise orits affiliate decreases due to inconformity with the arms length principle, the tax authoritiesmay make an adjustment through a reasonable method.However, under PRC taxation regime, there exist some transfer price issues of the affiliatedtransactions. According to the Taxation Administration on the Transactions betweenAffiliates modified in 2004, tax authorities are empowered to make tax adjustment whentransactions between related parties are not priced on an arm’s length basis. The adjustments by the tax authorities under Article 56 of the Detailed Rules for theImplementation of Tax Collection and Administration Law (issued on 15 October 2002) mustbe made within three years of the taxation year in which the transaction occurred. However,under “extraordinary circumstances” tax authorities may make adjustment within 10 years16.

16 Details of “extraordinary circumstances” are clarified in the Guoshuifa [2003] No.47 issued by the State Administration of Taxation.


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So in order to mitigate this potential risk, it is effective to enter into an Advance PricingAgreement (“APA’) with tax authorities according to the Article 46 of the PRC EnterpriseIncome Tax Law. Provided subsequent transactions are carried out in accordance with theAPA, tax authorities will honor their agreement to the policies and make no adjustments forthe effective period. Additionally, it allows taxpayers a stronger voice to pursue theirapplication with local tax bureaus.

5. CENTRAL BANK REPORTINGAre there central bank reporting obligations (balance of payments), bearing upon thecentralizing entity / each centralized entity / the banks?According to the Procedures for Reporting Balance of International Payments issued by PBOC,Balance of International Payment reports should cover all economic transactions betweenChinese residents and non Chinese residents17. While carrying out transactions with non-Chinese residents through financial institutions in China, the Chinese residents shall report,through the financial institution, the contents of the transactions to SAFE or its subsidiaries18.In the above event, the payment overseas exceeding USD 2,000 shall be reported to SAFE orits subsidiaries by the financial institution through which the transactions are carried out.19

6. EXCHANGE CONTROL REGULATIONSAre there any restrictions to the transfer of cash to foreign entities of the same group or theconversion of the local currency in other currencies?There are several restrictions on cash management involving foreign currency in Chinabecause of the strict regulations on the management of foreign exchange. Pursuant to the2004 SAFE Notice, the transfer of cash to foreign entities of the multinational company shallcomply with these provisions:

1. Qualifications of entities: 20

(1) Multinational company shall be an enterprise group concurrently comprises of membercompanies both at home and abroad and whose global or regional (including China)investment management functions are exercised by one of its member companies withinChina.

(2) Both the entrusting lender and the borrower shall have been lawfully setup uponregistration, and their registered capital has been fully paid in due time; and

(3) A Chinese-invested multinational company shall have at least three member companiesabroad;

(4) A foreign-invested multinational company shall have at least three member companieswithin China;

17 See Article 2 of the Procedures for Reporting Balance of International Payments; Article 3 prescribes legal persons of enterprises and institutions established on Chinese territory according to law are included in Chinese residents.

18 See Article 8 of the Procedures for Reporting Balance of International Payments.19 See Article 1 of the Circular on Adjusting the Limitation of Indirect Reporting Balance of International Payments.20 See Article 2.2 of the 2004 SAFE Notice

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(5) The China-based member company that exercises the global and regional investmentmanagement function of a multinational company shall have made at least USD 5 millionof investment in total into its overseas counterpart(s), and the overseas counterpart(s)were rated as Class II or higher in the latest joint annual inspection over overseasinvestments;

(6) As for a China-based member company of a multinational company that provides thelending fund, the ratio of its foreign exchange receivable of the previous year to its totalforeign exchange asset shall be lower than the normal or average level of the foreign-funded enterprises of the same industry of the previous year. The amount of bank foreignexchange settlement conducted by the company in the previous year shall be bigger thanits foreign exchange purchase amount; or if the foreign exchange purchase amount isbigger than the bank foreign exchange settlement amount, the margin between themshall be lower than the normal or average level of the foreign-funded enterprises of thesame industry of the previous year. The owner’s equity shall not be less than USD 30 million and the ratio of net asset to the total asset shall not be less than 20%;and

(7) As for a member that has been allowed to lend foreign exchange fund to its overseascounterparts, it shall, within the stipulated time limit, have taken back the principal andproceeds of the previous fund lent abroad.

It is noted that 2005 SAFE Notice has broadened the above strict qualifications for certainChinese-invested multinational companies in order to encourage domestic companies toinvest overseas, that is, Chinese-invested multinational companies registering in PudongShanghai may be allowed to lend foreign exchange fund to their overseas member companiesthough they can not satisfy the qualifications for the moment21.

2. SAFE’ approval: 22

The loan has to be approved by SAFE within 30 working days from the date SAFE receives acomplete set of application materials/documentation from the relevant parties, including, butnot limited to, filled-in application form, duly executed loan agreement, the entrustinglender’s audited financial report in the last year, the latest capital verification report of theentrusting lender and other documents as may be required by SAFE.

3. Other restrictions:(1) Subject to the limit of the loan as approved by SAFE, the onshore company may within

6 months after SAFE’s approval, remit the loan proceeds to the offshore company in alump sum or by several advances, each of such remittance shall be however subject toSAFE’s prior verification;

(2) After obtaining SAFE’s relevant approval, the onshore company shall by submitting therelevant required application documents to SAFE, apply for opening a specific drawdownaccount for the loan with the bank;

(3) the interest rate agreed by the companies must reflect the interest rates of commercialloans of the same period in the international financial market and must not be unusuallyhigh or low;

21 See Article 3 of Detailed Rules for Experimental Measures for Broadening the Restriction on Overseas Lending of Multinational Company 22 See Article 3.2 of the 2004 SAFE Notice


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(4) the foreign currency funds under the loan must be funds owned by the entrusting lenderitself including funds from the capital foreign exchange account or current foreignexchange account which can be disposed of freely and must not be funds borrowed bythe entrusting lender from another source23;

(5) the foreign currency loan between the onshore companies must not be converted intoRMB or be used as a pledge in any RMB loan transaction; and

(6) the term of each loan provided by an onshore company to an offshore company must notexceed 2 years.

A multinational company having been engaged in internal operation of overseas loans overone year shall, in June each year, gather the information about the overseas loans of itsonshore member companies and submit it to SAFE for examination.


There are no specific accountancy obligations and standards for entities participating in a cashpooling arrangement.

PRC Ministry of Finance promulgated PRC Generally Accepted Accounting Principles--Application Guidelines (“Application Guidelines“) containing thirty-eight detailed principles,which shall compulsorily apply to all of the PRC listed companies, banking institutions(including all commercial banks, foreign banks, asset management companies, trustcompanies, finance companies, financial lease companies, auto finance companies and inter-dealer brokerage companies governed by CBRC), the fund management companies, thesecurities companies, the insurance companies and futures brokerage companies. The otherenterprises shall have an option to implement the Application Guidelines. If such enterprisesdo not choose to implement the Application Guidelines, they may choose to implement the2000 Enterprise Accounting Rules promulgated by Ministry of Finance or the accounting rulesof the relevant industry into which they fall (for example, a non-listed real estatedevelopment company may choose to implement the Accounting Rules of Real EstateDevelopment Enterprises).

8. E-CASH POOLING Are there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?

Banks shall take measures to secure the safety of transferring information betweenparticipating companies, and between banks and participating companies. The PRC ElectronicSignatures Law became effective as of 1 April 2005, which recognizes the effectiveness of areliable electronic signature24. According to the 2005 Guidelines of Electronic Payment, when

23 In some areas, a multinational company in the PRC is allowed to purchase foreign currency to provide a loan to the offshore companies, such as a multinational company registered in the Pudong New Area, Shanghai.

24 According to Article 14 of the PRC Electronic Signatures Law, a reliable electronic signature shall have the same effect as the written signature or chop by hand.

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providing service for the business of clients’ electronic payment, banks shall, based on thenature of the client, types of electronic payment and payment amount etc., reach anagreement with the client on a proper authentication method, such as the cipher, encryption,digital certificate and electronic signature. If banks adopt digital certificate or electronicsignatures to attest the identity of the clients and the authorization of transactions, generallya qualified electronic authentication institution will be required to provide authenticationservices. Such cipher, encryption, digital certificate, electronic signature and authenticationwill make the e-cash pooling safer. In practice, banks and large groups usually will SWIFT andnetwork SWIFTNet to secure the safety and confidentiality of transferring funds andinstructions.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?From our points of view as non-accounting professionals, there is no specified regulationabout financial reporting, evaluation and control obligations associated with cash poolingarrangements in the PRC. According to the Accounting Standards for Enterprises No.35(Segment Reporting) in the PRC, the enterprises are required to disclose the risk in the“business segments” and “geographical segments”, but it doesn’t refer to the risk disclosure ofthe “cash management”. And no relevant regulation under the PRC law requires theenterprises to make internal control evaluation and reporting, which is stipulated in SEC 404of Sarbanes-Oxley Act of USA. We believe with the development of the financial market inthe PRC, the legal environment for the cash management will be improved.


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UNDER CZECH LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in the Czech Republic. The principles set out belowshould be considered in relation to individual circumstances, with legal and tax counsel.

HAVEL & HOLÁSEK s.r.o.,Advokátní kancelář

Týn 1049/3, 110 00 Prague 1Czech Republic

TACOMA Tax Consulting s.r.o. Bredovský dvůr, Olivova 4, 110 00 Prague 1

Czech Republic

Josef OTČENÁŠEKPartner

Banking, Finance & Capital MarketsTel.: (+420) 224 895 950Fax: +420 224 895 980

E-mail: [email protected]

Dita ŠULCOVÁSenior Manager

Tel: +420 226 219 000Mobile: +420 731 412 741


Věra PAŠTIKOVÁSenior Consultant

Tel: +420 226 219 000Mobile: +420 739 609 022



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1.1.1 ZBA cash poolingDo loans/advances to other group entities require banking authorities’ approval for thecentralized entities or the centralizing entity? Is a distinction to be made between short term,mid term and long-term loans/advances? Cash pooling implies an arrangement whereby the credit/debit positions of different accountsincluded in the cash pooling arrangement are viewed from a single summary perspective.Zero-balance accounts (or ZBA) cash pooling is a type of cash pooling that involves thephysical transfers of funds from multiple participating accounts to a single account(designated as the Master Account) and vice versa to achieve a zero-balance on allparticipating accounts and the summary position on the Master Account. If separate legal entities (forming part of the same group) participate in the ZBA cash pooling,the arrangement involves loans/advances among group entities.In the Czech Republic, loans/advances to other group entities do not per se require bankingauthorities’ approval for the centralized entities (i.e., entities holding one or more of theparticipating accounts) or the centralizing entity (i.e., the entity holding the Master Account).As a result, no distinction needs to be made between short term, mid term and long-termloans/advances.

Do investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized entities require banking authorities’ approval forthe centralized entities or the centralizing entity? Is an exemption available in groupcompanies?In general, the provision of investment services in the Czech Republic requires a securitiesdealer license from the Czech National Bank. The definition of investment services includes,among other things: (A) the execution of trades in investment instruments (such as shares,bonds, participation certificates, other securities commonly traded in financial or moneymarkets and derivatives) for the account of a third party, (B) engaging in these transactionson own account if the activity is conducted as a service to third parties, and (C) assetmanagement where the managed property includes one or more investment instruments.The above-mentioned regulated activities would therefore generally encompass the activityin which the centralizing entity engages in transactions in financial instruments includingderivative products on behalf of the centralized entities. However, an exemption is availableto persons who provide such investment services exclusively to their affiliates (i.e., personscontrolled by, controlling or under common control with the provider of the investmentservices). No banking authorities’ approval is required in such case.

In both cases, is there an exemption available for operations within groups of companies? Whatare the sanctions, if any, for breaching this requirement?As indicated above, an exemption is available to persons who engage in the relevantoperations as a service provided to their affiliates.

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The failure to obtain the requisite authorization may result in a penalty of up to CZK 5 million(approximately EUR 200.000), but it may also lead (in extreme situations) to criminalsanctions.



Notional pooling is a mechanism of calculating interest on the basis of the aggregated creditand debit balances of the participating accounts, but it does not involve any physical transferof funds among the participating accounts. The arrangement does not impose any obligationsor restrictions on the participating entities regarding the use or other management of theirfunds.

Czech law does not impose any prohibition/restrictions on banks/participating entitiesimplementing notional pooling (i) by way of bank margins reductions, (ii) by way of mergingcurrent account balances of the centralizing and centralized entities in order to create a singlebalance, or (iii) by way of calculating interest payable to each account based on merged scalesof interest.

Banks are not expressly required by law to require cross guarantees from participating entities.



Under Czech foreign exchange law, a person engaging in transactions in foreign currency (i.e.,buying and selling foreign currency) is required to obtain a foreign exchange license if theactivity is conducted as a business activity (i.e., a systematic and regular activity conductedwith a view to realizing profits or, in other words, a service to third parties).

Assuming the transactions in foreign currency are concluded between affiliates, it should begenerally possible to structure the arrangement such that none of the participating entitieswould be considered to be engaged in the transactions as a business activity (service to otherparties). However, a careful analysis is generally required on a case-by-case basis to determinewhether the foreign exchange license is necessary and a prior consultation with the CzechNational Bank may be advisable in unclear cases.



Such activities are not subject to any approval requirements under Czech banking regulatorylaws.


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Any information concerning a bank account of any centralized entity is subject to bankingsecrecy and may not be disclosed by the bank to the centralizing entity, except with the priorexpress consent from the relevant centralized entity.



Regulated financial institutions (banks, securities firms, insurance companies, investmentcompanies and investment funds, pension funds) are subject to specific restrictions as part ofthe prudential regulatory regimes applicable to them (e.g., limits on large exposures, specificlimitations on investments in certain assets and investment diversification requirements,limitations and requirements applicable to investment of clients’ funds, general prudentialrequirements, etc.). These specific restrictions and requirements may significantly limit theability of these institutions to implement ZBA cash pooling. On the other hand, there are nospecific restrictions or requirements that would limit the ability of these institutions toimplement notional cash pooling.

There is no specific requirement under Czech law that the global effective rate be stated inthe centralization agreement.

Czech money laundering regulations require that banks identify their customers by means ofsupporting evidence when opening a bank account. The regulations are harmonized with theEU Money Laundering Directives and impose specific duties in the following main areas: (i)identification of customers and suspicious transactions, (ii) notification of suspicioustransactions to the Ministry of Finance, (iii) storage of relevant data and documents, (iv)confidentiality duties, and (v) internal system and staff training.

1.4 Outsourcing


Czech law does not prevent outsourcing of cash pooling functions to an agent that is not amember of the group. However, the agent may need to obtain the necessary authorizationsfor the provision of banking, investment services or foreign exchange services in order to beable to provide such service (in particular, please note that the exemption for investmentservices provided exclusively to affiliated persons would not apply – please refer to section1.1.1 for more details).

In the case of regulated financial institutions, outsourcing may be subject to certainregulatory requirements and limitations designed to ensure prudent management ofassociated risks.

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2. CORPORATE LAW



Czech law does not impose any restrictions as regards the corporate form of entities that canparticipate in cash pooling arrangements, either as a centralized entity or centralizing entitiesand/or the form or the nationality of shareholders, except that the central and localgovernments, governmental agencies and certain other non-profit organizations ororganizations entrusted by law with special public service functions (such as building andmaintaining roads) may be limited in participating in cash pooling arrangements by theirlimited corporate purpose.



Under Czech law, cash pooling arrangement does not need to be expressly contemplated inthe bylaws. Specific authorization set out in an organization’s constitutive documents maybe required in the case of governmental agencies and certain other non-profit organizationsor organizations entrusted by law with special public service functions.



Czech law does not define the concept of a corporate benefit in explicit terms, but theconcept finds its manifestation in various legal requirements.

Most importantly, directors of a company have a duty (vis-à-vis the company) to executetheir powers with due care and are personally liable to the company for any damage causedby the breach of such duty. However, the breach does not affect the validity of any concernedtransactions with respect to third parties. As an exemption, directors are not liable for anydamage to the company arising as a result of the performance of an instruction of the generalmeeting (except when such instruction is illegal).


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Additional requirements apply to transactions between group entities:

• the controlling shareholder may not exert his influence to force the adoption of a measureor the conclusion of an agreement which may cause a loss to the controlled company,unless the controlling shareholder reimburses the company for such loss or executes anagreement on its reimbursement by the end of the same fiscal year. Should the controllingshareholder fail to reimburse the company for the loss, the company and its othershareholders are entitled to claim reimbursement from the controlling shareholder (pleasenote that, subject to certain conditions and exemptions, directors of the controlling ancontrolled company personally guarantee such obligation of the controlling shareholder);

• between entities that are personally connected within the meaning of the specificprovision of Czech law (such as in the case when any single individual is entitled to legallyrepresent both entities) loans and advances may be concluded only on an arm’s lengthbasis. Furthermore, in the case of upstream loans and advances, the approval by the generalmeeting of the controlled entity is required. The same requirements apply to the grantingof security by a company to secure obligations of a personally connected entity; and

• Czech law requires that, prior to the issuance of any intra-group guarantee (whetherdownstream, upstream or cross stream), the value of which exceeds 10% of the registeredcapital of the guarantor and/or borrower: (i) the value of the guarantee is assessed by acourt-appointed expert, (ii) the borrower undertakes to pay the value of the guaranteedetermined by the expert to the guarantor, and (iii) the issuance of the guarantee isapproved by the general meeting of the guarantor and/or borrower if it is issued within aperiod of three years from their incorporation. It is subject to discussion to what extent theabove rules might be applied not only to the issuance of intra-group guarantees, but alsoto the provision of any intra-group security and even to the extension of intra-group loansand advances.

Czech law does not impose any restrictions on the participation of certain entities in cashpooling due to their financial structure (ratios, etc.). There is no explicit requirement underCzech law to offer all participating entities equivalent terms and conditions (please note,however, that the requirement of an arm’s length basis, in cases in which it applies, may limitthe possibility of setting substantially different terms and conditions).

There are no explicit restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities. However, in cases when the centralizingentity is a regulated financial institution, the general professional requirements and standardsrelating to customer handling would also apply to services provided to the participatingentities.


Are there any prescriptions as to the remuneration of the centralizing entity (difference oflending/borrowing rates, lump sum fee…)?

There are no such specific prescriptions.

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2.5 Investment of excess cash by the centralizing entityAre there prudential investment rules? Prudential investment rules apply only to regulated financial institutions providing its servicesto participating entities.

2.6 Approval of cash pooling arrangementDoes the cash pooling arrangement need to be approved by the management board /supervisory board or the shareholders?In principle, Czech law does not require that cash pooling arrangements be approved by themanagement board/supervisory board or the shareholders of any participating entity. Theapproval by the shareholders is required in situations set out in detail in section 2.3.

2.7 Specific aspects relating to acquisition financing exitAre there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement modify the rules? Does anycompany law restriction prevent the centralizing entity from exercising its contractual right toterminate the agreement?Under Czech financial assistance rules (which apply to joint stock companies and limitedliabilities companies as the two main types of business entities in the Czech Republic), acompany (or any of its subsidiaries) may not advance loans or credits for the purpose ofacquiring its own shares, nor can it secure any loans or credits advanced for such purposes orother obligations relating to the acquisition of its own shares.Although the issue is not absolutely clear and may be subject to debate, it is prudent toassume that the use of cash of the target or the target’s subsidiaries to repay the acquisitionloan might be considered as violating or circumventing Czech financial assistance rules,especially in cases when there is a close timing or structural connection between theacquisition and the use of the funds of the target (or the relevant subsidiary). The existenceof a cash pooling arrangement could be used as an argument that there is no structuralconnection between the acquisition loan and the use of cash, but it does not per se provideany exemption from the financial assistance rules. Czech company law does not impose any restrictions preventing the centralizing entity fromexercising its contractual right to terminate the agreement.

3. BANKRUPTCYWhat are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)?On January 1, 2008, new insolvency laws came into force in the Czech Republic. The newinsolvency law contains several provisions which may affect the ZBA cash poolingarrangement in the event that a participating entity becomes insolvent:

• the mere fact that a participating entity becomes insolvent (i.e., even without any formalproceedings being opened) may lead to certain negative consequences for the other


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participating entities. The insolvency act stipulates that any transaction of an insolventdebtor prejudicing any creditor may be held "ineffective" by the insolvency court. If atransaction is held "ineffective", the trustee may require that the parties to the transaction(or any person benefiting there from) return the performance (or the benefit realized fromthe transaction) to the bankruptcy estate. There is a general 3-year statute of limitationsperiod for the trustee to attack transactions of the insolvent debtor concluded with relatedparties;

• the new insolvency law imposes certain restrictions on the debtor’s right to dispose of itsassets and liabilities once the insolvency proceedings are opened (irrespective of whetherthe debtor is actually insolvent or not). Most importantly, after an insolvency petition isfiled, the debtor may discharge its liabilities only insofar as it falls within the ordinarycourse of business. If the debtor fails to comply with these statutory requirements, thetransaction can be held "ineffective" against creditors of the debtor. Although day-to-daytransactions within the framework of the cash pooling arrangement should typically beregarded as transactions within the ordinary course of business, it cannot be excluded thatlarge withdrawals of funds from the account of the entity affected by the insolvencypetition could be successfully challenged, especially if occurring between related parties;and

• when a participating entity is declared bankrupt, its right to dispose of its assets andliabilities passes to the trustee. Any payments out of the cash pooling account of thebankrupt entity made by the bankrupt entity could be challenged by the trustee. At suchstage of the insolvency proceedings, the only way to enforce claims against theparticipating entity is to register the claims with the insolvency court.

Would this limit the centralizing entity's ability to exercise its contractual right to terminate theAgreement?The centralizing entity has the right to terminate the Agreement in accordance with termsagreed with the other participant of the cash pooling. Neither the fact that a participatingentity becomes insolvent nor the opening of the insolvency proceedings against aparticipating entity will affect the right of the centralizing entity to terminate the Agreement.

Are there any risks that bankruptcy proceedings issued against the centralizing entity or acentralized entity could be extended to other participating group entities?There is no such legal risk. However, as indicated above, the opening of the bankruptcyproceedings against a participating entity may affect its ability to make payments to otherparticipating entities within the framework of the cash pooling arrangement.

4. TAX ISSUES

4.1 Value added tax (VAT)Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?From a VAT perspective, provisions of loans that are not an extraordinary activity are

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considered to be the financial activity of “provision of loans and cash” which is VAT exempt.The place of taxable supply depends on the registered office of the recipient of the service.

4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?The general corporate tax rate is applicable. The Czech tax corporate tax rate is 24% for 2007,21% for 2008, 20% for 2009 and 19% for 2010 and subsequent taxable periods.

Is there a withholding tax on interest paid to a foreign entity? Yes, generally 15%. However, the withholding tax rate can be reduced by an applicable doubletaxation treaty.

What is maximal applicable rate in relation to the following countries?

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 0% 10% 10/15% 10% 10% 0% 0% 0% 10% 0% 10% 0% 0% 10%

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 0% 10% 0% 10% 10% 0% 0% 0% 0% 0% 0% 15% 10% 0%

4.3 Stamp duty


No.



Is it possible to obtain a ruling from the tax authorities as to the deductibility of interest? Ifso, at what conditions may it be obtained?


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According to generally accepted interpretations, “zero-balance pooling” is considered as theprovision of loans.In general, interest on loans is a taxable income for the lender and an expense for theborrower. If there are debit balances, thin capitalization rules must be applied.New thin capitalization rules are applicable from 1 January 2008:

• the equity-to-debt ratio of 1:2 restricts the tax-deductibility of financing costs in respectof intra-group credits and loans, or credits and loans where the security is provided by arelated party;

• the equity-to-debt ratio of 1:6 (1:4 from 2009 onwards) restricts the tax-deductibility offinancing costs in respect of all credits and loans (from related as well as unrelated parties);

• financing costs related to subordinated credits and loans or profit participating loans areconsidered as completely non-tax deductible; and

• the total of tax deductible financing costs is limited by an amount calculated from anaverage of the principal actually drawn. The total amount of tax deductible financing costsis restricted by a rate derived from an average interest rate on inter-bank deposits with amaturity of 12 months and increased by 4%.

The restrictions will not apply if financing costs for the tax period do not exceed CZK 1 millionand the creditor, or the party providing security, is not a related party.For a transitional period, the new rules only apply to agreements entered into after January 1,2008 and to agreements with an amendment changing the principal amount or the interestrate after this date. From 2010 onwards, the new rules will apply to all agreements.Transfer-pricing issues are mentioned below (please refer to section 4.7).

4.5 Tax havens


No.



No.



If the lender and the borrower are related parties under the Czech Income Taxes Act, theinterest should be at arm’s length, i.e. at usual market rates. Arm’s length interest is interestagreed between unrelated parties for a loan under the same or similar circumstances. Usually,the interest is determined using interest rates that could have been agreed under similarcircumstances (loan, security, maturity, repayment). If the entity fails to prove that the interest complies with the arm’s length principle, the taxauthority is entitled to adjust the tax base by the ascertained difference (i.e., exclude a partof interest expenses from the tax base or increase the tax base by interest revenue).

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An official binding decision from the Financial Authority can be issued to confirm thecorrectness of a transfer-pricing arrangement between related parties.


There is a specific exemption (provided under the Decree of the Czech National Bank),pursuant to which no reporting obligations (balance of payments) are imposed on thecentralizing/centralized entities/the banks in relation to their cash pooling operations.


There are no such restrictions.

7. ACCOUNTANCY OBLIGATIONS AND STANDARDSWhat, if any, are the specific accountancy obligations and standards for entities participatingin a cash pooling arrangement?

The receivables and liabilities arising from the transfer of funds to the main account shouldbe recorded in separate accounts in Group 35 (Receivables from partners, associationmembers and cooperative members) and Group 36 (Liabilities to partners, associationmembers and cooperative members) in accordance with Czech Accounting Standards. Werecommend that the contractual documentation be assessed individually.


Certain data security aspects should be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks such as data protection, bankingsecrecy and regulations governing electronic transactions and commerce. Czech regulationof data protection, electronic transactions and commerce is generally modelled according tothe relevant EU legislation governing these areas.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?

For the purposes of financial reporting, valuation and review, we recommend that thereceivables and liabilities arising from the transfer of funds to the main account be reportedseparately to allow cross compliance and consolidation.


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UNDER DANISH LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Denmark. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

LETTCopenhagen

Raadhuspladsen 4 - DK-1550 Copenhagen VTel +45 33 77 00 00 - Fax +45 33 77 00 01

Claus Molbech BendtsenEmail: [email protected]

Ricki BoyeEmail: [email protected]


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1.1 Banking authorities approval or exemption

1.1.1 Zero balancing cash pooling

Do loans/advances to other group entities require banking authorities’ approval for thecentralized entities or the centralizing entity? Is a distinction to be made between short term,mid term and long term loans/advances?

Provided that the cash pooling activities are limited by the centralizing entity to centralizationof cash flow from the other group entities in order to optimize the cash flow within the group,the centralizing entity does not need a banking license or an approval from the Danish FSA.

It does not fall within the powers of the Danish FSA to monitor cash pooling activities.

As to the question of approval of banking authorities, no distinction is to be made betweenshort term, mid term and long term loans/advances


Is there any prohibition/restriction on banks/participating entities implementing notionalpooling (i) by way of bank margin reductions, (ii) by way of merging current account balancesof the centralizing and centralized entities in order to create a single balance, or (iii) by way ofcalculating interest payable to each account based on merged scales of interest? Do banksrequire cross guarantees from participating entities? Can such guarantees be capped?

There is no prohibition on the establishment of notional pooling arrangements, but banksmay request certain formalities to be complied with by all group companies in the form ofbank mandates or agreements.

Under Danish company law the scale of interest payable to each entity of the cash poolingarrangement must correspond with the actual payment or withdrawal within the cashpooling arrangement.

Furthermore, general limitations in banking regulation will apply, e.g. restricting the relativesize of a bank’s allowed loans to a single borrower.


Does the arrangement, whereby a centralized entity agrees to buy from and sell to thecentralizing entity all its foreign currencies, require banking authorities’ approval or consent?

Provided that the cash pooling activities are limited by the centralizing entity to centralizationof cash flow from the other group entities in order to optimize the cash flow within the group,the centralizing entity does not need a banking license or an approval from the Danish FSA.



Provided that the cash pooling activities are limited by the centralizing entity to centralization

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of cash flow from the other group entities in order to optimize the cash flow within the group,the centralizing entity does not need a banking license or an approval from the Danish FSA.

1.2 Banks’ duties of confidentialityCan the centralizing entity obtain from banks holding the accounts of centralized entitiesinformation on such accounts?In order to obtain information on accounts held by centralized entities, the centralizing entityneeds to display a letter of authority granted by each of the centralizing entities.

2. CORPORATE LAW

2.1 Form of participating entities Are there restrictions as regards the form of entities that can partici-pate in cash poolingarrangements, either as a centralized or centralizing entities (certain forms of entities,groupings, partnerships…) and/or the form or the nationality of shareholders (state ownedentities, foreign shareholders…)?In accordance with section 115 (1) of the Danish Companies Act, Danish limited companiesare unauthorized to grant loans to (or provide security for) its shareholders or relativesthereof. The prohibition does not apply to loans to a Danish parent company which is a limitedcompany according to section 115 A (1) of the Danish Companies Act.Furthermore, the prohibition does not (as of May 2001) apply to loans to a parent companywhich has its registered office in an EU/EEA member state and which is equivalent to an A/S1 or ApS2 company under the First Company Law Directive.The extent of section 115A (1) of the Danish Companies Act is not quite clear regarding thedefinition of parent company. Therefore, a Danish company should not participate in a cashpooling arrangement where the centralizing entity is not a Danish A/S or ApS company or anequivalent company registered within the EU/EEA, with reference to section 115A (1) of theDanish Companies Act. Furthermore, the prohibition in section 115 (1) of the Danish Companies Act does not applyto a transaction which may be considered an ordinary business transaction.If participation in the cash pooling arrangement is based on reasonable corporate interest forthe centralized entity, and used only for the purpose of optimizing the cash flow of the entitieswithin the company group, and with no intention of granting loans to its shareholders, thecash pooling arrangement does not fall within the prohibition in section 115 (1) of the DanishCompanies Act. Additionally, participation in the cash pooling arrangement should not imply excessive risksfor the Danish entity, and the arrangement must not discriminate against the Danish entityin favour of other companies in the group.

1 a Danish A/S – Company is a public limited Company2 a Danish ApS - company is a private limited company


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If the Danish company is to be the centralizing company, the cash pooling arrangement maybe of such considerable importance that it ought to be specifically provided for in the objectsclause in the company’s articles of association.


How are corporate benefits defined?

In order to comply with reasonable corporate interest of the centralized entity in a cashpooling arrangement, the arrangement must be justifiable and customary for the centralizedentity.

Based on the above, a Danish company should probably not participate in a cashmanagement arrangement if it is not in the company’s own interest from an isolatedperspective.

The cash pooling arrangement should therefore carefully balance advantages anddisadvantages for each entity, whether participating as a centralizing or centralized entity.

Is there an obligation to offer all participating entities equivalent terms and conditions? Is therean obligation to offer the participating entities market financial conditions (i.e. the “arm’slength principle")?

The Danish Companies Act does not contain the “arm’s length principle“ as such, however,other principles of Danish company law may lead to the same result. As mentioned, a Danishentity should only participate in a cash pooling arrangement if it is in the company’s owninterest. Furthermore, the general principle of equal treatment of shareholders in the DanishCompanies Act may restrict the use of a cash pooling arrangement, if some of theshareholders, as entities in the cash pooling arrangement, benefits from the arrangement assuch.

Moreover, the Danish tax regime may often play a part in the consideration whether or notto participate in an international cash pooling arrangement.


There are no specific regulatory limitations as to the type of operations for which the surplusliquidity may be used (except the limitation on granting loans or providing security for theshareholders, see 2.1 above).

Nevertheless, the general principle of corporate interest requires that the surplus liquidity isused in a way which arguably can be said to be in the interest of the participating entities, atleast if the cash management agreement is considered in an overall perspective. Furthermore,the centralizing entity should generally not invest the surplus liquidity in a way which wouldinvolve excessive or unusual risks.

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2.4 Liabilities and sanctions

Management liability?

Can the managers/directors of the participating entities incur any potential liability byagreeing to the execution of cash pooling arrangement.

Liability cases are relatively rare in Denmark, but members of the management may incurliability, especially if the management has decided to participate in a cash poolingarrangement which clearly discriminates the Danish company in favour of the other entitiesor in favour of the centralizing entity.

However, liability only incurs if it can be demonstrated, that the management acted negligentlyin the process of deciding whether or not to participate in the cash pooling arrangement.

Shareholders’ liability?

Can the shareholders of the participating entities be exposed to any liability as a result of thecash pooling arrangement?

Liability cases against shareholders are very rare in Denmark. According to section 142 in theDanish Companies Act, shareholder liability only incurs if the shareholder has given themanagement specific instructions or influenced the management to enter into a cash poolingarrangement which clearly discriminates against the Danish company and hereby causes aloss for the Danish company, in favour of the other entities in the cash pooling arrangement.



In theory, the centralizing entity may fix the level of remuneration of the cash deposited withit by the centralizing entities in its own good judgment. However, tax considerations maydictate the level of remuneration, cf. 4.7 below and the terms of remuneration shouldgenerally be uniform throughout the group, so that there is no unjustified transfer of fundsbetween group companies.



No such rules will apply to the cash pooling arrangement, but as mentioned above in section2.3, the centralizing entity should not enter into or invest the surplus liquidity in a way whichmay involve excessive or unnatural risks.



According to the Danish companies regulations, entering into a cash pooling arrangement isin general a decision which can be made by the management board. But if the Danish entityis to be the centralizing unit, the cash pooling arrangement may be of such importance, thatit should be specially provided for in the company’s articles of association.


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3. BANKRUPTCY

What are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)? Would this limit the centralizingentity’s ability to exercise its contractual right to terminate the Agreement? Are there any risksthat bankruptcy proceedings issued against the centralizing entity or a centralized entity couldbe extended to other participating group entities?

As an overriding principle, bankruptcy proceedings against one entity in the cash poolingarrangement cannot be extended to other entities within the company group, unless in eachcase, the conditions for initiating bankruptcy proceedings are fulfilled.

According to chapter 7 of the Danish Insolvency Act, regarding bilateral agreements, theestate has, as a principal rule, the right to enter into agreements that debtor has establishedprior to the bankruptcy. A provision in the cash pooling arrangement concerning the lapse ofthe agreement in case the participant undergoes insolvency proceedings will not be validunder Danish law, and the insolvent estate may enter into the rights and obligations pursuantto the cash pooling agreement.

If the cash management agreement implies that the surplus liquidity of the centralizedcompanies is deposited in an account registered in the name of the centralizing company, allthe money in the account will, under Danish bankruptcy law, often be considered as belongingto the centralizing company.

In the event that the cash pooling agreement implies a superior consolidated account, withunderlying transaction accounts, wherein the individual participant’s in- and outgoingpayments, as well as the from time to time existing outstanding amount, are specificallystated, such outstanding amounts, in case the centralized Danish entity becomes insolvent,will probably be deemed as belonging to third party and with the consequent requirement ofrelease.

4. TAX ISSUES



The operations between the centralized entities and the centralizing entity are not subject toVAT in Denmark.



A Danish entity must include interest paid and received in their taxable income. At themoment the tax rate in Denmark for taxable income is 28 percent, and it applies on both fixedterm loans and current account advances.

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Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?There is no tax deducted from income at source on interest paid to foreign companies whichare not otherwise subject to taxation in Denmark.

4.3 Stamp dutyDo cash pooling operations raise any stamp duty? No.

4.4 Deductibility of interestAre there limitations to the deductibility of interest paid by the centralized or the centralizingentity (such as a thin capitalization rule - debt / equity capital ratio)?Danish entities in a cash pooling arrangement may deduct paid interest, as all othercompanies in Denmark, including interest paid to the centralizing entity.A company which is fully taxable in Denmark, and which is controlled by a foreign individualor by a foreign legal person, may not deduct interest expenses and debt discounts derivingfrom controllable debts, i.e. debts to the parent company or to affiliated or other foreign legalpersons, as well as individuals connected hereto, if the proportion between the debts of thesubsidiary and its equity exceeds the ratio of four to one calculated upon the expiry of theaccounting period. (Thin capitalization)The limitation in deductible interests paid and debt discounts only applies if the controlleddebt exceeds DKK 10 million. The company may avoid limitations in the allowed deduction if the company proves thatsimilar financing could have been obtained between independent parties. The rules do not apply if both companies are subject to Danish taxation, in which case aprinciple of symmetry between the lender and the borrower as to the fiscal treatment willprevail.

Is it possible to obtain a ruling from the tax authorities as to the de-ductibility of interest? If so,at what conditions may it be obtained?The National Assessment Council is authorized to make binding preannouncementsconcerning a number of various tax matters, including cases regarding the tax assessment oflegal persons. To obtain a preannouncement, the tax subject must file a request outlining thedetails of the matter concerned and pay a fee to the Council. It may take some months toobtain a pre-announcement.

4.5 Tax havensAre there specific provisions as to the interest accrued in tax havens?In Denmark, obligatory CFC taxation between a Danish and a foreign company is carried out,if (i) the Danish company controls or has an essential influence on the foreign company, and(ii) the business objects of the foreign company is mostly of a financial character, and (iii) ifthe foreign company’s income is subject to a more moderate taxation than under Danish law,or if the taxation of the foreign company is influenced by an agreement between the foreign


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company and the foreign tax authorities, or if the tax rules in the foreign country varydepending on the domicile country of the controlling company.



As such, no favorable tax regime exists. A Danish entity – like any other company - mustinclude interest paid and received in their taxable income.



The cash pooling arrangement must be carried out at “arm’s length”. If not then theconsequence might be a reclassification of interest paid or received demanded by the taxauthorities.

5. CENTRAL BANK REPORTING AND EXCHANGE CONTROL REGULATIONS

Are there central bank reporting obligations (balance of payments), bearing upon thecentralizing entity / each centralized entity / the banks? Are there any restrictions to thetransfer of cash to foreign entities of the same group or the conversion of the local currency inother currencies?

Today all payments to and from Denmark have been fully liberalized. This means that thereare no restrictions on taking banknotes and coins out of or bringing them into Denmark, noron other external transactions, including loans from and deposits with foreign banks, orportfolio investments and direct investments.

6. ACCOUNTING OBLIGATIONS AND STANDARDS

What, if any, are the specific accountancy obligations and standards for entities participatingin a cash pooling arrangement?

A Danish member of a cash pooling arrangement is governed by the rules of the DanishFinancial Statements Act implying that the company – like any other company – shall submitan annual account showing a true and fair view of the company’s financial position. Theaccount shall be prepared according to the guidelines adopted by the Danish Institute of StateAuthorized Public Accountants, supplemented with the international accounting standards.

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7. E-CASH POOLING

Are there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?Evidently, a high degree of data security is needed in the day-to-day administration of transferorders between the involved entities and the banks. This security should be provided by thebanks involved, and will normally include the use of electronic signatures and other kinds ofcryptography. The issuance of electronic signatures is subject to the requirements set forth in the Danish Acton Electronic Signatures, which incorporates Directive 1999/93/EC of 13 December 1999 ona Community framework for electronic signatures. There are several providers of differentkinds of electronic signatures in Denmark.

8. FINANCIAL REPORTING, EVALUATION AND CONTROL

Are there financial reporting, evaluation and control obligations associated with cash poolingarrangements?There are no specific obligations associated with participating in a cash pooling arrangement,but as mentioned above, a Danish entity is obligated to provide an annual rapport underliningthe financial status of the company.


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REGULATORY, LEGAL AND TAX FRAMEWORKFOR INTERNATIONAL CASH MANAGEMENT

UNDER FRENCH LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in France. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

JJeeaann--FFrraannççooiiss AAddeellllee ((11))

Avocat à la CourPartner87, avenue KleberTel: (33).(0).1.45.05.82.80Fax: (33).(0).1.47.04.20.41Port.: (33).(0).6.09.40.59.66E-mail : [email protected]

(1) The author thanks M Charles H. Taufflieb (Tresofi by Sidetrade) for his highly valuable and active contribution.


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Under French law, (i) credit transactions, and (ii) receipt of deposits from the public arebanking operations, which fall under the ambit of the banking monopoly according to ArticleL.311-1 of the French Monetary and Financial Code provided that they are carried out inFrance and in a habitual manner.

Hence, subject to exemptions available, they can be carried out only by credit institutions,being French credit institutions approved by the Comité des Etablissements de Crédit et desEntreprises d'Investissement (CECEI) or credit institutions from European Economic Areacountries, duly passported.

Credit transactions are defined pursuant to Article L.313-1 of the French Monetary andFinancial Code as “any act through which a person, acting in return for payment, makes, orpromises to make, funds available to another person or gives an undertaking in favour of thatperson (…)”. Consequently, the provision of loans/advances constitutes a credit transaction tothe extent such provision is made for consideration. The provision of loans/advances can beimmediate, future, or potential. The banking monopoly applies irrespective of the source ofloans or advances and thus applies even if the deposits are received from outside the public.

Article L.511-7 I 3° of the French Monetary and Financial Code provides for an exception tothe banking monopoly for treasury activities within a group: "(…) an enterprise irrespective ofits nature, may execute treasury transactions with companies with which it has, directly orindirectly, capital relations under which, one of the companies has a power of effectivecontrol over the others.” The concept of “treasury transactions” has been broadly interpreted to include all credit,exchange or interest rate transactions, regardless of their nature and duration. It includes loansand advances transactions under any cash pool scheme, the receipt of deposits and the creditby signature1. No distinction is made in relation to the exemption, between short-term, mid-term and long-term activities.

1 The 2005 annual report of the CECEI states that "the provisions of Article L.511-7 of the French Monetary and Financial Code authorize all types of transactions irrespective of their duration (…) and their form. They authorize transactions between all companies belonging to a group, even if the said companies do not have a direct interest link between them (...)".

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There is no restriction as regards the direction of the operations. They include all vertical andhorizontal transactions (between the subsidiary and the parent company both ways orbetween sister companies within the group). It is only necessary that the companiesconcerned maintain a direct or an indirect capital link (not necessarily higher than 50 %)provided this capital link bestows effective control on one of the companies in the group. Theconcept of “effective control”, which is the test for the exception provided under Article L.511-7 I 3° of the Monetary and Financial Code, is an economic concept, which must be analyzedon a case-by-case basis.

According to the 1994 annual report of the Comité de la Réglementation Bancaire to theConseil National du Crédit the concept of effective control must be examined by reference tocompany law provisions, which define the circumstances where a company is considered tocontrol another:

- direct or indirect holding of a sufficient part of the capital to give the company a majorityof the voting rights in the other company's general meeting,

- control of a majority of the voting rights under an agreement concluded with othershareholders,

- determination in fact, through voting rights, of the decisions of the said meetings companyis presumed to exercise this control when it possesses, directly or indirectly more than40% of the voting rights and no other shareholder possesses, under the same conditions,a higher percentage2.

Conversely, when the capital is dissipated, minority participation may suffice to exercise suchcontrol. In joint ventures, each of the two partners may not establish effective control by theirdetention of 50% of the capital. In the absence of participation of more than 50%, the notionof effective control will be defined by the detention of a fraction of capital giving a singleparent control of the company, implying that no other shareholder or group of shareholderswould hold a stake that could affect this control3.

It should be noted that a monopoly is provided along the same principles as stated above, inrespect of investment services4, in particular in relation to the reception, transmission andexecution of orders on financial instruments on third party account. Article L. 531-2 2° d ofthe French Monetary and Financial Code, in connection with intra-group transactions, isequally providing an exemption from the approval requirement.

The banking financial law restraints are thus limited. The centralizing company does not needto be classified as a credit institution or investment company, and it is not under the controlof banking regulatory bodies even if it borrows part of the funds from credit institutions or onthe market. All the companies of the group that are under the effective control of thecentralizing company, or of another company, may participate in the cash pooling agreement.They may contract by this method, intra company transactions without requesting anyapproval from the banking authorities.

2 Article L. 233-3 of the Commercial Code.3 The position of the “Banque de France” by a letter to the General Delegate of the AFTE dated April 26, 2000.4 Article L. 531-1 of the Monetary and Financial Code


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Notional pooling is a technique, which allows the virtual grouping of account balances ofparticipating entities. The latter continue to operate their accounts and the account balancesare not transferred to the centralization structure. Contrary to ZBA5 cash pooling, notionalpooling does not entail a physical transfer of cash. However, the interest remuneration ofexcess cash or the charge of cash needs of centralized entities are carried out on a net basis,i.e. taking into account the credit or debit positions of each participant. Generally, given thedifference between the rate of deposit of excess cash, and that of short-term loans, thegrouping of the account balances optimizes the resources of the group.

When notional pooling is implemented by way of merging current account balances of thecentralizing entity and centralized entities, such merger gives rise to a single balance, whetherpositive or negative, for all participants and therefore to a single credit or debit interestposition. In this respect, each participating company bears overdraw charges and benefitsfrom interest gains.

In notional pooling by way of merged scales of interest, the credit and debit interest of theparticipating companies bank accounts are merged at the end of an agreed reference period,and the advantage is then credited to the centralizing entity, which re-allocates it betweenthe participants.

Notional pooling may present a higher cost because of the impossibility for French banks ofnetting positive and negative balances held by the same company in different currencies intheir reports to the “Banque de France”.

In notional pooling by way of bank margins reductions, each participating company isallocated the positive adjustment on the margin rate included in the interest rate applied tocredit and debit balances of its account. The adjustment is calculated on the basis of the lowermargin, which would be applied by the bank if credit and debit balances of all participatingcompanies were merged and therefore entailed larger movements and a larger balance.However, the merger is fictitious and each company continues to operate its bank account.

Until 2005, France used to prohibit the remuneration of current accounts. Such prohibitionwas considered to be an impediment to notional cash pooling by way of merger of interest,as the pooling could be seen as indirectly resulting in the credit institution remunerating thecredit accounts to the extent of the debit balances of the centralized companies. Theprohibition originally laid down in Article L.312-3 of the Monetary and Financial Code hasbeen repealed6 further to a Community case law75, which held that French legislation wascontrary to the EEC principle of freedom of services.

5 EC decision “Caixa Bank” dated October 5, 2004. 6 By a decree dated March 8, 2005 which abrogated the Article 2 of the Regulation 86-13 of the Comité de la Réglementation Bancaire et Financière in order to

put the French banking regulation in accordance with provisions of European Community Law.7 ECJ case "Caixa Bank" dated October 5, 2004.

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It is now considered that there is no prohibition or restriction on banks and or participatingentities aiming to implement a notional pooling.In the case of a notional pooling in the form of a single account agreement, the centralizingbank may require cross guarantees from each participating entity. By this method, the bankwill limit its exposure in the event of an insolvency proceeding opened against one of thecentralized entities, as in such situation, it can no more offset the debit balance of theinsolvent participant with the credit balance of the other participants.



Centralisation of exchange rates and risks involves the selling and purchasing of foreignexchange currency and hedging of foreign exchange rates. Hedging transactions generallytake place after an express consent of each participant. The centralizing entity will invoice tothe participants the exact amount of the selling/purchasing commissions.



The provision or management of means of payment is one of the activities covered by thebanking monopoly set forth at Article L.311-1 of the Monetary and Financial Code. Means ofpayments are defined as any instrument, which allows any person to transfer funds,irrespective of the instrument or process used. The concept of provision of means of paymentsimplies the issuing or the creation of a means of payment. It covers cashing incomingpayments, receipt of payment orders and offsetting activities.Article L.511-7 II of the Monetary and Financial Code provides for an exemption from thebanking monopoly in respect of management of payment and debt collection: “The Comitédes Etablissements de Crédit et des Entreprises d'Investissement (CECEI) may exempt fromauthorization, a company engaged in any business involving the provision or management ofmeans of payment when they are only accepted by companies which are linked to thatcompany within the meaning of 3° of the I of Article L. 511-7 or by a limited number ofcompanies which are clearly distinguished by the fact that they are in the same premises orin a confined geographic area or by their close financial or commercial relationship with theissuing institution, in particular through joint sale or distribution arrangement”. In its review,the CECEI will generally verify, before granting the exemption, the security of the means ofpayment, the arrangements used to ensure user protection, the unit price and the terms ofeach transaction.Under a program of cash pooling payments and collections of receivables, the centralizingentity will normally open and maintain clearing accounts for each participating entity. Thepayment transactions are effected by debiting cash and crediting the account relevantdebiting and collection of account relevant. The “Banque de France” considers that theseactivities do not fall under the monopoly of the management of means of payments providedthat payments for external accounts are immediately covered by moneys remitted by the


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centralized entity, without prejudice to the possibility of obtaining the necessary funds fromthe centralized company.



Banks are bound by a statutory duty of confidentiality, which is justified by the protection ofprivate life and patrimonial interests of clients. The Cour de Cassation8 has ruled that to theextent the banker’s duty of confidentiality is only aimed at the client’s protection, the clientcan waive such protection9 except the case where the confidential information concerns athird party10 (as an example, the verso of a cheque). The participating entities can accordinglywaive this protection to the benefit of the centralizing entity, which can therefore have accessto information relating to the bank accounts of the centralized entities from their respectivebanks. The banks will generally require a release in writing from the participating entities,stipulating the type and nature of the bank accounts’ information that are to be transferredand the beneficiaries of such information.

Can/must the banks disclose the account statements of centralized entities to the anti-moneylaundering agency?

Fight against money laundering legislation prevails over bank confidentiality. The participationof banks in the fight against money laundering takes the following three forms; (1) thedeclaration of suspicions11 (2) the duty of vigilance12 and (3) the duty to check the identity ofclients and keep information relating to them.According to article L.562-2 of the Monetary and Financial Code, the suspicions report rulerequires financial institutions to report to TRACFIN13 all amounts entered into their books andoperations which could come from drug trafficking, fraud against the financial interests of theEuropean Communities, corruption or from organized crime, or which might contribute to thefinancing of terrorism.Furthermore, article 563-3 of the Monetary and Financial Code provides for an obligation forbanks to check carefully any transaction which, although it may not seem to come from drugtrafficking or organised crime, cumulatively meets the following three tests: (i) the transactionexceeds 150,000€, (ii) the transaction appears to be unusually complex and (iii) appears notto be economically grounded or have a lawful purpose.TRACFIN collects and assesses all relevant data and information, and may request thefinancial institutions to forward statements of accounts of the relevant persons and recipientbanks must cooperate with it. If the information is likely to reveal financing of terrorism,TRACFIN will provide such information to the Public Prosecutor. The latter will then carry outan investigation with the assistance of police.

8 Being the French Highest Court9 Cass. Com, 11 April 1995, Bull. Civ. IV n°121, p.197, and more recently, Cass.Com, 25 January 2005, Bull. IV, n°13, p. 1210 Cass. Com., 8 July 2003, Bull. n°119.11 Article L.562-2 of the French Monetary and Financial Code.12 Article L.562-3 of the French Monetary and Financial Code.13 Treatment of Intelligence and Action against Financial Clandestine Circuits, "French organization of the fight against money laundering”.

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Banks that participate in good faith in the fight against money laundering benefit from severalprotections. They may not be prosecuted in criminal courts on the basis of article 226-13 ofthe New Penal Code14, neither be held liable before a civil or commercial court for a breach oftheir duty of confidentiality, nor be subject to professional sanctions .

Can /must a bank disclose account statements to the tax authorities?

Banks duty of confidentiality is not opposable to the tax authorities. Article L.83 of the FrenchTax Procedure Code extends this rule to various institutions among others, namely to“establishments or organizations of any nature subject to the control of administrativeauthorities”, which include banking institutions placed under the control of the Comité desEtablissements de Crédit et des Entreprises d’Investissement as well as the CommissionBancaire.Moreover, banks have to declare to the tax authorities the opening and closing of accounts ofany nature15. For transfer of sums abroad, the bank officers must also communicate to theadministration, on its request, the identification of the author of the transfer and the recipient,as well as the references of the accounts concerned16

Tax authorities have a right of audit and access to documents on banks’ clients in the eventof a default of the taxpayer only to provide documents requested from him. However, therequest of tax authorities must be selective in the sense that the requests for communicationof all documents are not allowed. For instance, pursuant to article L. 84 of the Tax ProcedureCode, economic or financial documents collected during statistical surveys cannot be used fortax control as they contain personal information on the identity or address of individuals.

Extraterritorial aspects

French bank confidentiality rules apply to French banks including branches of foreign banks inFrance (exemption from the home country control for EU banks). However, branches mayfreely communicate confidential information about the centralized entities to their mainoffice abroad.

Banks carrying out activities on the French territory, including branches of foreign banks maynot communicate confidential information to foreign anti-money laundering agencies,foreign tax authorities and foreign police authorities, except as provided in internationalconventions.

In either case, the communication must be sought through TRACFIN, the French taxauthorities or French banking authorities.

However, pursuant to Law 26 July 196817, French authorities may refuse to communicatedocuments to foreign banks if:

(i) The request for disclosure interferes with the sovereignty, security or essential economic interests of France or with French public order.

14 Breach of professional secrecy: “The disclosure of secret information by a person entrusted with such a secret, either because of his position or profession, or because of a temporary function or mission, is punished by one year's imprisonment and a fine of 15,000€”.

15 Article 1649 A of the French Tax Code.16 Article L.96 A of Tax Procedure Code.17 Law n°68-678 of 26 July 1968 relating to communication of documents and information to foreign authorities in shipping trade.


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(ii) The request for disclosure of information is made with a view to producing evidence for a judicial or administrative proceeding abroad.

(iii) Criminal proceedings have been or been instituted in France on the basis of the same facts and against the same persons or when these persons have already been subject to a final judgement on the same facts.



According to Article L. 313-4 of the French Monetary and Financial Code, which refers toArticle L. 313-2 of the French Consumer Code18, the effective global rate is to be stated in allcredit agreements including a centralizing agreement.

In order to enable the fight against money laundering and based upon its obligation ofvigilance19, the credit institution shall, before entering into a contractual relationship orassisting a client with the preparation or execution of a transaction, confirm the identity ofthe co-contracting party (KYC obligation) through production of any probative documentwhich can take the form of an original or an expedition or a certified true copy of any deedor extract from an official registry, establishing the denomination, form structure and headoffice, along with the powers of the persons acting on behalf of the legal entity.

It should be noted that cash management agreements involving a French company may fallunder the law n° 94-665 of August 4, 1994, known as the Toubon Act, providing for themandatory use of French if they are entered into by private entities commissioned to executea public service mission, unless such contracts are fully performed outside of French territory.

1.4 Outsourcing


The execution of cash management/cash pooling operations constitutes either an exemptionor an exception to the banking monopoly. Nonetheless, outsourcing these operations outsidethe group is considered as lawful, although the appointed agent is not a duly authorized creditinstitution as the centralizing entity’s activities as the operator of a management ofpayments/collective program fall out of the scope of the Regulation n° 97-02 of the (Comitéde la Réglementation Bancaire et Financière ”CRBF”) on internal control of credit institutionsand investment firms.

18 “The effective global rate determined as stated in Article L. 313-1 must be mentioned in all written documents constituting a loan contract governed by this section of the code”.

19 Article L.563-1 of the Monetary and Financial Code.

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2. CORPORATE LAW

2.1 Form of participating entitiesAre there restrictions as regards the form of entities that can participate in cash poolingarrangements, either as a centralized or centralizing entities (certain forms of entities,groupings, partnerships…) and/or the form or the nationality of shareholders (state ownedentities, foreign shareholders…)?By virtue of Article L. 511-7 I 3° of the French Monetary and Financial Code, which providesthat “(…) an enterprise irrespective of its nature, may execute treasury transactions (…)”,there is no legal restriction regarding the form of either the centralizing or the centralizedentities. The choice of one form or another will depend on the advantages provided by one,compared to the others. Nevertheless, civil companies must be avoided for the centralizingentity as regards the commercial nature of the centralization activity. Moreover, the economicgrouping (Groupement d’intérêt économique, “GIE”) which is not a company may, accordingto academic commentators, be considered as equivalent to a company and therefore be usedas a centralizing entity, provided it is capitalized and hence can be subject to the specificcapital links which are required to meet the control test criteria within a group.

2.2 Corporate purposeDo the activities carried out in cash pooling arrangement need to be expressly contemplated inthe bylaws?As regards the centralizing entity, cash pooling is one of its principal activities and inaccordance with Article L. 210-2 of the French Commercial Code20, this has to be expresslydetermined in the company purpose of the centralizing entity’s bylaws. In contrast, for thecentralized entities, their participation in cash pooling is considered as normal treasuryoperations that are ancillary to their principal activities. Therefore such activities need not beexpressly mentioned in the bylaws.

2.3 Corporate benefit How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities? Is there an obligation to offer theparticipating entities market financial conditions (i.e. the “arm’s length principle")? What arethe liabilities and sanctions in case of violation of the corporate benefit of a participating entity(cancellation of the agreement, management liability, extension of bankruptcy proceedingsetc.)? Do they apply to directors, officers and shareholders?Article 1848 of the French Civil Code provides that the directors of a company “shall performall management purposes in the interest of the company”. However, corporate interest -orcorporate benefit- is not defined under French statute. According to statute, corporate interestis to be addressed at the company level exclusively.

20 “The form, duration, (…), the purpose of the company and the amount of the registered capital shall be determined by the company’s bylaws”.


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Although, French law recognizes the existence of groups in certain respects, in particular inlabour law, it does not provide for corporate interest at group level. However, according to caselaw, the interest of the group may in some instances prevail over or mitigate the corporateinterest of the group participants. The group interest should not be confused with theinterests of the parent company, which defines the policy of the group. In order to permit the interest of the group to prevail over the corporate interests of thesubsidiaries, the following tests set forth by case law21 should be verified:- The companies must belong to the same group shown by both equity interest and a

common strategy, a mere group of financial participations not being sufficient;- The group must have a "group policy" under which the courts will determine whether the

requested effort was truly dictated by a common economic, equity or financial interest. - Any sacrifice requested must maintain a balance between the financial commitments of

the concerned affiliates and must not exceed the net worth of the company, which bearsits charge.

There is no obligation to offer specific favourable financial conditions to the participatingcompanies as to the cash pooling transactions. Nevertheless, the transactions must beentered into at fair market value, taking into account the financial capacities of thesubsidiaries. For the borrowing centralized companies, the fact that they have obtained abelow-market rate alone is not enough to qualify the operation as abnormal, because it islawful to search for the lowest rate. Nevertheless, it would be abnormal for a higher thanmarket rate to apply. If the centralized company is a creditor, its remuneration must not bemuch lower than the market rate, and if it is lower, this difference should be compensated bythe advantages the company receives when asking for loans from other companies of thegroup. Concerning the centralizing company, lending at a below-market rate is not ipso factoconsidered as abnormal if this rate reflects the centralizing entity’s cost of the credit on thecapital market and the charges of the cash management, and does not result in a loss. Thescheme may not give preferential treatment to certain participating companies at thedetriment of other participants, unless justified by objective differences. Furthermore, the participation of an entity in the cash management scheme must not exposesuch entity to a liquidity risk stemming from other participants. Therefore, it should be verifiedthat draw down rights of each centralized entity are determined in consideration of its networth and its indebtedness. The centralizing entity should on its part take appropriateprecautions to avoid liquidity risk, in particular by setting draw down ceilings, requiring cashneed projections and investing excess cash in non volatile financial instruments (see infra 2.5).Violation of corporate interest may cause the agreement or the operations carried out thereunder to be declared void. In addition, directors may be personally liable for mismanagement,which is construed to be committed by the failure to ensure effective and serious control overthe administration and management of the companies.Furthermore, if the centralizing entity is the parent company of the centralized entities, it maybe liable for abuse of power. Shareholders face specific liability during any insolvency procedure.

21 Case Rozenblum, 4 February, 1985, D. 1985,472 case law confirmed on several occasions mainly, Cass. Crim., 21 June 2000, n° 99-83794 as regards existence of a group in connection with a common strategy, and Cass. Crim., 19 February 2003, n° 01-86809 regarding group policy.

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2.4 Remuneration of the centralizing entityAre there any prescriptions as to the remuneration of the centralizing entity difference oflending/borrowing rates, lump sum fee…?The remuneration of the centralizing entity can take various forms. It can be stated in theagreement by stipulating that the rate of the upstream may be inferior to the downstream,the difference in rate is construed as being the remuneration of the centralization activity.Usually, the remuneration is determined either by the differential between the interest rateapplied to external deposits made by the centralization entity and the interest rate applied tothe advances granted to the participating companies, or by the differential between theinterest rate applied to excess cash invested by the centralized entities and the rate applicableto the remuneration granted by the centralizing entity on their investment. However, because on one hand of the difficulties to determine an amount, and on the otherhand of the dangers in the case that certain companies have structural indebtedness inrelation to their cash flow and others are structurally beneficiaries, there is sometimes a riskthat the centralization activity could be considered from a tax standpoint, as an abnormaltransfer to the beneficiary company. If it is advised therefore to provide for an identical ratefor lendings and borrowings and that the centralizing entity gets its remuneration in the formof a management fee. Furthermore, some French academic commentators22 recommendmainly for tax purposes, that the centralizing agreement provide that the centralizing entityact as an agent of the participating entities.

2.5 Investment of excess cash by the centralizing entityAre there prudential investment rules? When investing excess cash of the participating entities, the centralizing entity must complywith all banking, corporate and financial regulations and take care not to invest in financialinstruments, which could expose the centralized entities to a liquidity risk, i.e. the impossibilityfor a centralized entity to meet at a given time, payments that fall due. However, centralizingentities which are not subject to regulatory control are not subject to ratios aiming to ensuretheir creditworthiness.

2.6 Approval of cash pooling arrangementDoes the cash pooling arrangement need to be approved by the management board /supervisory board or the shareholders? A specific approbation procedure exists under French law in relation to the prevention ofconflicts of interest.In joint stock companies (sociétés anonymes) Articles L.225-38 (companies with a board ofdirectors) and L.225-86 (companies with a management board and a supervisory board) ofthe French Commercial Code require prior authorization of the board of directors orsupervisory board, followed by the approval of the shareholders’ meeting, based on anauditor’s report, for agreements entered into directly or through a third party between thecompany and (i) its executive director (directeur général), (ii) one of its delegated executivedirectors (directeurs généraux délégués) (iii) one of its directors (iv) one of the members of

22 Bardet, Charveriat, Gouthière et Jahin, Les holdings : Lefebvre, 3e éd. 2002, n°920.


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the management board or supervisory board (v) a shareholder with more than a ten percentstake in the company or (vi) a controlling company pursuant to Article L.233-3 of theCommercial code. Agreements between two companies are subject to prior approval if anexecutive director or a delegated executive director, a board member or a member of themanagement or supervisory board of the first company is also owner, partner with anunlimited liability, manager, director, member of the supervisory board, or holds in any way amanagement position in the second company. For both types of company, unauthorizedagreements may be void if they have adverse consequences for the company23.In Sociétés par Actions Simplifiées ("SAS"), shareholders’ approval is required based on astatutory auditor’s report for agreements entered into directly or indirectly between thecompany and (i) its President, (ii) one of its managers or (iii) one of its shareholders with morethan 10 % stake in the company or in respect of a shareholder, a controlling companypursuant to the provisions of Article L. 233-3 of the Commercial code. Unauthorizedagreements are nevertheless effective, but the interested person, the President and othermanagers are liable for any adverse consequences to the company. Ordinary transactions concluded at arms length terms benefit from a simplified regime. Insociétés anonymes ("SAS”), a list and the purpose of these agreements are simplycommunicated to the board of directors and to statutory auditors and put at theshareholders’ disposal. In sociétés anonymes simplifiées ("SAS), the agreements themselvesare communicated to the statutory auditor who prepares a report, and to any shareholderwho so requires24. In both cases, when, because of their object or their financial implications,the said ordinary transactions are not significant for any of the parties, they are exemptedfrom the simplified procedure25. It follows this concept creates a genuine legal uncertainty.In the case of centralized cash management arrangements, academic commentatorsgenerally consider that there is a presumption that the transaction is an ordinary one whenthe agreement falls within the exception to the banking monopoly, because the purpose ofthis text is to allow centralized management within groups of companies. The ordinary natureof such agreements was expressly confirmed by a judgment of the Appeal Court of Versaillesof April 2, 200226. However, it should be noted that in connection with other types ofagreements, the French Supreme Court has ruled that the ordinary character of an intra-groupagreement should be assessed in concreto, in light of the former practice of company or thegroup. Hence, it cannot be excluded that a cash management agreement could be seen as notbeing an ordinary agreement if it is the first time such type of agreement is entered into bythe relevant group company.The determination of the normal character of the agreed conditions is more delicate anddepends upon the circumstances. In the opinion of the Association Nationale des Sociétés parActions (ANSA) it is necessary to verify (i) that the amounts do not exceed the financialcapacities of the supporting company; and (ii) that the interest rate is normal regarding thenature of the transaction and the applicable conditions within the group. These conditionsmust be the same for all participants, subject to the relevant variation in circumstances, andthe same as those prevailing on the marketplace.

23 Article L. 225-42 of the Commercial Code.24 Article L.227-11 of the Commercial Code.25 Article L. 225-39 of the Commercial Code.26 Appeal Court of Versailles, April, 2 2002 n° 00-3930, ch. com. réunies, Sté Clos du Prieuré / Souchon.

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2.7 Specific aspects relating to acquisition financing Are there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement involving the target modifythe rules? The use of the cash of a target company to repay an acquisition loan may fall under theprohibition of financial assistance. Pursuant to Article L. 225-216 of the Commercial Code, "acompany may not advance money, grant loans or grant a security in order to assist a thirdparty to subscribe to or purchase its own shares" (except when in transactions whereemployees acquire shares of the company). Such is deemed to consummate the share capitalof the company other than in furtherance of its corporate benefit. Violation of financialassistance prohibition is an offence, which exposes management to fines and imprisonmentnotwithstanding the fact that the courts can declare the loan granted in breach of thefinancial assistance restriction null and void. More generally the transaction may also bequalified a misappropriation of corporate assets.The use of dividend distribution by the target company to repay an acquisition loan is valid27

subject to satisfaction of certain tests, aimed to verify that the distribution is not contrary tothe corporate interest of the target company:- the projected distribution has been assessed reasonably;- the remuneration of minority shareholders is preserved (so as to prevent disputes based on

majority abuse);- the distribution financing plan is not too aggressive, so as to allow a possible decrease in

the distribution capability of the target company. The distribution of a dividend prior to theapproval of the accounts and in violation of distributable dividends entails criminalsanctions.

In the event the target is a party to a cash pooling or a management scheme, the target maybe extending loans advances to the centralising entity, and the issue arises whether it ispermissible that the centralising entity uses the proceeds thereof to repay the acquisition loanor lend to the group entity within the cash management scheme which entered into theacquisition loan. Normally, all advances granted to the centralising entity will give rise to a single balance andfunds lent by the centralising entity cannot be considered the funds of any particularcentralised entity unless there are a small number of participants.The participation of the target in the cash management scheme will be subject to carefulscrutiny to make sure that the purpose of the advances made by the target is not to repaythe acquisition loans, and that the target may borrow funds from the centralising at similarterms as other companies. If the cash pool funds are lent under an acquisition loan to a borrower, which is not a memberof the pooling arrangement, or which joined the arrangement at the time of the acquisition,the loan will trigger more concern. The same will apply if the participation of the target in the arrangement has taken placeshortly before or shortly after the acquisition.

27 Cass. Com 15 November 1994, Revue des Sociétés, January-March 1995, page 66.


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Financial assistance only prohibits loans or advances "in order to assist…", i.e. granted prior toor at the same time as the transfer of the shares consummating the acquisition. However, onecan argue that what it considered is the purpose of the loan. Operations implemented afterthe acquisition in implementation of an agreement entered into prior to the acquisition, oroperations executed for the sole purpose of avoiding the prohibition probably fall under theambit of financial assistance prohibition.The arrangement should meet all tests set forth in the Rozenblum case law. (see 2.3 supra).The Delattre-Levivier28 case of 1995 case set forth a further test for the validity of cashpooling arrangements in the context of an acquisition. A cash advance should not triggerexcessive risks with regards to the financial situation of the acquisition holding company andshould not prevent the target company from making the necessary investments for itsactivity. The foregoing case law has been confirmed on several occasions by the Cour deCassation (French Highest Court)29.

2.8 Termination


As regards the centralizing entity’s contractual right to terminate the agreement, there are nocompany law restrictions preventing the centralizing entity from exercising its right. However,if the termination occurs by mutual consent of the two parties, it is considered from a legalpoint of view, as an agreement between two companies and accordingly, it has to follow theprocedure in connection with the prevention of conflicts of interest referred to in 2.6 above.


Each member of the group constitutes an independent legal entity and therefore undergoesan independent insolvency filing and procedure.In the event a participating entity becomes insolvent, it is prohibited to make payments inconnection with receivables that are anterior to the judgment opening the proceeding.Nevertheless, as an exception to the prohibition, if the centralizing entity and the centralizedentity have reciprocal claims under the cash management arrangement, set off is permitted,allowing the corresponding debts and claims to be excluded from the bankruptcyproceedings, provided that the two claims are certain, liquid and payable. Set-off occurs as ofright, by the sole operation of the law. Furthermore, the above conditions need not to be fulfilled in the event the reciprocal claimsare deemed connected, i.e. they are derived from a single agreement.

28 Cass. Crim, 10 July 1995, JCP, Ed. E 1996 Vol I.29 Cass. Crim., 9 March 2005, pourvoi n° 04-81.700 for misuse of corporate assets, and Cass. Crim., 14 December. 2005, pourvoi n° 05.81-552 for swindling.

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However, in respect of a cash pool agreement, the centralizing entity may be held liable whilegranting loans and advances to a participating entity, if such loans and advances are grantedwhen the centralized entity is insolvent or nearly insolvent. This constitutes under recent caselaw30, an abusive support resulting in the aggravation of the liabilities of the insolventcompany at the detriment of its creditors. The abusive support is characterized pursuant tothe said case law when:

- there is a granting of a loan/advance by the parent company to its subsidiary,

- parent company was aware of the situation irreparably compromised of its subsidiary, orotherwise,

- the parent company failed to comply with its duty to keep itself informed.

Moreover, the insolvency procedure opened against a company may be extended to thecentralizing entity if the latter can be seen as de facto directors31, provided however that it isheld liable for mismanagement32.

Also, in cases where the cash management arrangement results in shared assets andmanagement, the bankruptcy procedure may be extended to the companies involved in theshared management, if abnormal financial relations are characterized33 between them. Itshould be noted that the abnormal financial relations which is the test criterion for sharedmanagement and assets, has been clarified in connection with cash pooling and cashmanagement arrangements by the Cour de Cassation in the famous case Métaleurop34. Forthe French Highest Court, “ in a group of companies, cash pooling arrangement, managementof exchange risk (…), and advances granted to the centralizing entity, are not in themselvesrevealing abnormal financial relations constituting shared assets and management betweenthe centralizing entity and the centralized entity”.

It is rather the way of performing the transactions in respect of cash pooling and cashmanagement scheme, than the arrangement itself, which is reprehensible.

Accordingly, although the Court refuses to characterize the shared management and assets,it considered expressly by an obiter dictum, that the centralizing entity could further be suedon the ground of mismanagement35, which was one of the main reasons of the great financialdifficulties of the centralized entity.

The common funds resulting from the shared asset and management may exist through theoverlapping of the bank accounts or the financial and accounting comminglement ofparticipating companies of the group36. Their interdependence, the lack of autonomy and theirsolidarity will give rise to a common fund available to creditors of all the entities involved37.

30 Cass. Com., 25 March 2003 “Société CDR Créances”31 Article L. 651-2 of the Commercial Code, “Where the rescission of a safeguard or of a reorganization plan or the liquidation of a legal entity reveals an excess of

liabilities over assets, the court may, in instances where management fault has contributed to the excess of liabilities over assets, decide that the debts of the legal entity will be borne, in whole or in part, by all or some of the de jure or de facto managers, who have contributed to the management fault. If there are several managers, the court may, by way of a reasoned ruling, declare them jointly and severally liable”.

32 First Instance Tribunal of Sens, 22 August 2000.33 Cass. Com., 5 March 2002, pourvoi n°99-13302.34 Cass. Com., 19 April 2005, pourvoi n°A 05-10094, Bull. Joly 2005, art. 155, p. 690, C. Saint-Alary-Houin.35 Article L.651-2 aforementioned.36 Cass. Com., 4 July 2000, JCP E 2001 p. 173.37 Case Félix Potin of 1996.


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Furthermore, Article L.650-1 of the Commercial Code38, created by statute n° 2005-1845 of26 July 2005 on safeguard of companies, provides that creditors may not be held liable forcredit granted except in case of fraud, material interference with the management of thecompany or taking disproportionate security interest with respect to the amount of thelending. Although the said Article L.650-1 was purported to restrict the liability of banksgranting credit to companies experiencing difficulties, the broad terms of the new provisionencompass all types of creditors granting facilities to a company, therefore including acentralizing company under a cash pooling arrangement. Its potential effect would be to avoidthe liability of the centralizing entity (in the absence of fraud or material interference into themanagement of the centralized entity) in the event a participating entity would fall into aconciliation, safeguard, reorganization or liquidation procedure as a result of advances grantedto it under the cash management scheme. To our knowledge, the new provision has not givenrise to case law in the context of a cash pooling arrangement.Concerning the contractual right of termination of the cash management agreement,notwithstanding of any provision to the contrary in an agreement entered into between thecentralizing entity and the centralized entities, the administrator of an insolvent participatingentity, may within 30 days following the bankruptcy judgement, compel the continuation ofthe ongoing contracts, provided however that it shall perform its own obligations there under.

4. TAX ISSUES

4.1 Value added tax (VAT)Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?

4.1.1. General principleCash management operations, like most financial operations, are not subject to V.A.T., eventhough they fall within the scope of V.A.T. Consequently, it is not possible to obtain recoveryof the V.A.T. on purchases or fixed assets39.

4.1.2. Exceptions relating to the right to deduction of V.A.T. The provisions of Article 212 of annex II of the French Tax Code40, which provide for thelimitation of the right to deduction by the method of prorata, do not apply to exemptedfinancial operations, where such operations have an accessory character with respect to theprincipal activity of that company. A European case law41 confirmed by French case law42 had added a qualitative criterion,considering that the interest generated by cash management operations, even if lower

38 Article L.650-1 of the French Commercial Code, “Creditors may not be held liable for harm in relation to credits granted, except in cases of fraud, indisputable interference in the management of the debtor or if the guarantees obtained for the loans or credits are disproportionate. If the liability of a creditor is established, the guarantees obtained for the loans will be declared void”.

39 According to Article 261 C of the French Tax Code.40 Modified by Decree n°2005-1648 dated 26 December 2005.41 European Court of Justice: Régie Dauphinoise/Cabinet Forest, 11 July 1996; Floridiene SA/Berginvest SA, 14 November, 2000.42 Cases Bouteille/Billon of 29 December 1997, Havre/Tronchet of 11 February 1998, RJF February 1998, n° 2 p 75-80.

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than 5%, is not an accessory product (and must then be added to the denominator of theprorata of V.A.T., decreasing the percentage of deduction) because this interest is "the direct,permanent and necessary continuation of the company’s activity". However, this has beenheld by the French tax authorities43, which consider that the accessory character set forth inthe said case law, cannot be extended to persons other than a receiver.As a consequence, if the exempted financial operations are accessory in relation to theprincipal activity, i.e. pursuant to the fiscal instruction n° 3 A-1-06, “where the expensessubject to V.A.T. incurred for the performance of exempted financial operations are inferiorto 10% of the total expenditures subject to V.A.T. ”, a company may then deduct the fullamount of V.A.T. on the purchases provided that it does not carry out other exemptedtransactions. Conversely, when overtaking the aforesaid threshold of 10 %, such financial operations are nomore accessory and therefore, are subject to the limitations provided by the said Article 212.Accordingly, the company can only deduct a fraction of its V.A.T. in proportion of productssubject to V.A.T. in its turnover all tax included (the prorata of V.A.T.).

4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?If the company receiving the interest is located in France, the interest received qualifies asfinancial products and is therefore subject to corporate tax at the ordinary corporation taxrate (33.3%). If the company receiving the interest is located abroad, the interest paid can besubject to a withholding tax in France, at a rate determined according to bilateral tax treaties.

Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?It is worth mentioning that the European Directive 2003/49/EC of 3 June 200345, anexemption from withholding tax, interest and royalties due from associated companies inmember states of the European Union.

43 By a fiscal instruction dated January 10, 2006, n° 3A-1-06.45 Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest payments and royalties between associated companies of different

Member States.

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

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Den

mar

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Dub

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Engl

and

Ger

man

y

Hun

gary

Indi

a

Irela

nd

Ital

y

AffiliatedCompanies

in



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4.3 Stamp dutyDo cash pooling operations raise any stamp duty? The registration of the documents establishing the granting of loans/advances is not legallyrequired in France. No stamp duty is therefore payable in France in that respect. Nevertheless,the borrower in France has the burden of proving that the debt is in existence for tax purposes.In this respect it is advisable that the initial loan documentation is registered with the taxauthorities. Registration confers a date certain upon such document preventing any challengeas to the date thereof in the absence of fraud. Registration triggers the payment of aregistration tax, amounting € 125 per document (Article 680 of the French Tax Code).

4.4 Deductibility of interestAre there limitations to the deductibility of interest paid by the centralized or the centralizingentity (such as a thin capitalization rule - debt / equity capital ratio)?As a general rule, applicable irrespective of the nationality of companies, interest paidbetween affiliated companies is tax deductible to the extent of the annual effective rateoffered by credit institutions to companies for mid term debts with a duration of more thantwo years (TMPV) or if they are superior, to the rate that this borrowing company could haveobtained from independent credit institutions in similar conditions.Since 1 January 200746, the capitalisation rules also apply to loans from all affiliates of thegroup, and not only to loans from the holding company as provided for under the previousregime. The loans taken into consideration include aggregated amounts left or made available to theborrower by directly or indirectly linked companies, i.e. when one holds the majority of theshare capital or voting rights of the other or carries out in fact the authority of decision orwhen they are both under the common control of a third party.When (i) the advances exceed a limit of one and a half times the amount of the company’sequity, (ii) the amount of interest paid exceeds 25% of before tax revenues subject to certainadjustments, (iii) the amount of interest paid to linked companies exceeds the amount ofinterest received from these companies, the interest relating thereto is not immediatelydeductible unless inferior to € 150,000. Nevertheless, the excess interest may be carriedforward for deduction purposes within 25% of profit before tax and applying a discount of5% per annum. The above imitations do not apply if the company supplies evidence that thedebt ratio of the group to which it belongs is greater than or equal to its own debt ratio forthe same financial period.

Ivor

y Co

ast

Japa

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Mex

ico

Net

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Pola

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Port

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Russ

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Sout

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Spai

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Switz

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USA

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in

Withholdingtax rate 15% 10% 10% 15% 10% 0% 12% - 0% 10% 0% 0%

46 By Instruction tax of 31 December 2007 (BOI 4-H 8-07, No. 133).

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It is possible to ask for the advice of the tax authorities with a view to conclude a contract oragreement47. If the administration does not reply within six months, the act of asking for itsrelief excludes potential prosecution for the misuse of the company’s assets. However, whilerequesting such ruling, it is advisable to give all details of the proposed agreement to the taxadministration in order to allow it to appreciate the lawfulness of the operation, as otherwise,it is capable of contesting retrospectively the implemented arrangement if it considers thatat this time and based on the documents communicated to it, it was not in a position toappreciate the real tax consequences of the agreement. The consultation of the taxauthorities must concern a contract or agreement that may be challenged under the taxprocedure of punishment of abuse of law (procédure de répression des abus de droit).

4.5 Tax havens


Article 209 B of the French tax Code provides that if a company runs a company outside ofFrance or holds directly or indirectly at least 50 percent (reduced to 5 percent upon certainconditions) of the stock capital, financial rights or voting rights of a legal entity, a trust or acomparable institution is situated in a tax haven, then the foreign profits are subject to Frenchcorporate tax, which is supported by first company in proportion to the part that thiscompany holds in the foreign company.

This procedure, which enables the fight against international tax evasion, also exists in othercountries of the OECD. The idea is to tax the revenues arising in other countries in which taxbenefit regimes are applied: holdings in the Netherlands or in Luxembourg, coordinationcentres in Belgium, International Financial Centres in Ireland.48 However, a State cannotsystematically avail of such procedure to tax locally, profits made abroad49.



A benefit regime has been set up50 for cash management pool which, upon satisfaction ofcertain conditions51, allows:

- an exemption from withholding at source, including, with respect to current account loans,interests paid by a cash management pool established in France to a company of the groupsituated abroad, and

- secondly the deductibility of the entirety of interest paid, assuming it is at market rate.

47 Livre des Procédures Fiscales, Article L. 64 B.48 International Financial Services Centers (docks in Dublin).49 Schneider Electric, Conseil d’Etat, 28 June 2002, where the judge condemned France for an abusive use of Article 209 B, which was not conforming to the bilateral

tax treaty signed between France and Switzerland.50 By an instruction dated 3 November, 1998 addressed to the President of the French Association of Corporate Treasurers (Association Française des Trésoriers

d’Entreprise, AFTE) confirmed by the Fiscal instruction 4C-1-99 of 16 avril 1999 and a letter from the Directorate of Tax legislation the General Delegate of the AFTE dated October 15, 2001.

51 Set out in a tax instruction 4 C-1-99 n°72 dated April 16, 1999.


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The above regime has been declared partly as not conforming to Community rules withrespect to State aids by a Commission decision dated 11 December 2002. Nevertheless, the benefit regime is not entirely undermined. It still allows an exemption fromwithholding tax on the interest paid by a centralizing company located in France toparticipating companies located abroad on current account debt. Since the said exemptionrelating to domestic law does not constitute a “selective advantage”, it has not beencontested by the Commission. By a tax instruction dated 28 February of 2003, the taxadministration had extended to cash management arrangements the maximum commonregime deductibility rate, TMPV52. However a decision of the Conseil d’Etat53 gave a restrictiveinterpretation of the scope of Article 131 quarter of the French tax Code (regarding foreignloans) by making a distinction between amount left to a French company on theshareholder’s current account (liable to withholding tax) and amounts granted to Frenchcompanies from foreign companies (exempted from withholding tax). Accordingly, it isadvisable in order to avoid tax reassessment that the loans granted between French andforeign companies are evidenced by funds transfer and that the interest are regularly paid andnot capitalized on the shareholder’s current account. Regarding the issues in connection with V.A.T. see section 4.1 (Value Added Tax).

4.7 Transfer price issuesDo cash pooling operations raise transfer-pricing issues? The French tax authorities as regards cash pooling transactions may construe the indirecttransfer of profits between related companies as taxable income (by example, payment ofexcessive interest without compensation). Yet, to the extent that these operations areconcluded at market or close to the market conditions, this risk seems to be weak.

5. CENTRAL BANK REPORTINGAre there central bank reporting obligations (balance of payments), bearing upon thecentralizing entity / each centralized entity / the banks?Reporting obligations are aimed at elaboration of the balance of payments and the followingof the overseas position of France.Companies and groups of companies which payments overseas in connection with servicesand revenues exceed 30,000,000 € (Déclarants Directs Généraux) make monthly statementsto the Banque de France54. Companies below such threshold but which opened bank accountsabroad (Déclarants Directs Partiels) must make monthly statements to the Banque de Franceof movements occurred in such accounts. However, the current practice of the French central bank consists in requiring statements forstatistical purposes only from those companies which it identifies itself as due, following theinformation communicated by banking institutions. Cash management transactions,previously included in the above mentioned services, are from now on taken into account in

52 Instruction 4C-2-03 of 28 February 2003.53 Case “Meridia France” dated November 3, 200354 Decree n°2005-1739 dated December 30, 2005 on financial operations with abroad and enforcement of Article L.151-3 of the French Monetary and

Financial Code.

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the calculation of the threshold of 30.000.000€ (Déclarants Directs Généraux) pursuant tothe interest received from intra-group loans only if they are performed with companiesacquired by direct investment.Furthermore, Banque de France requires monthly statements pursuant to the “DéclarationDirecte Partielle” only from those companies which it designates as such. However, the latteractually restricts the inspection of the statements to the existing “Déclarants Directs Partiels”.In fact, it is important to point out that article 3-III of Law 20th February 200755 makesprovision for sanctions for not complying with the reporting obligations to the Banque deFrance56.

6. EXCHANGE CONTROL REGULATIONSAre there any restrictions to the transfer of cash to foreign entities of the same group or theconversion of the local currency in other currencies?The general principles of exchange control regulation in France provide for freedom offinancial relationships between France and foreign countries, except for certain specific areassuch as the military field. Other than the reporting obligation to the Banque de France for thestatistics purposes, referred to in point 5 above, certain direct foreign investments made inFrance must be declared to the French Ministry of Economy or even authorized by it (ArticlesR.151-1 et seq, French Monetary and Financial Code). Further, capital movements to a fewcountries are not allowed or subject to prior authorization.

7. ACCOUNTANCY OBLIGATIONS AND STANDARDSWhat if any are the specific accountancy obligations and standards for entities participating ina cash pooling arrangement?France implemented Regulation EC No 1606/2002 of the European Parliament and Councildated 19 July 2002, regarding the application of international accounting standards by anorder dated 20 December 2004. IFRS apply mandatorily to the consolidated accounts ofcompanies traded on EU regulated markets. These apply only upon option to non-listedcompanies for their consolidated accounts. Accordingly, depending whether the group is listedor not, IFRS shall apply either mandatorily or upon option.

8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?The use of Internet for purposes of communication between participating companies, andbetween the latter and banks relating to bank accounts information, reporting and transferorders require high security technical measures. Banks offers take this factor into account.

55 Law n°2007-212 of 20th February 2007 relating to various provisions concerning Banque de France.56 Sanctions fixed by a Decree which publication is expected for December 2007.


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Electronic transfers are facilitated by the recognition of electronic signatures, in particular asevidence before the courts57. In order to secure electronic signatures in transfer instructions,cryptography can provide proof of the identity of the signatory, of its willingness to be bound,of the validity of the transaction, as well as confidentiality of the transaction.In the implementation of cash management schemes, large groups may have access to theSWIFT58 network SWIFTNet, which, thanks to its “Secure Internet Protocol Network”, warrantsthe confidentiality and integrity of messages transferred and strictly controls accessauthorizations.Important simplifications and cost savings are expected for intra-European cash managementoperations as a result of the Single Euro Payments Area (“SEPA”). The objective of SEPA projectis to provide European Union residents with common cashless payment instruments that willenable them to make payments in euros under similar terms from and to all European Unioncountries59. European payment instruments will coexist with national payment instrumentsduring a transitional period (2008 to 2010) after which they will replace the national paymentinstruments.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?The Financial Security Act 200360 adopted in France further to the Enron scandal, has similarobjectives to the 2002 Sarbanes-Oxley Act voted in the United States. It provides for specificinternal control procedures, financial reporting and the improvement of corporategovernance, mainly by guaranteeing the independence of the statutory auditors, stiffeningthe legal control over financial statements and the reinforcement of the transparencyprinciple. Contrary to the Sarbanes-Oxley Act, The Financial Security Act also applies to publicand private companies. These obligations are to be addressed both at the company and grouplevel.In addition, Statute n°2005-842 of 26 July 200561 which implemented the EC Directive“Transparency” dated 15 December 2004, bring forward new financial reporting obligationsaddressed to issuers whose shares are admitted for quotation on a regulated market. Hence,as from January 20, 2007, listed French companies must publish and file with the Autorité desMarchés Financiers (“AMF”), an annual financial report, a semi-annual financial report and aquarterly financial report, in order to allow better transparency and to reinforce the obligationof information disclosure that falls due by issuers.However, other than the obligations stated above, there are no statutory financial reporting,evaluation and control obligations, which apply specifically to cash pooling arrangements.

57 Article 1316-4 of the Civil Code.58 Society for Worldwide Interbank Financial Telecommunication s.c.59 The SEPA includes the 27 EU member states as well as Norway, Iceland, Liechtenstein and Switzerland.60 N° 2003-706 dated August 1, 2003.61 Codified at Article L. 451-1-2 of the Monetary and Financial Code.

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UNDER GERMAN LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the principles inGerman corporate law, banking law and tax law as well as regards central bank reporting and exchangecontrol that are applicable to cash management in Germany. The answers set out below must be consideredin relation to individual circumstances, taking into account the nature of the activities, the structure chosenand the location of the centralizing company

NÖRR STIEFENHOFER LUTZFriedrichstraβe 2-6 - 60323 Frankfurt am Main - Germany

Tel: +49 (0) 69/ 97 14 77-211 - Fax: +49 (0) 69/ 97 14 77-100Email: [email protected]

Georg Edelmann Sebastian Bock


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1. BANKING LAW

1.1 Banking monopoly

Are the activities of the centralizing company submitted to the Banking Authorities forapproval, consent or exemption? Do these authorities have any right of control over theactivities performed?

The cash management activities of the centralizing company as well as of the centralizedcompanies are exempt from the requirement of permission from the Federal SupervisoryOffice for Financial Services if all participating companies are related to each other as “parentcompany”, “subsidiary”, or “sister company” (group privilege). The pre-requisite to a companybeing deemed a “parent company” and another company its “subsidiary” is that the parentholds more than 20% in the nominal share capital of the other company which is underuniform guidance or where the parent has a dominating influence over the other company.The group privilege only applies if no banking or financial services are provided to third parties.The group privilege applies regardless of the participating companies having their seat inGermany or abroad. This privilege, however, does not apply to groups where the groupcompanies are not under uniform control of a common parent company.

1.2 Remuneration of cash deposited

Is the centralizing company prohibited from remunerating cash deposited with it by thecentralized companies?

In general, the centralizing company is not prohibited under German law from remuneratingsums collected from centralized companies within the cash management system. Thisrequires that the centralizing company’s objects of business allow its cash pooling activitiesin the first place and also depends on the provisions of the framework agreement (see below,6.2). In most cases the centralizing company is even required to remunerate amountsdeposited with it due to corporate requirements of the centralized companies (see below).There are, however, restrictions to the extent of the remuneration, which is in general limitedto a fair market standard.

1.3 Notional pooling of current accounts

Is there any prohibition/restriction on banks implementing notional pooling of currentaccount balances of the centralizing and centralized companies in order to create a singlebalance?

The carrying out of both the notional cash pooling and the (physical) cash pooling of currentaccount balances of a group of companies are typical banking activities. Thus, the bank needsto have a full banking license granted by the Federal Supervisory Office for Financial Services.Apart from that there are neither any prohibitions nor any restrictions on banks offering thisservice.

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2. COMPANY LAW

2.1 Approval of the cash management agreement

Is the cash management agreement subject to any approval by the management board /supervisory board or the shareholders of the participating company?

The decision on a company’s participation in a cash management system and signing of theagreement is subject to the discretion of the management board/managing directors andgenerally does not require the shareholders' consent. Under specific circumstances, especiallywhere the company’s articles of association provide accordingly, the management may,nevertheless, require the consent of the supervisory board (in case of an Aktiengesellschaft(AG) – German Stock Corporation) or the shareholders (in case of a Gesellschaft mitbeschränkter Haftung (GmbH) – German Limited Liability Company).

However, the shareholders of a GmbH may, by passing a resolution, give instructions to themanagement and therefore can request or prevent participation in the cash managementsystem. The management board of an AG, by contrast, is independent from instructions of theshareholders or the supervisory board. However, where a GmbH or AG submits itself to thecontrol of another company by entering into a controlling agreement (Beherrschungsvertrag)with such other company, the dominating company may instruct the management of theGmbH or AG, respectively, whether or not to participate in the cash management system.

2.2 Respect of the corporate interest of the participating companies

To what extent is the cash management structure affected by the principle of protecting thecorporate interest of the centralizing company, the centralized companies, and the group?

German corporate law allows for the implementation of a cash management system ifseveral restrictions protecting the centralized company are respected. Above all, the cashmanagement may not interfere with the company’s object of business. If the cashmanagement does not hinder the centralized company to pursue its business and is in somerespect supportive to its business, e.g. allows the company access to finance resources or toinvest excess cash at favorable conditions, the centralized company’s object of business is notviolated.

In case of an AG, the centralized company may carry out measures also in the interest of aparent or other group company, if they are not to the disadvantage of the centralizedcompany, which is not the case in an arm’s length transaction. If the parent company uses itsinfluence over the centralized company to demand a disadvantageous measure the parenthas to compensate for the damage.

In case of a GmbH, the centralized company is required to obtain a valuable consideration forany transfer of assets made to the benefit of a shareholder if this transfer affects thecompany’s capital stock due to insufficient “free” equity exceeding the nominal share capital.If the centralized company has minority shareholders, any transfer of assets or a usurpationof business opportunities to the benefit of a majority shareholder requires a valuable


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consideration. These restrictions are binding on the centralized company’s managing directorsand its shareholders and violation thereof can result in claims for damages to replace anydamage relating to the breach of fiduciary duties including the loss of profits. Shareholderresolutions in breach of these fiduciary duties are unlawful and void.

Especially where the cash contributed to a centralized company for an increase of its sharecapital is forwarded to the centralizing company, the amount may only be provided to thecash management system in an arm’s length transaction. And repayment of these amountsto the centralized company must remain possible at any time. Otherwise, the capitalcontribution may be regarded as not validly granted. If, however, the shareholding companyproviding cash for the capital increase is at the same time the centralizing company collectingthe injected amount via the cash management, it is questionable whether the cashcontribution has to be regarded as a contribution in kind for the purpose of the capitalincrease.

Is there an obligation to offer the participating companies financial conditions at marketterms? (i.e. the “arm’s length principle")

To avoid liability to compensate for transfers made from the stated capital or any liability fordamages being incurred by the centralized company (see above), the centralized companymust receive a valuable consideration for the sums transferred into the group’s cashmanagement system. In order to establish whether the consideration is of value, all relevantfactors shall be taken into consideration, i.e. any consideration obtainable at marketconditions from a third party bank, the security provided to secure the claim for repaymentof the transferred sums, the advantages as well as the disadvantages the centralized companyrealizes from participating in the cash management. The centralizing company requesting aloan at favorable conditions not only incurs the above described liability. Any such advantagegranted to the centralizing company is also regarded as a transfer of profits under tax laws.

Accordingly, the interest for a loan obtained by the centralized company from the cashmanagement system has to be reasonable. Any interest obligation in excess of the marketconditions triggers the above-mentioned compensation and liability problem as well as taxissues.

Are there restrictions on the type of operations the centralizing company can undertake withthe cash of the centralized companies?

A company’s management has to exercise the care and diligence of prudent business practice.This requires the management of the centralized company and of its parent company to makesure that neither the centralized company nor the centralizing company is at any time at riskof lacking the liquid funds necessary to meet their obligations due to the implemented cashmanagement system. When such a risk occurs, in order to act prudently, the management ofthe centralized company (supervised by its parent company) has to terminate the cashmanagement agreement and ask to have the sums provided to the cash management systemreturned. To keep the cash management system working, this in turn requires the centralizingcompany to observe the credit standing of all companies participating in the cash

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management system. Any operation jeopardizing the financial standing of the centralizingcompany would also put the centralized companies at risk. Therefore, the centralizingcompany may not grant loans to participating companies or third parties that lack good creditstanding. This applies all the more so where the parent company itself is the centralizingcompany.

2.3 Management liabilities

Do the managers / directors of the participating company incur any potential liability byagreeing to the execution of a cash management agreement?

The management owes to its company the diligence of an orderly and prudent businessman,and any violation of that obligation incurs liability for damages vis-à-vis the company. Thisrequires the management to ensure that the cash management agreement, the loanagreement, and each individual transfer are in the interest of the company. Therefore theyhave to ensure that the centralized company receives or grants loans at market conditionswith regard to the consideration and the security provided. To act diligently, the managementis, furthermore, required to observe the activities of the centralizing company, especially withregard to risk bearing transactions that could endanger the repayment of contributions.Where necessary, the management has to refuse cash transfers, ask for repayment ofamounts, or, as a last resort, terminate the cash management agreement.

A liability of the management ends where it has to follow instructions of the shareholders(see above, 2.1). In a GmbH, however, despite a shareholder instruction, the managementmay not make any transfer of assets or grant advantages, directly or indirectly, to the benefitof the shareholders, if the company has insufficient total equity so that thetransfer/advantage cannot be made without affecting the company’s nominal share capitaland in the absence of a valuable consideration for the transfer (see above, 2.2).

The management of any company involved in the cash management system may be liablefor any damage intentionally caused to any creditors and minority shareholders bytransferring sums into the cash management system without providing for a valuableconsideration to the centralized company and thereby putting the creditors’ or minorityshareholders’ claim at risk.

2.4 Shareholders’ liabilities

Can the shareholders of the participating companies be exposed to any liability as a result ofthe cash management agreement?

Where a shareholder uses its influence over a company to request actions that are detrimentalto the company, it has to compensate the company for any damages sustained. This alsoincludes the profits that the company is unable to realize due to the shareholder’s interference.

This shareholder liability is less strict where the shareholder is the sole shareholder of aGmbH. If a shareholder in a GmbH obtains from the company (directly or indirectly) anadvantage that reduces the company’s total equity below its nominal share capital withoutcompensating for it, the shareholder is liable for the amount by which the equity has be


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reduced below the nominal share capital.

A shareholder loan is generally treated like any other third party lending. However, to protectthird party creditors, a loan is qualified as “capital-substitution” if it is made (or an earlier loanis allowed to accrue) at a time when shareholders acting as orderly merchants would haveinstead provided capital to the company. The determinative test is the company’screditworthiness, whether it would have been able to obtain the loan from a third party atmarket conditions. If the company lacks creditworthiness, the capital-substituting loan istreated as share capital and during insolvency proceedings the satisfaction of all othercreditors takes precedence over repayment of the shareholder’s loan.

2.5 Bankruptcy

Are there any risks that bankruptcy proceedings issued against the centralizing company or acentralized company could be extended to other participating group companies?

Under German law a company’s management has to apply for the opening of insolvencyproceedings not only when the company is over-indebted, but already when it does not havesufficient liquidity to pay due debts or its insufficient liquidity becomes apparent. When allliquid funds of centralized companies are transferred to the centralizing company, the liquidityof the transferring centralized companies depends on the centralizing company’s ability toprovide the necessary funds for the payment of debts of the centralized companies.Insolvency of any other participating company may result in the centralizing company’sinability to make cash transfers to other centralized companies and, therefore, require theopening of insolvency proceedings not only against the centralizing company but also againstother centralized companies. This demonstrates that economically successful companies canbe threatened by the failure of any remote participating group company. Hence, themanagement of any participating company has to assess the intra-group credit risks on anongoing basis.

2.6 Centralizing company structure

Assuming the centralizing company is not required to be a group bank, are there corporatearguments in favor or against the centralizing company having any particular corporate form,such as a holding company, a subsidiary, or a European grouping?

Where the centralizing company is the group’s parent company, its own corporate structureis less important than the structure of its subsidiaries participating in the cash managementas centralized companies. Subsidiaries in the form of a GmbH allow shareholders already onthe basis of statutory corporate law to issue instructions to the management. In principle,this does not apply to shareholders of an AG. The holding company can, however, enter intoa controlling agreement with a centralized company and then give direct instructions to it,regardless of its corporate form and its being an indirect subsidiary.

Where the centralizing company is not the group’s parent company the shareholding

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companies do have some influence over its management, even if it is in the form of an AG.

Since the centralizing company needs to keep in mind the interests of the entire group andthe individual participating companies, it should not at the same time have an operatingbusiness, since both interests, the group’s and the individual company’s interests, are likely toconflict with its own business interests. Even if the only purpose of the centralizing companyis to centralize the cash management, a conflict of interests with an individual company orthe group arises where a shareholder can exercise its influence over the centralizing company.The centralized companies are more likely to participate in the cash management if theirmanagement can be assured that the centralizing company will not ignore their individual orthe group’s interests.

3. TAX ISSUES

3.1 VAT

Are the operations between the centralizing company and the centralized companies subjectto VAT? If so, at what rate?

The cash transactions between the centralizing company and the centralized companies arequalified as lending and banking transactions for VAT purposes. Therefore, they are exemptfrom German VAT. The company providing the service may waive from the exemption andelect the transaction as being taxable for VAT. Such election may be recommendable to creditinput VAT against the VAT liability. The standard VAT rate is currently 19 percent.

The lending transactions are not subject to VAT if the centralizing company and thecentralized companies are part of the same VAT group. In such a case, the transactions aretreated as internal services. A VAT group exists if a company is financially, economically andorganizationally integrated into the business of the controlling company.

Further, the lending transactions by a resident company to a foreign company are not subjectto VAT as the place of the transaction is abroad. In such a case, input VAT is only creditable ifthe company receiving the service is resident in a non-EEC country.


How is the accrued interest, whether owed to the centralized company or by the centralizedcompany, taxed?

Interest income derived by the centralized company or the centralizing company resident inGermany is subject to trade tax, corporate income tax and solidarity surcharge. The effectivetrade tax rate can vary between 7 percent and 17 percent depending on the fact in whichmunicipality the company is located. Taking into account the corporate income tax rate of 15percent and the solidarity surcharge of 5.5 percent, the overall tax rate ranges between 22,825percent and 33,325 percent.


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3.3 Withholding tax on interest paid to a foreign company

Interests paid by a German company to a foreign company are only subject to Germanwithholding tax, if the loan is secured by a real pledge. In such a case, the withholding tax rateamounts to 30 percent (from 2009: 25 percent). The relevant double taxation treaty mayreduce the withholding tax rate usually to nil percent.

Interest paid by a bank to a company is subject to German withholding tax at a rate of 30percent (from 2009: 25 percent) plus 5.5 percent solidarity surcharge thereon.

The following table below shows various treaty jurisdictions with the applicable limitation onwithholding tax on interest paid by a resident person to a non-resident person:

Aus

tria

Belg

ium

Can

ada

Den

mar

k

Fran

ce

Gre

at B

ritai

n

Irela

nd

Ital

y

Japa

n

Luxe

mbo

urg

Net

herla

nds

Port

ugal

Spai

n

Switz

erla

nd

USA

AffiliatedCompanies

in

Withholdingtax rate 0% 15% 10% 0% 0% 0% 0% 10% 10% 0% 0% 15% 10% 0% 0%

(or 10%)

The preconditions for the lower limitation of the withholding tax rate are specifically definedin the respective double tax treaty. Usually, bank loans, notes or group relations benefit fromthe lower withholding tax rate.

Additionally the Interest and Royalties Directive under certain circumstances reduceswithholding taxes to nil percent in case of interests paid between affiliated companies withinthe European Union and Switzerland.


Are there limitations to the deductibility of interest paid by the centralized company to thecentralizing company?

Basically, interest paid by the centralized company to the centralizing company is taxdeductible. In a domestic context, the interest deduction is limited to the fair market rate, ifexcessive interest is paid by the controlled company to the controlling company. The same istrue if interest is paid by the controlling entity to the controlled company and if the interestrate is lower than the market rate. Then the different amount is treated as a hidden dividenddistribution and the income of the subsidiary is increased accordingly.

Additionally in a cross-border context, the income is increased, if the interest rate is lowerthan the market rate and if the loan is granted by the controlling company.

The arm’s length interest rate is usually an arm’s length range which is limited both by theinterest rate on deposits and the credit interest rate. The debit interest may include a mark-up as the centralizing company provides for the cash management and usually the guarantee

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towards the banks in favor of the centralized companies. Correspondingly, the credit interestmay be reduced due to the volume of the pooled cash amounts.

Often the refinancing bank requires that the centralizing company and the centralizedcompanies are liable jointly and severally for the debts. In order to avoid a hidden dividenddistribution, a commission or bank guarantee should be agreed between the companies.

There is also a risk of a hidden dividend distribution if there is no legally effective and clearcontract between the companies and if such contract is not agreed in advance. Therefore, acash pooling system should be agreed contractually and the contract should provide for thelegal relationships, interest rates, invoicing, etc.

Is there a debt / equity capital ratio (thin capitalization)?

Effective 2008, Germany introduced the new interest barrier rule which has a far broaderscope than the previous thin capitalization rule. Under the thin capitalization rule, the taxdeductibility of interest was limited, in particular, if corporations borrowed capital fromsubstantial shareholders.

In contrast, the new law will apply to all types of borrowed capital – including interest on themaster account – regardless of the company's legal form and it will also apply, for example,to borrowed capital received from banks or capital raised on the capital market. Interestexpenses will be deductible without limitation only under strict conditions. If these conditionsare not satisfied, interest expenses for the current year may be deducted only up to 30percent of the (adjusted) profits, while any additional non-deductible interest may, if at all,only be claimed in subsequent years.

Interest expenses are tax deductible without limitation from profits earned in Germany onlyif interest expenses do not exceed interest income in the same year. If interest expensesexceed interest income ("excess interest expenses"), such excess interest expenses may bededucted without limitation only if

(1) excess interest expenses total less than the exempt threshold of EUR 1 million,

(2) the company is not or only partially an affiliated company or

(3) the company is an affiliated company, but the equity capital ratio of the company claiming the deduction of interest is not more than 1 percent lower than the equity capital ratio of the group as a whole.

The exceptions (2) and (3) are applicable to corporations only if no detrimental debt financinghas been received from substantial shareholders being outside the group.

If none of the above exceptions apply, the deduction of excess interest expenses is limited to30 percent of taxable income as increased by interest expenses anddepreciation/amortization and as reduced by interest income (“modified EBITDA”). Theadjusted taxable income is not increased, for example, by tax-exempt income (which, in thecase of a corporation, includes, for example, 95 percent of dividends received and income froma foreign permanent establishment within the meaning of a double taxation treaty).


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Non-deductible interest expenses of the tax assessment period are carried forward tosubsequent tax assessment periods, and may – provided that interest expenses are notsubject to the limitations be deducted in those years ("carry forward interest"). Interest maynot be carried forward, if a corporation is subject to a merger, if a business, operationaldivision, or co-ownership interest is transferred by contribution in kind to a corporation orpartnership or in the case of a so-called corporate shell purchase within the meaning.

Interest may be deducted without limitation, if the business is not or only partially anaffiliated company. The reason for this provision is that the legislature presumes that interestexpenses are used to reduce the tax base in Germany especially by groups. A business isconsidered an affiliated company if (1) the business is or can be consolidated with one orseveral other companies in accordance with the accounting standards applicable to the group(generally: IFRS), or (2) the fiscal and business policy of the business can be determined inuniformity with that of one or several other companies. The legislative rationale explains thatthe interest limitation provisions are based on a broad definition of a group. Affiliatedcompanies may be individual business owners, partnerships, or corporations. Consolidationoccurs, in particular, if a business holds more than 50 percent of the voting rights in anotherbusiness.

Even businesses that are considered affiliated companies may deduct interest withoutlimitation, if the business claiming the deduction of interest can prove that the equity capitalratio reported in its single-entity financial statements is not more than 1 percent lower thanthe equity capital ratio reported for the group as a whole.

To calculate the equity capital ratios for the single-entity financial statements, variousamounts must be added to or deducted from the equity capital:

Equity capital reported in the single-entity financial statements

+ going concern value of the affiliated company as reported in the consolidated financialstatements

+ 50% of special items with reserve portion

./. equity capital without voting rights

./. book value of shares in affiliated corporations

./. capital contributions made within the last six months preceding the balance sheet date,to the extent offset by withdrawals or distributions made within the six monthsimmediately following the balance sheet date

= equity capital of the single-entity financial statements relevant for the escape clause.

Generally, corporations also may escape the interest barrier rule, provided that they are notaffiliated with a group. However, this exception is available to a corporation only if it can showthat no more than 10% of its excess interest expenses involve interest paid to substantialshareholders (shareholdings > 25%), persons closely related to such shareholders, or thirdparties that have recourse against such shareholders or any persons closely related thereto(guarantees, letters of comfort, or liabilities noted below the balance sheet of a shareholderor a person closely related thereto). This would mean a return to an unreasonably broad

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definition of recourse. However, recourse among companies that are considered a fiscal unitcompany (Organschaft) should not preclude the deduction of interest, because such a fiscalunity is considered a single business within the meaning of the interest limitation provisions.

Corporations that are considered corporate affiliates may avail themselves of the so-calledescape clause like any other affiliated companies. The escape clause is applicable tocorporations that are affiliated companies only if they can show that (i) they themselves and(ii) and each of the other affiliated companies paid no more than 10 percent of excess interestexpenses as interest to substantial shareholders, persons closely related thereto, or thirdparties that have recourse against such shareholders or any persons closely related thereto.

To calculate the 10 percent limit, interest expenses are taken into consideration only if theunderlying liabilities are – in the case of financing provided by shareholders or personsassociated with such shareholders – reported in the fully consolidated financial statements,or – in the case of financing provided by a third party – allow for recourse against shareholdersoutside the group or persons closely related thereto.

Is it possible to obtain a tax ruling from the authorities as to the deductibility of interest? If so,under what conditions?

The German tax authorities only give tax rulings in case the legal situation is unclear. Thus,the tax authorities do not give a tax ruling regarding the appropriate interest rate.

3.5 Risk of reclassification of the interest paid by the participating company

Is there any risk that the interest paid by a participating company could be regarded (i) ashidden dividend distribution (subsidiary-borrower) or (ii) as an informal contribution to itsregistered capital (parent company-borrower)?

Provided the interest rates are at arm’s length, the interest or part of it can not be reclassifiedas hidden dividend distribution or informal contribution to the capital.

Item 3.4 above provides guidelines for the determination of the arm’s length interest rate.


Do cash management operations raise transfer price issues?

For financial services provided within a cash management system, such as netting or pooling,the centralizing company must invoice the centralized companies for costs and, depending onthe type of financial services provided, also for a profit mark-up. Synergy advantages – forexample, as a result of lower debit interest and higher credit interest on internal clearingaccounts of the group – must be passed on to the companies concerned.

In 1983, the German tax authorities issued the German Administrative Principles on IncomeAllocation between Multinational Enterprises to provide the methods and factors thatdetermine the arm’s length prices.

The arm’s length interest rate is usually derived from the market rate, i.e. Euribor, which is thenadjusted by the credit rating of the participating companies. Other services may furtherinfluence the interest rate (see item 3.4 above).


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3.7 Are there specific provisions as to the interest accrued in tax havens?

If a foreign financing subsidiary of a German parent company is involved in the cashmanagement system, the Foreign Relation Tax Act may not be overlooked. In case the foreignsubsidiary is low taxed (< 25 percent) and if the German company holds at least 1 percentdirectly or indirectly, the financing income is attributed to the German company and usuallytaxed at the normal rate.

4. CENTRAL BANK REPORTINGWhat are the central bank reporting obligations (i.e. balance of payments), if any, bearingupon the centralizing company / each centralized company / the bank?

Foreign Trade Regulations do not restrict payments to or from a foreign country but requirecompanies seated in Germany to notify the German Federal Bank of cash transfers exceedingthe value of Euro 12,500 to or from a foreign company. This notification requirement servesstatistical purposes of the Federal Republic of Germany and the European Monetary Union,and notices are treated strictly confidentially. A violation of the notification requirement doesnot render the relevant transaction invalid.

Payments or repayments of loans, however, with a stipulated term or termination period ofless than 12 months are exempt from this notification requirement. As a rule cash transfersunder a cash management system will, therefore, not trigger the notification requirementunder German trade regulations.

5. EXCHANGE CONTROLAre there any exchange control regulations issues?

There are no general export control regulations restricting cash transfers by or to a Germanparticipating company. Capital import or export restrictions of other countries can alsoobstruct the cash management of participating German companies, which is mainly the casewith developing countries.

6. CONTRACTUAL ENVIRONMENT

6.1 E-cash management

Are there data securitization aspects to be addressed regarding the relations between thecentralizing company, the centralized companies, and the banks?

The German Data Protection Act is limited to the protection of natural persons and their dataand, therefore, does not apply to the information obtained within a cash managementsystem. The banks involved are bound to the usual banking secrecy and banker’s privilege.These principles are based on provisions of the bank agreement with the respective client and

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prohibit disclosure to any third party including other group companies. The banker’s privilegeis, however, revoked in criminal proceedings and under specific circumstances with regard tothe tax authorities. Nor does it apply in cases of money laundering. When opening a bankaccount the respective client generally has to waive the banking secrecy with regard to thedisclosure by the bank of general information on the client’s credit-worthiness.

6.2. Legal qualifications

What are the legal qualifications to be retained between the: centralizing company andcentralized companies: agency, loan, partnership, other?

Each participating company maintains a current account with a bank, which is ideally thesame bank for all participating companies in spite of different locations. Aside from this, eachparticipating company enters into an agreement with such bank regulating the automatedtransfer of excess cash from the centralized accounts to the centralizing accounts and thebalancing of a negative centralized account balance (so in an automated cash managementsystem). Further, the centralized companies frequently grant power of attorney to thecentralizing company to make or receive declarations on their behalf with regard to themanaging bank.

The participating companies enter into a framework loan agreement with each other to coverthe obligations to transfer excess cash to the centralizing account, the centralizing company'sright to make draw downs, regulating treatment of the cash transfers as loans, interest rates,maturity, rights of control for participating companies, terms of termination, etc. Where thecentralizing company invests excess cash of the centralizing account or enters into loanagreements with third parties to cover cash shortfalls of the group, such agency transactionis part of the framework agreement. The extent of the centralizing company’s agencytransaction varies depending on whether the centralizing company also assumesresponsibility for the payment transactions of centralized companies.

Furthermore, there are agreements providing security for obligations, mainly comfort-letters,guaranties, or additional assumptions of debt.

7. ACCOUNTING

7.1 Accountancy obligations and standards

What if any are the specific accountancy obligations and standards for entities participating ina cash pooling arrangement?

According to German GAAP there are no specific accountancy obligations and standards forcash pooling arrangements. In general, the German GAAP rules must be applied in any caseby all entities. The receivables and liabilities resulting from cash pooling arrangements arereported in the balance sheet item "receivables from affiliated companies" or "liabilities toaffiliated companies". Additionally, the cash pool leader under certain circumstances has toreport cash pool liabilities stated as off balance sheet items.


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In the draft version of revised IDW PS 800, the cash pool participant must not add thereceivables resulting from cash pooling as exit cash in the statement of liquidity. So far,discussions concerning this rule are ongoing.

8. DATA PROTECTION

8.1 E-Cash Pooling

Are there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?

There are no data protection law matters in respect of mere cash pooling, i.e. theconcentration of cash in certain accounts. As a rule, in such cases there are no personal datainvolved.

However, this is different in the case of treasury services, such as re-invoicing or debtcollection. To the extent these services require the collection, processing or transfer ofpersonal data (i.e. in this context: financial data of natural persons), German data protectionlegislation must be complied with. According to German data protection law, intra-group datatransfers are not privileged. Such transfers are governed by the same rules which apply to thetransfer of personal data to unrelated third parties. Therefore, if financial personal data (e.g.data pertaining to debtors) are transmitted to a provider of treasury services, it is required bylaw either that the data subject has consented to such transfer or that such transfer ispermitted by law. Such permission could be the legitimate interests of the centralizing entity,provided that there are no reasons for assuming a prevailing interest of the data subject whichis worthy of protection (§ 28 (1) no 2 Federal Data Protection Act). In this context it must benoted that specific rules apply to data collected in the context of so-called telemedia services,which includes e-commerce vendors. Here, a transfer of customer data is more difficult tojustify and may require the consent of the data subject.

9. FINANCIAL REPORTING

9.1 Financial reporting, evaluation and control

Are there financial reporting, evaluation and control obligations associated with cash poolingarrangements?

Information about the cash pooling arrangements has to be published within the notes of thefinancial statement explaining the balance sheet items. Furthermore, cash pool activities canbe noticed in the management report.

The CEO of the cash pool participant has to assure by certain control obligations that onlyexit cash can be paid into the pool.

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REGULATORY, LEGAL AND TAX FRAMEWORK FORINTERNATIONAL CASH AND TREASURY MANAGEMENT

UNDER INDIAN LAW

PROFILE

The Firm: ‘Kundra & Bansal’ is a New Delhi based law firm, started by two lawyers Shivendra Kundraand Amit Bansal. Both left the services of their erstwhile employers, Arthur Andersen, and set up theFirm with the objective of providing legal services that match international standards. The firm has anassociate office in Mumbai.

The two offices have more than 30 lawyers serving commercial organizations, multilateral institutions,public entities and the Government. K&B also advises emerging and closely-held companies, not-for-profit organizations and high net-worth individuals. K&B has close links with specialist lawyers acrossseveral jurisdictions, national and international.

PROFILE OF CONTRIBUTORS:

Mr. Shivendra Kundra – He is a partner in the firm. His practice areas include foreign investmentregulations in India, IPOs, private equity placement, Euro bonds, including GDRs and FCCBs, Advisingmutual funds, venture capital funds companies (domestic & international), FIIs and other non-bankingfinancial companies. He has advised an array of clients on diverse legal issues, including names such asMicrosoft Corporation, General Electric International Inc, Sony, Cadence Design Systems, Gillette, GECountrywide Consumer Financial Services, Citi Group Overseas, Risk Management Solutions,International Management Group, Yum Restaurants International (Pizza Hut), Electrolux Kelvinator,IL&FS Trust Company Limited, Comverse Network Systems, Verint Technologies.

Mr. Rama Kant Rai – He is an associate in the firm. He has been working extensively in the area offoreign investment, company law, capital market, taxation law and banking law. He has graduated fromNational Law Institute University, Bhopal, one of the premier law schools of India.

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in India. The principles set out below should beconsidered in relation to the individual circumstances, with legal and tax counsel.


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I CASH POOLING


1.1 Banking authorities’ approval, consent or exemption Do Loans/advances to the other group entities require banking authority’s approval, consent orexemption for the centralized entities or the centralizing entity? What are the sanctions, if any,for breaching this requirement? In India, cash management service is a new entrant to the market. Generally, cash managementservices comprise integrated collections, payment, liquidity management and receivablefunctions. Although there is no requirement of any approval from the banking authorities, there arecertain provisions of the Companies Act, 1956, which may get attracted in relation to cashpooling. Integrated liquidity management, for instance, will be governed by Section 372A of theCompanies Act. As per this section, inter-corporate loans are subject to certain ceiling limitsprescribed for the lending company. Therefore, if cash were to move between the centralizedand the centralizing entities, compliance would need to be ensured with Section 372A, as cashmovement from one entity to another would be regarded as ‘’loan”. In terms of this Section,no company shall directly or indirectly, (i) make any loan to any other company, (ii) give anyguarantee, or provide any security in connection with a loan, or (iii) acquire securities, exceedingsixty per cent of its paid-up capital and free reserves, or hundred per cent of its free reserveswhichever is higher. The limit applies to all the three categories, individually or collectively. So,as long as the above limits are complied with, the Board of Directors can approve inter-corporate loans by passing a resolution at a meeting. It is necessary that the Board of Directors’resolution sanctioning the loan is passed by all the directors present at the meeting. For goingbeyond the prescribed limit, a special resolution, passed by at least 75 per cent of the votingshareholders, will have to be passed. Another significant aspect of Section 372A is that no corporate loan shall be made at a rate ofinterest lower than the prevailing bank rate, as specified by the country’s central bank, theReserve Bank of India. The fallout of this on cash pooling is worth considering. As movement ofcash from one entity’s account to another is treated as loan, the lending entity will have tocharge interest at the prevailing bank rate.Significantly, the above provisions will not be applicable to the lending company if, (i) it is aprivate company, unless it’s a subsidiary of a public company in which case the provision willbe applicable, or (ii) the borrowing company is the lending company’s wholly-owned subsidiary.Section 372A provides that in case of default in complying with the provisions of the section,every officer of the company who is in default will be punished with imprisonment up to twoyears or with fine up to fifty thousand rupees.

Does the approval, consent or exemption apply to short term, mid term and long-termloans/advances? There is no distinction between short term, mid term and long term loan/advances in thiscontext and the provisions of Section 372A of the Companies Act will apply equally to loans ofdiffering terms.

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Does the activity of investments in financial instruments on behalf of the centralized entitiesrequire banking authorities’ approval, consent or exemption, for the centralized entities or thecentralizing entity?

Again, investment in financial instruments on behalf of the centralized entity does not requireany approval from the banking authorities. However, company law mandates that investmentproposals should always be considered at the Board meeting, and shall be approved by meansof a resolution. Directors of centralized entities may delegate such powers to the centralizingentity. The board resolution giving authority to invest funds shall state the total amount up towhich the funds may be invested, and the nature of investment that may be made.

Does the activity of allocation of interest reduction granted by the bank among centralizedentities in notional pooling require banking authorities’ approval, consent or exemption, for thecentralized entities or the centralizing entity?

Multilateral netting and notional pooling are currently not permitted by Indian law.

Do banking authorities have any right of control over the activities performed?

In India, banking authorities do not have any right of control over the cash pooling functions.However, attention should be paid to the requirements of Companies Act. Company lawmandates that certain matters like loans and investment shall always be considered andapproved by the Board of Directors. The Board may delegate such functions by a resolution toa committee of Directors, the Managing Directors, manager or a principal officer of theCompany.

1.2 Remuneration of loans/advances

Are there any banking regulations restrictions on the remuneration of loans/advances from theparticipating entities?

Indian banking regulations do not place any restriction on the remuneration linked to theactivity of cash pooling, and this is the subject matter of agreement or arrangement betweenthe parties.

1.3 Notional pooling

Is there any prohibition/restriction on banks/participating entities implementing notionalpooling (I) by way of bank margins reductions, (ii) by way of merging current account balancesof the centralizing and centralized entities in order to create a single balance, or (iii) by way ofcalculating interest payable to each account based on merged scale of interests?

Do banks require cross guarantees from participating entities? Can such guarantees becapped?

In India, multilateral netting and notional pooling are currently not permitted. Therefore,banks/participating entities cannot implement notional pooling by any of the three methods.However, zero balancing and concentration across multiple accounts are currently used by theparticipating entities.


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Centralized entity and centralizing entity are two distinct persons from a legal standpoint. Asubsidiary company has a legal existence separate from its holding company. Informationpertaining to individual accounts is protected by banking secrecy and right to privacy.Therefore, legally, a centralizing entity cannot obtain information from banks pertaining toaccounts of centralized entities, in the absence of an express authorization from the relevantcentralized entities.


Are there specific requirements in regulated financial activities (e.g. insurance industry, assetmanagement etc.)?

Section 372A of the Companies Act that deals with inter-company loans and investments isnot applicable to banking and insurance companies. Such companies can sanction loanswithout the Board approval. There is no specific requirement for investment in regulated financial activities. Companies arefree to make investment in either insurance companies or asset management companies.

1.6 Outsourcing

Can the cash pooling function be entrusted to an agent, which is not the member of thegroup?

Is there a requirement that the global effective rate be stated in the centralization agreement?

Yes, cash pooling functions can be entrusted to an agent, who is not a member of the group. Parties have the option to include global effective rate in the agreement, but they are notunder an obligation to state the global effective rate in the agreement. However, the loangiven to a corporation should carry interest at a rate not lower than the prevailing bank ratein India.

2. CORPORATE LAW


Are there restrictions as regards the form of entities which can participate in cash poolingarrangements, either as centralized or centralizing entities (certain forms of entities,groupings, partnership…) and/or the form or the nationality of shareholders (state ownedentities, foreign shareholders…)?

In India, there are no restrictions as regards the forms of entities that can participate in cashpooling arrangements either as centralized or centralizing agencies. Individuals, companies,trusts, partnerships or associations of persons can apply for participation in cash poolingarrangements. Though there are no restrictions on participation of different forms of entitiesin cash pooling services, these services are designed in such a way as to meet the demands ofcorporate customers.

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There are no specific requirements as regards nationality of shareholders of centralizing andcentralized entities. In order to avail of cash management service (CMS), centralizing orcentralized agency must have a bank account in India, and should have an office in India,established in terms of Reserve Bank of India Regulations.


Do the activities carried out in cash pooling arrangement need to be expressly contemplatedin the bylaws?

Activities carried out in cash pooling arrangements do not require specific mention in thebylaws. However, bylaws, or Articles of Association should provide for the powers of the Boardof Directors, such as borrowing money or making loans, as this will allow the activity of cashpooling.


How is corporate benefit defined? Is it different when it relates to entities belonging to a samegroup?

Corporate benefit is not defined by statute.

Are there restrictions on the participations on certain entities due to their financial structures(ratios, etc.).

In India, there are no specific restrictions on the participation of entities owing to theirfinancial structures (ratios, etc.). There are no stipulations as to minimum debt-equity ratiofor participation in a cash pooling arrangement.


There is no obligation on the centralizing entity to offer all participating entities equivalentterms and conditions. The terms and conditions have to be determined by the contractingparties, based on their individual needs and requirements.

Are there restrictions on the type of operations, which the centralizing entity may undertake,with the cash of the centralized entities?

There are no restrictions on the type of operation which the centralizing entity may undertakewith the cash of the centralized entities. However, consent of the Board of Directors ofcentralized entities is a pre-requisite for any investment made by centralizing entity utilizingthe cash of centralized entities.

Is there an obligation to offer the participating entities market financial conditions (i.e. the“arm’s length principle)?

Under Indian law, there exists an obligation to offer the participating entities market financialconditions. For example, the loan given to a corporation shall carry interest at a rate not lowerthan the prevailing bank rate. Similarly, all transactions between the participating entitiesmust be according to the principle of arm’s length.


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What are the liabilities and sanctions in the case of violation of the corporate benefit ofparticipating entities (cancellation of the agreement, management liability, extension ofbankruptcy proceedings etc.).Misrepresentation of corporate benefit may attract several sanctions. Sanctions vary fromimposition of fines to extension of bankruptcy proceeding. Penalties are determinedaccording to the nature and seriousness of the violation.

2.4 Remuneration of the centralizing entity Are there any prescription as to the remuneration of the centralizing entity difference oflending/borrowing rates, lump sum fee..) ? In India, all transactions between centralizing entity and centralized entities must be at arm’slength. Therefore, the loan given to a corporation (even a group entity) shall carry interest ata rate not lower than the prevailing bank rate. Accordingly, all lending and borrowing ratesshould be decided by the parties as per market norms. There is no specific prescription as tolump sum fee. However, it is advisable to negotiate such fee at arm’s length.

2.5 Investment of excess cash by centralizing entityAre there prudential investment rules? Prudential investment rules are not applicable to corporations; Indian company law gives afree hand to the companies in the matter of making loans and investments. However, consentof the Board of Director of the centralized and centralizing entities is a pre-requisite formaking any investment of excess cash by the centralizing entity. The Board of Directors isexpected to exercise adequate financial prudence in the matter of utilizing funds of theircompanies or giving loans and making investments. In terms of the Companies Act, theGovernment or the Company Law Board may investigate the affairs of a company if acomplaint is made that the business of the company is being run in a manner prejudicial tothe interests of the company, members, or creditors.

2.6 Approval of cash pooling arrangement Does the cash pooling arrangement need to be approved by the managementboard/supervisory board or the shareholders?In India, cash-pooling arrangement requires approval from the Board of Directors of a company.The Board can approve of loan or investment proposals up to 60 % of the paid- up capital andfree reserves of that company or 100% of the free reserves of the company, whichever ishigher. The said limit applies either to loans, investments or guarantee/security individually orto all the above transactions together. Where the aggregate of the loans and investments sofar made and the amount of guarantee or security so far given and outstanding together withthe loans, investments, guarantee or security proposed to be given exceeds the limit of 60 %or 100 %, referred to above, no loan or investment or guarantee or security in excess of thesaid limit shall be made or given unless the proposal is previously authorized by a SpecialResolution in a general meeting of the company. Special Resolution is a resolution that hasbeen passed by at least 75 % of the voting shareholders. However, a company does not requireapproval by shareholders for loans or investments made to its wholly- owned subsidiaries. Thesaid limitation of 60% of paid- up capital or 100 % of free reserves do not apply in cases ofwholly- owned subsidiaries.

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2.7 Specific aspects relating to LBO exit Are there restrictions on the use of cash of the target or target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement involving the target modifythe rules?There are no restrictions on the use of cash of the target or the target’s subsidiaries to repaythe acquisition loan. The purpose of taking the loan is not to be taken into consideration forloans made within India, so long as the loan is for a legal purpose.

3. BANKRUPTCY What are the consequences of the bankruptcy of a participating entity on the operationsinvolving that entity (ZBA and notional)?Are there any risks that bankruptcy proceeding issued against the centralizing entity or acentralized entity could be extended to other participating group entities?There are no specific guidelines regarding consequences of bankruptcy of a participatingentity per se on the cash pooling arrangement. However, it may be noted that funds swept inparent company’s accounts by a subsidiary company continue to be subsidiary’s funds, andmay be treated only as a loan.Generally, there are no risks that bankruptcy proceedings issued against the centralized entityor a centralizing entity could be extended to other participating group entities. However, inthe case of parent-subsidiary relationship, courts sometimes lift the “corporate veil”, and insuch a case, bankruptcy proceedings may, in the court’s discretion, extend to both companies.

4 TAX ISSUES

4.1 Value added tax (VAT)Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?In India, there is a distinction between tax on services and tax on sale of goods, although thereis a proposal to bring them under one common legislation. Whereas VAT covers only sale ofgoods, there is a separate service tax for services such as the one rendered by a bank for cashpooling service. The rate of service tax for cash pooling services provided by the bank is12.36%.

4.2 Taxation of interest At what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?Currently, a tax rate of 33.66% (30% income + 3% surcharge + 0.66% excess) is levied on allbusiness incomes of the participating companies. Accrued interest is treated as “income fromother sources” but is taxed at the same rate as business income, i.e., 33.66.

Is there a withholding tax on interest paid to a foreign entity? At what rate in relation to thefollowing countries? As per exchange control laws, a foreign entity will not be allowed to participate in a cash


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pooling arrangement in India. Cash flows between entities are treated as loan. An Indian entityis not allowed to raise loan from a foreign entity except as is provided under ExternalCommercial Borrowings (ECB) Guidelines. As per these Guidelines, Indian companies mayborrow from foreign collaborator or from foreign equity holder for certain specified purposessuch as: (a) For investment (such as import of capital goods, new projects, modernization/expansion

of existing production units) in real sector- industrial sector including small and mediumenterprises ( SME) and infrastructure sector in India. Power, telecommunication, Railways,Roads including bridges, Ports, industrial parks and urban infrastructure are the sectorswhich are qualified as infrastructure sector.

(b) For first stage acquisition of shares in the disinvestment process and also in themandatory second stage offer to the public under the Government’s disinvestmentprogramme of public sector unit shares.

(c) For direct investment in overseas joint venture or wholly- owned subsidiaries subject tothe existing guidelines on Indian Direct investment in joint venture or wholly-ownedsubsidiaries abroad.

(d) Any other eligible purpose as specified by the Reserve Bank of India.

Therefore, for a company to raise loan from an overseas group company, not only should thelender company be an equity holder or a JV partner, but the money lent may be utilized forthe purposes described above. The rates prescribed for deduction at source on interest payments to a foreign entity (madein terms of ECB Guidelines) in terms of the Double Taxation Avoidance Agreements (DTAAs)that India has signed with various countries, the rates are as given below. For countries withwhom India has not signed DTAAs, the rate of deduction is 20 per cent.

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Fran

ce

Ger

man

y

Hon

g Ko

ng

Hun

gry

Irela

nd

Ital

y

AffiliatedCompanies

in

Withholdingtax rate 10% 15% 15% 10% 10% 10% 10% 20% 10% 10% 15%

15 % & 10% if

garanted by a bank

Japa

n

Kore

a

Luxe

mbo

urg

Mal

aysi

a

Mau

ritiu

s

Mex

ico

Net

herla

nds

Nor

way

Pola

nd

Port

ugal

Russ

ia

Sene

gal

AffiliatedCompanies

in

Withholdingtax rate 20% 10% 20% 20% 10% 15% 15% 10% 10% 20%

10% for banks&

15% for others

10% for banks&

15% for others

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4.3 Stamp duty Do cash pooling operations raise any stamp duty? Stamp duty in India is payable on documents and not, strictly speaking, on transactions. Socash pooling operations will attract stamp duty in so far as written agreements or otherdocuments are executed. For example, stamp duty will be payable on any agreement that isentered into with the bank, or between the participating entities inter se. Similarly,documented investments made will also attract stamp duty. Share certificates, for example,attract stamp duty. Stamp Duty varies not only according to the nature of document, butalso across states. Some States have their own stamp legislation, whereas others follow thefederal legislation in principle, but have differing stamp duty rates.

4.4 Deductibility of interest Are there limitations to the deductibility of interest paid by the centralized or the centralizingentity (such as a thin capitalization rule – debt/equity capital ratio)? Is it possible to obtain a ruling from the tax authorities as to the deductibility of interest? If so,under what conditions? Thin capitalization rule is not applicable in India. It is possible to obtain a ruling from the taxauthorities as to the deductibility of interest. The Authority for Advance ruling (AAR) can beapproached by non-residents for obtaining a ruling for deductibility of interest.

4.5 Tax haven Are there specific provisions as to the interest accrued in tax havens?No specific anti-tax haven provisions have been incorporated in the Income Tax Act.

4.6 Favorable tax regime Is there a favorable tax regime for (i) corporate tax of centralizing entities, (ii) taxations of cashpoling operations (VAT, interest)?The tax regime for corporate taxation of centralizing entities is not more favorable. This is alsotrue for cash pooling operations that are accorded the same treatment as inter-companyloans and deposits.

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

UA

E

Uni

ted

Arab

Rep

.

Uni

ted

King

dom

Uni

ted

Stat

es

AffiliatedCompanies

in

Withholdingtax rate 20% 10% 15% 20% 20% 15% 20%

10% for banks&

15% for others

10% for banks&

15% for others

10% for banks&

15% for others

5% for banks&

12,5% for others


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4. 7 Transfer price issues Do cash pooling operations raise transfer- pricing issues? All considerations between related parties are subject to transfer pricing regulations. Theincome earned or expenses incurred by a company from an associate enterprise should be atarm’s length for the purpose of income tax.

5. CENTRAL BANK REPORTING Are there central banks reporting obligations (balance of payments), bearing upon thecentralizing entity/each centralized entity/ the banks? There are no obligations on centralizing entity/each centralized entity / the banks to reportcash pooling arrangements or transactions to the country’s central bank, the Reserve Bank ofIndia.

6. EXCHANGE CONTROL REGULATIONS Are there any restrictions to the transfer of cash to foreign entities of the same group or theconversions of the local currency in other currencies? As per Foreign Exchange Laws, an Indian entity may lend in foreign exchange to its wholly-owned subsidiaries or joint venture abroad. “Joint Venture “means a foreign entityincorporated overseas in which the Indian entity makes a direct investment.Although Indian laws do not impose any restriction on conversion of the local currency in anyforeign currency, but there is a ceiling on the total investment that can be made by an Indiancompany in its joint venture(JV) or wholly-owned subsidiaries (WOS) abroad. A company caninvest up to 300 percent of its net worth in its JV or WOS abroad. The ceiling of 300 percentof net worth will include contribution to the capital of the JV/WOS, loans granted to theJV/WOS, and 100% guarantees issued to or on behalf of the JV/WOS.

7. ACCOUNTANCY OBLIGATIONS AND STANDARDSWhat if any are the specific accountancy obligations and standards for entities participating ina cash pooling arrangement?In India, there are no separate accountancy obligations and standards for entities participatingin a cash pooling arrangement. However, Accounting Standard 18 (AS-18: Related PartyDisclosures) issued by the Council of the Institute of Chartered Accountants of India shouldapply in cash pooling arrangements. Apart from operation of AS-18, there are no specificaccountancy obligations for cash pooling arrangement. Income and expenditure have to beaccounted for on accrual basis.

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8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?There is an obligation on the banks to maintain secrecy and confidentiality of customers’accounts. Although this has not been provided for specifically under a statute, right to privacyof data is protected under common law principles, and a breach of data privacy can result ina claim for damages. It will be necessary for the bank to get permission from eachparticipating entity to share or pass on data between entities. Also, banks are under anobligation to institute adequate risk control measures to manage risks like hacking or othertechnological failures. Additionally, Information Technology Act, 2000, provides for use of aparticular technology (viz. the asymmetric crypto system and hash function) forauthentication of electronic records.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements? There are no specific financial reporting obligations with cash pooling arrangements.However, Companies Act requires that every company should report all relevant transactionsin its Books of Accounts. For taxation purposes, companies are required to report alltransactions.

II CENTRALIZATION OF EXCHANGE RATES AND RISKSCan a centralized entity agree to buy from and sell to the centralizing entity all its foreigncurrency? Are there prescriptions as to terms and conditions?Does the authorization agreement need to be approved by the managementboard/supervisory board/shareholders?In terms of India’s foreign exchange laws, sale and purchase of foreign currency can only beundertaken through authorized dealers, usually banks. So, there can be no transaction of saleor purchase of foreign currency between participating entities.

III CENTRALIZED MANAGEMENT OF PAYMENTS

1. BANKING/FINANCIAL REGULATION Is the delegation of the management of payments (payments of invoices, instructions to thebank) to another group entity subject to banking authorities’ approval, consent or exemptionfrom the centralized entities or the centralizing entity? Are there confidentiality obligations? In India, the delegation of the management of payments to another group entity is notsubject to approval, consent or exemption from the federal bank, the Reserve Bank of India.


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However, consent of the Board of Directors of centralizing and centralized entities is a pre-requisite for delegation of management of payments to another group entity. Each centralized entity is a separate, autonomous and independent entity from the legalstandpoint, and each entity is therefore protected by banking secrecy. In case the centralizingentity needs to obtain any information from the bank, it will require express consent orauthorization from the concerned entity.

2. CENTRAL BANK REPORTINGAre there central bank reporting obligations? There are no obligations regarding reporting of cash pooling arrangements to the central bank.

3. EXCHANGE CONTROLAre there any exchange control issues?Please see answer to Question 4.7.

4. ACCOUNTING OBLIGATION Are there specific accounting obligations for the participating entities?Accounting Standard 18 (AS-18: Related Party Disclosures) issued by the Council of theInstitute of Chartered Accountants of India should apply in cash pooling arrangements. Apartfrom operation of AS-18, there are no specific accountancy obligations for cash poolingarrangement.

5. DATA PROTECTION Are there data securitization issues to be addressed? Please see answer to Question 4.7.

6. TAX Is the management of payment operations subject to VAT? Please see answer to Question 4.1.

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UNDER IRISH LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Ireland. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Arthur CoxEarlsfort Terrace - Dublin 2 - Ireland

William JohnstonTel: +353 1 618 0560Fax: +353 1 618 0747Email:[email protected]

Niamh CaffreyTel: +353 1 618 1128Fax: +353 1 616 3946Email:[email protected]


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We assume for the purpose of this chapter that save where otherwise specifically stated, thecentralizing entity is a company which operates a cash management facility only for othercompanies in the same group.

Loans (whether short term, medium term or long term) or advances by the centralizing entityto other group entities do not require the approval or consent of the banking authority, theIrish Financial Services Regulatory Authority (known as the Financial Regulator).


No approval from the Financial Regulator is necessary where the centralizing entity isinvesting on behalf of group companies.

In both cases, is there an exemption available for operations within groups of companies?What are the sanctions, if any, for breaching this requirement?

Not applicable as no consent is required.



There are no prohibitions or restrictions on the implementation of notional pooling. Typicallyall three of the above would be applied by banks to pooling of group companies. Banks willrequire cross guarantees from participating entities and such guarantees may be capped,although it is not common to do so.


Does the arrangement whereby a centralized entity agrees to buy from and sell to thecentralizing entity all its foreign currencies require banking authorities’ approval or consent?

No, again assuming it is for group comp anies.

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No.



Banks have a duty of confidentiality. However, it would be anticipated that each of thecentralized entities involved would give its consent to the sharing of information with theauthorized entity and other companies in the same group.



There are requirements where a centralized entity would act as a captive insurance companyfor other companies in the group.

Each bank tends to have its own particular bank mandate for the opening and operation ofaccounts such as the ability of the company to deal in its account on the authority of any oneor two designated signatories. Before opening an account the bank will be required to obtaininformation under the Anti Money Laundering Requirements including the certificate ofincorporation of the company, its memorandum and articles of association, a board resolutionauthorizing the company to deal with its account in the bank, details as to the names andresidential addresses of the directors and secretary of the company, as well as passportphotographs of the directors and secretary and at least one utility bill in respect of servicesreceived by each director and secretary in their place of residence over the preceding sixmonths.

1.4 Outsourcing


Yes, but if the cash pooling function is entrusted to a third party agent then the agent willrequire approval from the Financial Regulator to operate the cash pooling arrangement.


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2. CORPORATE LAW



There are no restrictions as to the form of entity that can participate in cash poolingarrangements but in the case of a corporation the entity must have the power to carry outsuch activity set out in the objects clause of its memorandum of association.



Yes, see the answer to 2.1.



In the case of an entity not belonging to the same group, it is assumed that such entity willbe paid a market fee, and the question of corporate benefit per se does not arise.

In the case of a company belonging to the same group, there is no definition of corporatebenefit as such but the directors of such company must consider that it is in the best interestand for the commercial benefit of the company to engage in such activity. In that context,while they must inform themselves as to the financial standing of the company in question,they are also entitled to consider the group as a whole.

There are no restrictions on the participation of certain entities within the same group due totheir financial structure. The directors of the company have a duty to act in the best interestsof the company. There are no sanctions as such in the case of violation of the corporatebenefit but in the event that the company became insolvent the directors would need toshow that they acted reasonably and properly in the conduct of the company’s affairs. Failureto do so could result in the directors being restricted or disqualified from acting as a directorfor a further five years.

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The centralizing entity, acting for other group companies, should not request a fee for actingas a centralizing entity. To do so would constitute as carrying on business and would requireauthority from the Financial Regulator.



Not when acting for other group companies.



The arrangement should be approved by the board of directors of each entity participating inthe arrangement.



There are restrictions on a company giving financial assistance for the purpose of or inconnection with the purchase or subscription of shares in the company or in its holdingcompany. A cash pooling arrangement would have no effect on the rules. There is nocompany law restriction preventing the centralizing entity from exercising its contractualright to terminate the agreement.


The directors of a company which becomes insolvent are required either to take such stepsas will bring the company to solvency or seek the appointment of an examiner or a liquidatorto the company. Insolvency will not limit the centralizing entity’s ability to exercise itscontractual rights to terminate the agreement. The appointment of an examiner or liquidatorto a centralized entity may result in a similar appointment to other group companies.


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4. TAX ISSUES



The transactions between the centralizing company and group companies should generally beexempt from VAT in Ireland.


How is the accrued interest, whether owed to the centralized company or by the centralizedcompany, taxed?

Generally, where the centralizing company carries on a trade of financing (as is usually thecase) its interest income will be taxable / deductible on an accruals basis. Accordingly, itstaxable income and gains will broadly equate to its profits as determined under InternationalAccounting Standards (IAS) or Irish Generally Accepted Accounting Principles (GAAP)(whichever is used in its financial accounts) and will be subject to corporation tax currently ata rate of 12.5%. There are anti-avoidance rules to deal with unusual arrangements, forexample, the pre-payment of interest and other arrangements designed to exploit timingdifferences which may alter the basis of taxation. However, the rate of tax does not varydepending on the nature of the loans / advances.

Non trading companies are subject to tax on interest income at a rate of 25%.

Interest paid to a foreign company may be subject to withholding tax in Ireland currently ata rate of 20%. However, Irish withholding tax does not apply to discount or short interest (i.e.interest payable on an advance for a period of less than one year). There are a number ofexemptions from withholding tax which a borrower may be able to avail of. For instance,interest paid in the ordinary course of business of an Irish borrower to a lender resident fortax purposes in the European Union or a country with which Ireland has a double taxationtreaty may be paid gross, provided the interest is not connected with an Irish branch or agencyof the lender. Therefore, where an Irish borrower pays interest in the course of its business, toa company resident in one of the double taxation treaty countries considered below, theinterest may be paid gross, provided it is not connected with an Irish branch or agency of thelender. In addition, there is a specific exemption from withholding tax for payments to groupcompanies (51% relationship and certain consortia) which is available to group companies’resident in the European Union or the European Economic Area (EEA). Interest may also bepaid gross to any country in respect of certain Eurobonds under the quoted Eurobondexemption. In addition, the rate of withholding may be reduced from 20% (in some cases tonil) in accordance with the terms of Ireland’s double taxation treaties.

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The treaty rates (or withholding rate where there is no treaty) for interest payments fromIreland for the following countries are as follows:

Aus

tria

Belg

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Braz

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Can

ada

Chi

na

Cze

ch R

epub

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Unite

d Ara

b Em

irate

s

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 0% 15%

1

20%6

10%1-3

10%1-3

0% 20%6

0% 0% 20% 0% 10%1-3

20%2

10%1

10%1

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 0% 5/10% 0% 10%

1-5

15%1-3

0% 20%6-7

0% 0% 0% 0% 20%6

20%6

0%1-3-4

1. The rate of withholding tax may be reduced to nil under Ireland’s domestic exemption where thelender is a company, the interest is paid in the course of the borrower’s business and the interest is notconnected with an Irish branch or agency of that lender.

2. The rate of withholding tax may be reduced to nil where the recipient is a group company (that is,51% or more association or a member of a qualifying consortium).

3. The rate of withholding tax may be reduced to nil where the lender meets specific requirements whichare set out in the treaty (e.g. it is a government agency or local authority) but these exemptions areunlikely to be relevant to cash pooling operations.

4. A 5% rate of withholding tax applies where the lender is a bank.

5. The rate of withholding tax may be reduced to nil on loans made by a bank and in other specificcircumstances.

6. No treaty.

7. A treaty is currently being negotiated with Singapore

Note: the above is not an exhaustive list of treaty rates, Ireland has 44 double tax treaties; unlikethe domestic exemption mentioned above, the treaty rates do not apply automatically, anapplication may need to be made to the relevant authorities for clearance in accordance withthe terms of the specific treaty; and, generally, the relevant treaty rate will not apply to interestwhich exceeds a reasonable amount.


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4.3 Stamp duty


Generally speaking, cash pooling arrangements should not give rise to stamp duty. However,stamp duty is a tax on documents, not on transactions, and therefore care needs to be takento ensure that no stampable document is produced in a particular transaction which may giverise to stamp duty. There is a specific exemption from stamp duty for agreements for the saleof debts, where the sale occurs in the ordinary course of business of the vendor or purchaser,which cash pooling arrangements may benefit from in certain circumstances.



Ireland does not have any minimum debt / equity capital ratio rules. Interest is generally taxdeductible where it is paid wholly and exclusively for the purposes of a trade of a company.Therefore, generally interest payable by the centralizing entity or by the centralized entityshould be tax deductible. In certain circumstances, interest which would otherwise bedeductible can be reclassified as a dividend and therefore disallowed as a deduction, forexample, where the rate of interest charged is excessive or is dependent on the results of thecompany. In addition, in certain circumstances interest paid to a 75% parent or fellowsubsidiary resident for tax purposes outside the European Union can be deemed to be adividend and therefore non-deductible. However, this rule is unlikely to impact on cashpooling operations as it can be disapplied where the interest is paid in the ordinary course oftrade of the borrower.


It is possible to obtain such an opinion. This could arise, for example, where an advanceopinion is sought from the Revenue Commissioners on the issue of whether the centralizingcompany will be regarded as carrying on a trade. If the centralizing company is regarded ascarrying a trade, interest payable by it will be deductible.

4.5 Tax havens


No.



Centralizing entities established in Ireland which carry on a trade here are taxable at thetrading rate of corporation tax of 12.5%. This means that centralizing entities / cash poolingoperations established in Ireland are taxed at a relatively low rate of tax. Ireland, in line with other members of the European Union, operates a system of VAT inaccordance with EU directives on VAT. Generally, the activities of cash pooling operations willbe exempt from VAT.

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4.7 Transfer price issuesDo cash pooling operations raise transfer-pricing issues? Ireland does not have transfer-pricing rules governing cash pooling operations.

5. CENTRAL BANK REPORTINGAre there central bank reporting obligations (balance of payments), bearing upon thecentralizing entity / each centralized entity / the banks?Assuming all participating companies are in the same group, there are no central bankreporting obligations, neither for centralized entities nor for the centralizing entity in respectto its activities for other group companies. Banks have reporting requirements as part of theirregulatory compliance.

6. EXCHANGE CONTROL REGULATIONSAre there any restrictions to the transfer of cash to foreign entities of the same group or theconversion of the local currency in other currencies?There are no restrictions, save in the case of countries where the Minister for Finance hasmade a restriction order. Such order would typically arise from a United Nations sanction.

8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?In the absence of consent from all parties at the transaction, data would be protected by theData Protection legislation.


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UNDER ITALIAN LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Italy. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Gilberto ComiCarnelutti Studio Legale Associato

Via Principe Amedeo, 3 - 20121 Milan - ItalyTel: +39 02 65 585 1 - Fax: +39 02 65 585 585

E-mail: [email protected]: www.carnelutti.com

Goffredo GuerraStudio Legale Tributario Associato

Via Gabrio Casati 1 (Piazza Cordusio)20123 Milan - Italy

Tél. + 39 02 80 618 1 - Fax + 39 02 80 618 201E-mail: [email protected]


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A centralized treasury management convention to which different companies participate,intending to carry out daily banking transactions of each company’s bank account on acentralized single bank account in order to use liquidity surplus of one of the companies’ poolto set to zero any eventual debt of another company of the same pool, can be defined as atype of “fund raising”.

As a general principle, the Italian Banking Act (Legislative Decree of September 1, 1993,no.385) states that bank services performed to the general public called “fund raising(“Raccolta del Risparmio”) and loan granting” (“Esercizio del Credito”) are reserved to banksor other specific intermediary financial institutions duly authorized by the Bank of Italy.

In particular, to engage in activities of remitting funds of any kind and in payment services(these are to be meant, according to Article 4 of the Ministry Decree dated July 6, 1994, as“activities of financial brokerage performed through: a) funds collection and transfer”) to thegeneral public, companies other than banks must enroll in a special registry held by the“Ufficio Italiano Cambi” (U.I.C.) (Article 106 of the Banking Act). When these activities exceedthe volumes determined, according to the decree of the Treasury Ministry of May 13, 1996,to an extent “equal to or higher than ITL 200 billions or assets equal to or higher than ITL 10billions”, the same intermediaries shall enroll in a special list ex article 107 of the Banking Act.

When the same activities are performed in a prevailing way and for entities other than thegeneral public, enrolment in a special section of the general registry is requested pursuant toArticle 113 of the Banking Act.

There are some exceptions to these provisions. One concerns the activity of fund raisingperformed by a company situated in a country other than Italy if this company is authorizedby the law of its country of residence to perform the kind of activity which it carries out inItaly. In this case Italian law may provide for a specific exemption from the formalities andauthorizations whenever the foreign country provides for requirements that are equivalent toItaly’s.

A second exemption to the general provisions, is provided for by Article 113 of the BankingAct, according to which the enrolment in the general register is not compulsory for thecompanies performing activities of funds remittance of any kind and payment services in case

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such activities are carried out vis-à-vis entities within the same group (and therefore not tothe general public), and such activities do not prevail over the core business of the company.

The prevalence principle exists, according to Article 2 of the Ministry Decree of July 6, 1994,if on the basis of the approved financial statements concerning the last two years:

a) The total amount of the financial assets of the above companies, jointly considered -including the undertakings to grant funds and the relevant guarantees - is higher than50% of the total corporate assets, including undertakings to grant funds and the relevantguarantees;

b) The total amount of the revenues deriving from the assets mentioned in the previousparagraph a), of the revenues deriving from intermediary transactions on currencies andof the charges on the services indicated in article 106 paragraph 1, Banking Act is higherthan 50% of the total revenues.

Moreover, in order to determinate the prevalence principle, Article 3 of the above MinistryDecree states that:

“The total amount of the assets of the financial statement pursuant to Article 2 paragraph 1letter a) and relevant revenues referred to in the following letter b) are to be added, in orderto verify the condition provided for by article 1 paragraph 2 (that is to verify if the financialactivities prevail over the core business) to:

a)The amount arising from those activities, even not financial, which are ancillary with respectto one or more of the activities indicated in Article 106 paragraph 1, Banking Act;

b) The amount arising from the financial activities other than those indicated in Article 106paragraph 1 Banking Act, and referred to in Article 1, paragraph 2 letter f) numbers from2 to 12 and no. 15 Banking Act, if such activities, except for the reserved provided for bylaw, are functional and connected with the above mentioned activities.”

A third exception is provided for by Article 11 of the Banking Act, integrated with Article 8 ofthe Resolution of C.I.C.R. - “Comitato Interministeriale per il Credito ed il Risparmio”- n.1058dated July 19, 2005. Such regulations concern banking activity carried out by a companywithin a group of companies and specify that fund raising within the companies belonging tothe same group may be allowed without specific authorization, because it cannot beconsidered as directed to the public.

With regard to the fund raising within a group of companies, the C.I.C.R. Resolution has usedthe definition of subsidiary (“società controllata”) and affiliate companies (“societàcollegate”) referred to in Article 2359 of the Civil Code. This article defines a subsidiary as acompany in which a parent company holds the majority of the votes exercisable in theordinary shareholders’ meeting or when the parent company has a dominant influence overthe subsidiary. As regards the affiliated companies, one-fifth of the votes in the ordinaryshareholders’ meeting (one-tenth for listed companies) must be held by one the parentcompany.

In conclusion, a centralized cash management within a group of companies needs noauthorization by the supervisory authorities, as long as the companies involved in thismanagement: i) fall within the scope of Article 2359 of the Civil Code and can therefore bedefined as subsidiaries or affiliates; ii) carry out no activities of fund remittance or paymentservices prevailing over the other activities of the same company.


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The existence of short term, mid term and long term loans/advances does not affect theabove conclusion considering that, from a legal point of view, there is no clear distinctionamong them. The only possible distinction could derive from the powers delegated by theBoard of Directors to the Managing Director(s) if they are limited with respect to the term ofloans/advances that can be authorized.

With respect to sanctions for the violation of the above rules, and in particular with referenceto the omission to enroll in the general registry provided by article 113 Banking Act, article132, c.2 of the same Banking Act applies, which states that anyone performing in a prevailingway and for entities other than the general public activities of financial brokerage accordingto article 106, c.1 is punished with the imprisonment from 1 year to 6 years.



No particular restrictions apply to notional pooling in addition to the ones indicated under1.1 above, if applicable. Request and capping of guarantees derive from contractualnegotiations. Please consider, however, that this form of cash pooling is seldom used in Italydue mainly for fiscal reasons. This derives from:

a) positive interest accrued by the centralizing company may be exempted from taxation,provided that the cash pooling relationship is linked with a contract of current account,and not with a financing contract, and as long as the centralizing company is notdomiciled in a jurisdiction included in the so-called “black list” (created by the MinisterDecree 23/1/2002 and listing tax havens). Decision no. 194, of October 8, 2003, excludedthe fiscal exemption for notional pooling which is considered a form of financing form,even if indirect). This limitation does not apply to ZBA;

b) in addition, thin capitalization rules state that if the debt to equity ratio exceeds 4:1, thetax deductibility of interest on the excessive financing is disallowed and such paymentsare treated, from a tax perspective, as dividends.



The arrangement whereby a centralized entity agrees to buy from and sell to the centralizingentity all its foreign currencies can be made only if the centralizing or centralized entities isenrolled in the list held by “Ufficio Italiano Cambi”(U.I.C.) (Article 155, c.5. Banking Act). In factunder Italian law (Banking Act as specified by Legislative Decree n. 372/2001) the money-changer activity can be exercise by U.I.C. or by natural and legal persons enrolled in the listheld by U.I.C. To be enrolled in that list the subject has to own the requirements specified inArticle 106, c. 3, 108, 109 of the Banking Act.

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The companies enrolled in the list indicated in Article 113 of the Banking Act are subject tothe scrutiny of the bank supervisory authorities.

The supervisory activities generally concern compliance with paragraph 2 of Article 113 of theBanking Act, according to which the shareholders of the companies enrolled must have therequirements of respectability fixed by the Decree n. 517 of December 30, 1998,implementing Article 108.

In particular, Article 1 of the above Decree states that any holder of an interest in a financialintermediary higher than 5% of the capital, consisting of shares with right to vote, shall notexercise its right to vote related to the part exceeding the above threshold if:

a) it is subject to preventive measures by the judicial authority pursuant to Law n.1423 ofDecember 27, 1956 (Preventive measures towards people dangerous for the public safetyand morality) or of Law n. 575 of May 31, 1965 (Provisions against organized crime), andfollowing amendments and integrations, without prejudice to eventual rehabilitation.

b) it is condemned with final judgment, without prejudice to eventual rehabilitation, to: 1)not less than six months prison-term for one of the offences provided for by the rulesdisciplining the bank, financial, insurance and securities activities and by the rules whichdiscipline stock markets and values, and means of payments; 2) not less than six monthsprison-terms for one of the offences indicated in Title XI, Book V, Civil Code, and in theRoyal Decree n. 267 of March 16, 1942 (Discipline of bankruptcy, composition withcreditors, reorganization, compulsory winding up); 3) not less than one year prison-termfor an offence against the public administration, the public faith, the assets, the publicorder, the public economy or for a fiscal offence; 4) not less than two years prison-termfor any not culpable offence.

c) it is subject to a judgment which applies the punishment upon request by the parties,except for extinguishment of offence, to one of the punishments indicated in letter b).

Moreover, the Chairman of the Shareholders’ meeting, who is responsible for the verificationof the regular call of the meeting and of the legitimacy of the shareholders to attend, mayadmit or not to vote the shareholders who, based on available information, has to giveevidence of existence of the respectability requirement.

The observance of the respectability requirements is the sole obligation for the enrolledcompanies also considering that no limitation as to legal form, minimum capital andprofessionalism of the company’s representatives exists.

However, with reference the anti-recycling rules, the company holder of the centralizedaccount, carrying out activities of “funds remittance” and “payment services”, is obliged toidentify and record the subjects on behalf of whom “transactions implying the transfer ormovements of any means of payment higher than ITL 20 millions are carried out”, as well asbeing obliged to create and keep an electronic database according to Article 2 of the Decreen. 143 of May 3, 1991 (converted into Law n.197 of July 5, 1991).


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The identification obligations apply to two cases:

1. When activity is carried out in prevailing way, as defined in the Ministry Decree of July 6,1994;

2. When independently from the effective activity, the financial activity is identified in theby-laws as “prevailing activity”.



As a matter of principle, banks are subjected to the so-called banking secret obligation whichprevents them from providing information on accounts and financial transactions of a clientto third parties. Such obligation is not expressly stated in a single legal provision, but derivesfrom the cross-application of several articles of laws (such as, for example, those limiting theaccess of the judiciary bodies to banking information with respect to fiscal investigations andArticles 1337 and 1375 of the Civil Code, that impose, in the pre-contractual and contractualstage, a general duty of good faith). In addition, the law regulating the protection of personaldata and privacy adds further limitations to the possibility to provide information on accountsto third parties.

The above limitations can however be overcome if the “owner” of the bank account expresslyauthorizes the bank to disclose the information to a designated third party.


Are there specific requirements in regulated financial activities (e.g. insurance industry, assetmanagement etc.)?

No specific requirements apply to regulated financial activities.

Is there a requirement that the global effective rate be stated in the centralization agreement?

Italian laws identify the need to state the conditions of the relationship, including applicableinterest rates, in bank – client relationships. General contractual principles also require all theessential elements of a contract to be identified therein.

In application of the above, it is advisable to expressly identify the global interest rate in acentralizing agreement, also with the scope to avoid conflict of interests situations (seebelow).

Are there specific requirements in connection with the opening of bank accounts (KYC,language…)?

Under applicable laws, it is essential that the agreement for the opening of a bank account bein writing, otherwise it would be null and void. Banks generally also require evidence of thepowers of the individual executing such agreement on behalf of a legal entity. Finally, all theindividuals with powers to operate on the bank account must give evidence of such powersand file their signature with the bank.

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1.4 Outsourcing


If the cash pooling function is entrusted to an agent that is not member of the group, therequirements and authorizations indicated above for cash pooling outside of groups must bemet and obtained (and therefore render this option less attractive).It is however important to note that the centralizing company does not necessarily have tobe the ultimate parent company, provided that it is an affiliated company or subsidiary,according to the requirements set forth in Article 2359 of the Civil Code.

2. CORPORATE LAW



No limitation or restrictions apply, except as indicated in Paragraph 1 above with respect tocorporate groups.



The reform of corporate law, implemented with the Legislative Decree 17 January 2003, no.6,introduced a significant innovation regarding the company’s object. After the reform, theArticles of Association must clearly identify, pursuant to article 2328 Civil Code, “the activitythat constitutes the company’s object” and no more the company’s object. The new articlewording is of great importance, because the companies are no longer able to use genericnotion of company’s object anymore, as was common practice before. The legislator decidedto follow the theory that requires companies to identify ab origine the effective companyactivity in the by-laws. As a consequence, the activities connected to cash pooling must bestated in the corporate object, even though the specification that the same do not constitutethe prevalent activity is advisable.


How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions?

Corporate benefit may be defined as the need to manage a company in its best interest andregardless of conflicting interests of third parties.With respect to corporate groups, Italian jurisprudence and commentators used to debate on


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whether the interest of a parent company could prevail over the other group companies’management. More recently, Courts started to envisage the possibility of a “group interest”that prevailed over the single company’s interest. With the reform of corporate law,implemented as stated above with Legislative Decree 17 January 2003, no.6, for the first timein the Italian legal framework, the concept of “corporate group” has been disciplined (Articles2497 and following of the Civil Code). The new discipline essentially foresees that:

1. Companies exercising control over other companies are liable towards shareholders andcreditors of the subsidiaries in the event they have acted in violation of the principles ofcorrect corporate and entrepreneurial management of the subsidiaries. Liability is foreffective damages caused and subject to the subsidiary not being able to satisfy itscreditors. In case of bankruptcy of the subsidiary, the receiver may act instead of thecreditors. Liability will not be asserted if there is evidence that there are no damages inlight of the more general result of the activity of the controlling company.

2. A subsidiary must indicate in its letterhead and documents that it is subject to anotherentity’s control. Controlling companies must be registered in a specific role of the BusinessRegistry.

3. Decisions based upon the controlling company’s instructions must be analyticallymotivated and must indicate in detail the reasons and interests whose assessment hasaffected the decision.

4. The repayments of loans issued by the controlling company in favor of a subsidiary aresubject to the prior satisfaction of other creditors.

In light of the above, the centralizing company’s services must be competitive in the bestinterest of the subsidiaries or in the general interest of the group. They must not imply anabuse of power with damage to the subsidiaries. Otherwise a conflict of interest, competitionand abuse of the majority position may arise and the centralizing company may be liable.


In absence of a specific regulation in this matter, there are no particular prohibitions withregard to the choice of financial operations by the controlling company. Following generalprinciples of Italian corporate law, only a case by case analysis is possible regarding thecompatibility of the operation with the interest of the controlled company. Moreover, thesame definition of “company interest” (never defined by law, but mentioned in the Civil Codeonly in Article 2441 with reference to the option right) may be construed in different ways.For example, a case by case analysis could lead to a negative judgment in case of operationscharacterized by high risk undertaken for speculative purposes.

Is there an obligation to offer the participating entities market financial conditions (i.e. the“arm’s length principle")?

There is no specific obligation to offer the subsidiaries market financial conditions, providedthat the conditions offered by the centralized company do not damage the other companies.If so, liability for conflict of interest may arise. The requirement to offer market conditions mayarise in cross-border pooling arrangements to avoid “transfer pricing” challenges.

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In the absence of a specific regulation, the general principles of the Civil Code apply. Inparticular, if the directors of the controlled company executing the cash managementagreement have executed it against the interest of the company and operate in such a wayto prejudice the interest of the controlled company they manage, Article 2391 of the CivilCode shall apply, given that the directors would have acted in conflict of interests. Article 2391of the Civil Code states that a director must inform the other directors (and the statutoryauditors) of any conflicting interest he has with respect to a transaction, detailing the nature,the origin and extent of such interest. If a managing director is in such a situation, he mustabstain from entering into the transaction, which reverts to the board as a whole. In any event,the resolution of the board must adequately motivate the reasons and advantages for thecompany in entering into the transaction. Failure to do so would cause the director to be liabletowards the company for the damages caused. The relevant resolution can be challengedbefore courts if they are potentially damaging for the company and if without the vote of thedirector that should have abstained, the necessary majority would not have been reached.

Construing Article 2391 of the Civil Code, it becomes clear that damage is a necessaryelement for liability for conflict of interests. This becomes a determining factor inrelationships existing inside a group when the danger of damage to the controlled companyis effective and real.

Conflict of interests discipline can only be applied to situations in which such conflicteffectively exists and is not merely potential, especially within groups. The result of a broaderapplication could practically paralyze group directed strategies, since the directors appointedby the mother company and sitting on the board of a subsidiary would have to abstain fromvoting any resolution necessary to implement group originated directives.

Nevertheless, in the evaluation of the damages provided by Article 2391 of the Civil Code, notonly the single apparently “prejudicial” operation performed by the controlled companyshould be considered, but also the advantages arising from the belonging to the group. Forexample, financing granted by the controlled company to the controlling one at a below-market interest rate may be considered an intra-group operation not performed in conflict ofinterest- if the controlling company undertakes the liability, with guarantees or patronageletters, for debts of the controlled company.

Moreover, if the centralizing company’s directors undertake fraudulent acts damaging thecontrolled company, they become jointly and severally liable with the controlled company’sdirectors, according to Article 2395 of the Civil Code (the controlled company being a “thirddirectly damaged” by fraudulent acts of the centralizing company’s directors). Based on thenew “corporate group” discipline, the controlling company itself could also be liable in thisevent.

The directors would also be liable for the unlawful damage deriving from the centralizingcompany’s directors exercising a prejudicial dominant influence on the controlled companyand having induced the controlled company’s directors not to fulfill their duties. In thisrespect, there is both contractual (of controlled company’s directors) and extra-contractual(of centralized company’s directors) liability.


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No liability may be ascribed to the shareholders of the group company. They remain outsidethe decision-making process concerning the cash management agreement, because they donot have direct administrative power. This applies also if the shareholders’ meeting were toresolve upon the cash management agreement, subject to the provision of Article 2373 of theCivil Code with regard to the possibility of challenging the shareholders meeting’s resolutionsif shareholders exercise the right to vote in conflict of interests. On the basis of an ex anteevaluation, which is possible only in the shareholders’ meetings, it is almost impossible toassess the majority shareholders’ clash of interest (the holding company) given that, within agroup of companies, the interest of the shareholders of the controlled company coincideswith those of the parent company.



Except for the limits indicated earlier and for the eventual specific provisions set forth in thecash management agreement, the centralizing company faces no limits on the form ofremuneration it obtains for its activity. In particular, the centralizing company may request acommission for the use of the cash deposited by the affiliated companies.



Under Italian law the principles governing the activity of the directors are set forth in Article2392 of the Italian Civil Code for joint stock companies. Such discipline provides that “thedirectors shall fulfill the duties imposed upon them by law and by the articles of associationwith the diligence of a mandatory and are jointly liable towards the company for damagesderiving from the non-observance of such duties, except for functions vested solely in theexecutive committee or in one or more directors. In all cases, the directors are jointly liable ifthey failed to supervise the general conduct of company affairs or if, being aware of prejudicialacts, they did not do what they could to prevent their performance or to eliminate or reducetheir harmful consequences”.

As a consequence, there are no specific prudential investment rules but general guidelines onto how the directors should operate.



The management of a company is the exclusive competence of the board of directors or otheradministrative body. The shareholders should not be involved in the management of thecompany – the only possibility arises if the by-laws subject certain resolutions of the directorsto the authorization of the shareholders’ meeting. Also in this case, however, theauthorization, or lack thereof, does not bind the directors who may act regardless of what theshareholders decided, assuming nonetheless liability for the eventual damages this couldcause.

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By virtue of the above, any decision relating to a cash pooling arrangement is vested upon thedirectors. The Board may delegate some of its powers (with the exception of those thatcannot be delegated pursuant to law) to single members of the Board or to an executivecommittee. In such event, it may be possible for a single director or the executive committeeto have the powers to authorize the cash pooling arrangement.

In any event, the Managing Director(s) must refer to the Board of Directors and to the Boardof Statutory Auditors about the most important transactions entered into, the managingtrend and its foreseeable development. This communication must be made with theperiodicity stated in the company by-laws, but no more than every six months (Article 2381,c. 5, Civil Code).



Any restriction as to the use of cash of a target or its subsidiaries to repay the acquisition loanmay derive from two principles of law:

(a) article 2358 of the Italian Civil Code forbids any company from providing so-called“financial assistance” to a purchaser of its shares. This translates in the prohibition for thetarget to grant loans or guarantees for the purchase of its shares. The use of the target’scash through one of the above instruments would therefore be unlawful;

(b) if the target’s cash is to be used to repay the acquisition loan by way of a merger into thepurchaser (leveraged buy out), there are specific provisions that apply. Article 2501 bis ofthe Italian Civil Code states that, in such event:- the merger plan (that must be prepared by the Board of Directors) must identify the

financial resources that will be used by the merged company to satisfy its obligations;- the report by the board of directors (required for a merger) must indicate the reasons

that justify the transaction and must contain a business plan indicating the financial resources that will be used and the milestones that the company will aim for;

- the report by the experts on the exchange ratio (required for a merger) must certify that the information contained in the merger plan is reasonable;

- the report by the auditors of the purchaser or the target must be attached to the merger plan.

The existence of cash pooling arrangements does not impact the above limitations nor addadditional ones nor are there any corporate law principles that would limit the centralizingcompany’s ability to terminate the cash pooling agreement, if so allowed contractually.


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3. BANKRUPTCYWhat are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)? Would this limit the centralizingentity’s ability to exercise its contractual right to terminate the Agreement?

In the event of insolvency or near-insolvency of a company participating to a cash poolingarrangement, the main legal consequence would be:(a) the deprivation of the bankrupt company of the management and of the availability of

its assets existing at the moment of the bankruptcy and during the bankruptcy. This is dueto the fact that such assets are to be destined to the satisfaction of the creditors;

(b) the possibility that the receiver would have of having certain payments made by theinsolvent company revoked. This derives from the principle that all creditors should haveequal rights and possibilities of being satisfied and the law presumes that certainpayments made within defined time periods prior to the bankruptcy would favor thereceiving creditors over others. In particular, the following activities performed during theyear prior to the bankruptcy may be revoked, unless the other party gives evidence of thefact that it was not aware of the insolvency:

- payments made, if their value exceeds by one quarter the value of what obtained in exchange;

- payments of outstanding debts, if not made with cash or with normal methods of payment;

- guarantees given for existing undue debts;- guarantees given for existing and due debts (in this case the term is six months prior

to the bankruptcy).

Moreover, if the receiver gives evidence that the other party was aware of the insolvency, thepayment of outstanding debts, other onerous activity and the creation of a right of firstrefusal due to debts (if performed in the six months prior to the bankruptcy) may also berevoked.

There are several exceptions to the above rules (e.g. payments for goods and services madeas parte of the business and in line with existing practice; payments to employees, paymentsto a bank account if they do not reduce significantly and over time the debt towards thebank). Nonetheless, the receiver would definitely scrutinize a cash pooling arrangement, andpayments made pursuant to it during the “risk periods” indicated above, to verify thepossibility if revoking payments made to the centralizing entity.

In addition, one must consider that article 2467 of the Civil Code states that thereimbursement of financings made by shareholders to the company:- has to be postponed to the satisfaction of the other creditors; and- if given within the year prior to a bankruptcy, may be revoked.

This rule has to be applied to all shareholders’ financings which were given:- at a moment whereby there is an excessive imbalance between the debt and the net

assets; orin a financial situation in which a capital contribution would be reasonable.

The fulfillment of a return in violation of article 2467 generates the liability of the companydirectors, who have decided the return, and to the shareholders who have authorized the operation.

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As regards the centralizing entity’s ability to exercise its contractual right to terminate theagreement, such right is limited by the fact that, following a bankruptcy, all decisions as towhether continue or terminate contractual relationships rests with the receiver.

Are there any risks that bankruptcy proceedings issued against the centralizing entity or acentralized entity could be extended to other participating group entities?

In principle, the juridical autonomy of the companies in a group shields them from liability tothird parties for the obligations of other group companies. The companies of the group, eachjuridically distinct, are liable only for the debts they undertake individually. The bankruptcythat effect one will not affect the others except for the cases provided by the new “corporategroup” (see above) which foresees that, in case of bankruptcy of the subsidiary, the receivermay act instead of the creditors. Liability will not be asserted if there is evidence that thereare no damages in light of the more general result of the activity of the controlling company.

Therefore, declaring a company belonging to the group bankrupt requires taking into accountonly the economic situation of the individual company, as opposed to the situation of thewhole group it belongs to.

To verify insolvency, the fact that the company acts inside a group is not relevant, unless thebankruptcy derives from a violation of the principles of the correct corporate andentrepreneurial management of the subsidiaries.

Article no. 91 of the Law Decree n. 270 of July 8, 1999, concerning the new measures for theextraordinary administration of large companies in state of crisis, regulates the extraordinaryaction for revocation with respect to groups of companies. This article states that theextraordinary commissioner and the company’s trustee in bankruptcy can propose the actionfor revocation provided for by Article n. 67 of actions, indicated in items 1,2,3 of the same law,which have been performed three or five years before the declaration of the state of crisis.According to Article n. 80 of the above law n. 270/1999, the companies of the group subjectto the same procedure are following:

1. the companies directly or indirectly controlling the company in extraordinaryadministration;

2. the companies directly or indirectly controlled by the company in extraordinaryadministration or by its controlling company;

3. the companies that, according to their administrative bodies or any agreement, are underthe same direction of the company in extraordinary administration.

4 TAX ISSUES



They are exempt, i.e. subject to 0% rate.


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4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?Interest paid to companies is to be included in yearly taxable income and subject both tocorporate tax at 33% rate and to local tax at 4,25% rate.

Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?Yes, source withholding tax on interest (excluded interest accrued on bank deposits andaccounts) paid to foreign entities under loan agreements apply at ordinary 12,5% rate, unlessthe beneficiary is resident in a tax heaven, in which case a 27% withholding tax would apply.Interest paid under cash pooling arrangements – structuring as “zero balance systemagreements” – is not subject to any withholding tax, whilst “notional cash poolingarrangements” qualify as loans agreement and therefore withholding tax is levied on the basisof the above rates.Interest on bonds issued by banks, public participations entities and by listed joint stockcompanies is subject to a flat withholding tax of 12,5% as well. The 12.5% flat withholdingrate applies also on bonds and securities issued by not listed joint stock companies dependingon the date of issue, the maturity and the net yield compared to official discount rate at timeof issue. Interest paid on bonds with duration inferior to 18 months paid to non residents issubject to a flat withholding tax of 27%. For interest paid between EU resident group companies, provided that certain conditions aremet, no withholding tax is applied.Finally, the above rates may be further reduced based on the specific tax treaty provisions, asfollows:

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 10% 15% 15% 15% 10% 0 0 10% 10% 27% 0 15% 10% 12,5% 10%

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 10% 15% 10% 10% 15% 10% 12,5% 0 10% 12% 12,5% 10% 15% 15%

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4.3 Stamp duty


No, they don’t.




Thin capitalization rules apply to loans extended or guaranteed by (domestic and foreign)shareholders or shareholders’ related parties holding directly or indirectly at least 25% of theshare capital of the Italian borrowing company.

If the debt-to-equity ratio exceeds 4:1, the tax deductibility of interest on the excessivefinancing is disallowed.

However, thin capitalization rules do not apply for interest accrued on the basis of “zero-balance cash pooling” and “operative leasing” agreements; on the contrary, “notional cashpooling” and “financial leasing” agreements fall under thin capitalization rules.

Payments remunerating the excess debt are re-characterized as dividend distributions and,consequently, are not deductible from the taxable income of the paying company and aresubject to the domestic WHT on cross-border dividends.

Italian companies holding participations in subsidiaries that benefit from the participationexemption regime are subject, in addition to the thin capitalization test, to a second test(“pro-rata test”). If the value of the participations is higher than the net equity of the holdingcompany, then part of the interest paid by the holding company to any lender (third partylenders included) may not be deductible.

Thin capitalization rules do not apply if the borrowing company proves that the excessfinancing is based on its own credit rating. Furthermore, thin capitalization rules do not applyto companies (other than holding companies) whose annual turnover does not exceed€ 5,164,569.00.

The so-called “pro-rata” test does not apply if the parent and the subsidiary elect for taxconsolidation or for the tax transparency regimes.

4.5 Tax heavens


No, there are not. However, Italian tax law provides for the non deductibility of cost andexpenses (interest included) derived from transactions undertaken between residentcompanies and non EU companies domiciled in tax heavens.


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There are no favorable tax regimes deriving from the above.



Yes, cash pooling operations fall under the Italian transfer pricing rules that operate byreference to arm’s length principles. Accordingly the relevant arrangements must be carriedout and result consistent with an arm’s length interest rate.


Italian banking law provides that only companies enrolled on the UIC register are subject toinspection of the banks’ economic, financial and patrimonial conditions.

According to Article 5 of Legislative Decree no .87 of January 27, 1992, Italian bankingauthorities may conduct this inspection through activity balance sheets and periodic reports.

As a general rule, it is the company holding the central accounts and conducting financialactivities that must comply with the reporting requirements, if any.


The Ministerial Decree of April 27, 1990, which implemented EU Directive of June 24, 1988,introduced the liberalization of movements of capital and subsequently eliminated exchangecontrols in Italy.

The obligation in force under Article 13 of Legislative Decree no. 625 of December 15, 1979,substituted by Article 2 of Legislative Decree no.143/1991 and subsequent modifications,provides for the identification and registration of person or companies conducting operationsfor the transmission or movement of methods of payment of any amounts higher than Euro12,500,00. They also require the maintenance of record for reviewing movements of certainmethods of payment.

The “U.I.C.” through the Instructions about the statistical indications of the balance ofpayments, RV no. 1998/1 of February 27, 1998, has provided for the obligation to informabout the transactions having as subject the transfer from Italy to abroad of amounts higherthan Euro 12,500,00 (“Statistical Monetary Communication” – “Comunicazione ValutariaStatistica” CVS).

With reference to the above mentioned operations of sums performed within a cash poolingarrangement, such obligation of Statistical Monetary Communication shall bind the Italian

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bank through which the transfers are made (“canalized operations”).

In this case, the company holder of the account shall not be bound to give any explanationabout the requested transfer because in the Statistical Monetary Communication the bankshall indicate only that the operation subject of the communication is within a cash poolingarrangement.

If the above mentioned transfers are not made through a bank (“non-canalized operations”)the obligation of the Statistical Monetary Communication would be charged to the Companyof the group, holder of the centralized account.


There are no specific accountancy obligations and standards for entities participating in a cashpooling arrangement.


The Italian Code on the Protection of Personal Data (Legislative Decree no.193 of June 30,2003 – “Code”) sets forth the discipline that applies to the protection of personal data.

With regards to the exchange of the information and third party’s personal data between thecentralizing company, the centralized company and the banks for e-cash managementpurpose, said hypothesis falls within the scope of Article 24 of the Code (cases in which noconsent is required for processing data).

As regards communication (being “communication” according to Article 4 of the Code“disclosing personal data to one or more identified entities other than the data subject, thedata controller’s representative in the State’s territory, the date processor and person incharge of the processing in any form whatsoever, including by marking available orinterrogating such data”) this kind of processing is allowed without the consent of the datasubject if it is necessary to pursue a legitimate interest of either the data controller or a thirdparty recipient in the case specified by the Italian Data Protection Authority (“Garante”) onthe basis of the principle set out under the law, also with regards to the activities of bankinggroups and subsidiaries or related companies, unless said interest is overridden by the datasubject’s rights and fundamental freedoms, dignity or legitimate interests.

Furthermore, the communication of the data should not refer to personal data that must beerased by order and should not be carried out upon expiry of the period of time that isnecessary for the purposes for which the data were collected or subsequently processed. Thecommunication should refer to the purposes specified in the notification to the “Garante”,whenever the latter is to be submitted.

With specific regard to the data security measures, the Code provides that personal dataundergoing processing shall be kept and controlled, also in consideration of technological


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innovations, of their nature and the specific characteristics of the processing, in such a wayhas to minimize, by means of suitable preventative security measures, the risk of theirdestruction or loss, whether by accident or not, of unauthorized access to the data or ofprocessing operation that are either unlawful or inconsistent with the purposes for which thedata have been collected.In particular, the rules to comply with regarding the minimum security measures to beadopted when processing personal data by electronic means or without electronic means areprovided for by Articles 34 and 35 of the Code. Such measures must be set forth in a specificdocument, approved by the Board of Directors.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?There are no financial reporting, evaluation and control obligations associated with cashpooling arrangements.

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UNDER JAPANESE LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Japan. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Hiromasa OgawaAdmitted in Japan, 1993Practice areas: International Business Law;Corporate Law; Bankruptcy Law.

Hitomi SakaiAdmitted in Japan, 2003Practice areas: International Business Law;Corporate Law.

KOJIMA LAW OFFICESGobancho Kataoka Bldg - Gobancho 2-7, Chiyoda-ku

Tokyo 102-0076, JapanTel: 81-3-3222-1401 - Fax: 81-3-3222-1405



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The Money Lending Control Law (Article 3) requires any person or entity who wishes toconduct the business of lending money, i.e., a business which intends to lend moneyrepeatedly to an unspecified number of persons or on a commercial basis, to register with theprefecture government or the prime minister, except in cases where the money lendingbusiness is conducted in accordance with the provisions of other laws such as the Banking Act.As the authority of the prime minister has been delegated to the Financial Service Agency, thebusiness of money lending is generally conducted under the supervision of the FinancialService Agency. As described later, the loan from the centralizing entity to the centralizedentities is considered « unspecified » unless the relationship between the centralizing entityand the centralized entities is a parent-child entity relationship under Companies Act.

To enable it to conduct the activities involved in a cash management system, the centralizingcompany generally registers as a money lending company under the Money Lending ControlLaw. However, the money lending company cannot receive deposits from the centralizedcompanies since receiving deposits from an unspecified number of persons or on acommercial basis is prohibited under the Investment Deposit and Interest Rate Law, except inthe case of banks and other financial institutions licensed under the Banking Act or otherrespective laws. Both the lending of money and the receiving of deposits are activities whichfall within the definition of banking business and are thus generally reserved for banks underthe Banking Act (Article 2).

Therefore, the cash flows from the centralized companies to the centralizing company cannotbe “deposits”. Instead, they need to be considered as loans to the centralizing company orpayments of a similar nature. The Financial Service Agency will not likely raise an issue of abreach of the Investment Deposit and Interest Rate Law or the Banking Act by the cashmanagement system as long as it is clear that the centralizing company does not receive thefunds from the centralized companies on deposit, but instead borrows the funds for its ownuse (i.e., for the purpose of lending them to the affiliates).

There is no distinction between short term, mid term and long term.

According to the official interpretation of Financial Service Agency, the relationship betweencentralizing entity and centralized entities is deemed a parent-child entities relationship underCompanies Act, e.g., the centralizing entity holds more than fifty (50) % of the shares of thecentralized entities, the centralizing entity does not need to be registered as a money lendingcompany under the Money Lending Control Law.

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Do investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized entities require banking authorities’ approval forthe centralized entities or the centralizing entity? Is an exemption available in groupcompanies? In both cases, is there an exemption available for operations within groups ofcompanies? What are the sanctions, if any, for breaching this requirement?

There is no necessity of the banking authority’s approval for the centralizing entity to carryout some investments in financial instruments including derivative products on behalf of thecentralized entities. As the cash provided by the centralized entities to the centralizing entityare (conditional) loans or of a nature similar to such loans, the remuneration for the cash, i.e.,receiving of interest, is not prohibited. The use of the cash is at the discretion of thecentralizing entity to the extent that it is allowed under the cash management agreement.

The sanctions to be imposed to the centralizing entity when it breaches the Money LendingControl Law, i.e., it lends money to centralized entities without registration with the prefecturegovernment or the prime minister, in the case that relationship between centralizing entityand centralized entities is not an parent-child entities relationship, is up to five (5) years in jailor/and fine up to ten million (10,000,000) JPY (Article 47).



There is no restriction on the implementation of notional pooling of current account balances.Once the cash is provided by the centralized entities to the centralizing entity in a form ofloans governed by the terms and conditions of the cash management arrangement, it belongsto the centralizing entity. The centralizing entity does not need to keep separate accounts; itcan mingle all the funds and dispose of them together. Generally banks require crossguarantees from participating entities. The amount of such guarantees can be capped by theagreement between the banks and participating entities.



Banking authorities’ approval or consent is not required for the arrangement whereby acentralized entity agrees to buy from and sell to the centralizing entity all its foreigncurrencies.



No. There is no restriction on the centralizing entity’s activities as the operator of amanagement of payments/collective program.


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There is no specific regulation stating the bank's specific duty of confidentiality on this matter.However banks in Japan seldom provide information of a bank account to a person or entityother than the account holder.



If the centralizing entity operates insurance business, it requires a license from the primeminister and management from the Finance Service Agency. But for an insurance companyto operate a cash management system the same rules would apply as to others.

If the centralizing entity undertakes trust as its business, it requires a license from the primeminister and management from the Finance Service Agency in principle. But if such trustoperation is conducted within the members of the group entities, the license is not requiredand just a report to the prime ministry is required and such trust operation is not basicallymanaged by the Finance Service Agency.

There is no specific regulation in connection with the opening of bank accounts. However therequirements and conditions to open a bank account is left to the internal rules of each bank.

1.4 Outsourcing


Yes as long as the outsourcing entity has the necessary registration stated in the above whichis required to operate cash pooling function. However the favourable exemptions which areallowed to the operation between parent company and its subsidiaries, stated in the above,have the possibility to not apply.

2. CORPORATE LAW



There is no specific category of entities that can not participate in cash pooling arrangements,either as centralized or centralizing entities.

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However, in Japan, the centralizing entity is commonly a wholly-owned subsidiary of theparent company. That arrangement facilitates the parent company’s control over thecentralizing company and operation of the cash management system. There is no prohibition on the nationality of shareholders of a stock existing company underthe Companies Act. With regard to regulations of the Foreign Exchange and Foreign TradeControl Law, see section 6.

2.2 Corporate purposeDo the activities carried out in cash pooling arrangement need to be expressly contemplated inthe bylaws?The business purpose of company shall be stated in the Articles of Incorporation of suchcompany. Some general representation, such as “associated business” is allowed, but themoney lending business which is necessary for the operation of cash management systemmust be stipulated expressly in the registered Articles of Incorporation.

2.3 Corporate benefit How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities? Is there an obligation to offer theparticipating entities market financial conditions (i.e. the “arm’s length principle")? What arethe liabilities and sanctions in case of violation of the corporate benefit of a participating entity(cancellation of the agreement, management liability, extension of bankruptcy proceedingsetc.)? Do they apply to directors, officers and shareholders?The law does not specifically require the centralizing entity to offer the centralized entities, orvice versa, market financial conditions. The terms and conditions of the loans can, in principle,be freely decided between the parties to the extent that said terms and conditions do notviolate the laws concerning public order and morality such as the Interest Rate RestrictionLaw. If the terms and conditions of the loans are prejudicial to one entity, the directors of suchcompany could be liable for the damages, but the enforceability of the agreement would notbe affected. The activities of the centralizing entity shall be within the business purposes set forth in itsArticles of Incorporation (Article 27 of the Companies Act). However, the business purposesare interpreted quite loosely and, as such, incidental businesses can be deemed included.Other than the above, there are no restrictions on the type of operations the centralizingentity can undertake with the cash of the centralized entities.The directors of a company have a duty of loyalty to the company and obligation to act withthe care of a good manager (Article 644 of the Companies Act). If the directors fail to fulfilsaid duty or obligation, the directors will be jointly and severally liable for the damagesincurred by the company. It is recognized, however, that certain risks are inevitable in managing a company. Inconsideration of same, the directors are deemed to have certain amount of leeway and thecourts, under the business judgment rule or another similar theory, often refrain from holdingdirectors responsible for their business decisions.


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In connection with this, the directors might not be held responsible, even if they approved theextension of unsecured loans. The benefit of the cash management system to the wholegroup may take precedence over the risk of default of a particular loan provided by onecentralized company, especially in the case of closely-held subsidiaries. However, if thecentralized entity is a listed company with many shareholders outside the group, suchcentralized entity will sometimes request that the parent company provide a guarantee forthe loans to the centralizing entities so as to avoid possible claims from the shareholdersagainst the directors for nonfeasance.

The liabilities of the shareholders of stock companies or private limited companies are limitedto their capital contribution; they do not generally have any further liabilities. The oneexception to this general rule is where a shareholder holds 100% or the vast majority of theshares of the company and said shareholder’s interests are not kept separate from that of thecompany’s. In such a case, the shareholder could be held responsible for the liabilities of thecompany under the “piercing the corporate veil” doctrine.



From a tax point of view, transactions advantageous to one company may be considered asa donation or raise the issue of transfer pricing, which would result in a limitation on thedeductibility of expenses.



No particular rules would be applicable to investments by the centralizing entity.



For companies which have the board of directors, the common form of business organizationin Japan, the Companies Act provides that important administrational matters, including theborrowing of a large amount of money, must be approved by the board of directors of thecompany (Article 362 of the Companies Act). The execution of a cash managementagreement is not specifically listed among the items which are subject to board approval. Nordoes the Companies Act delineate a clear standard by which to determine what mattersshould be considered important to the administration of the company. Thus, the need forboard approval will depend on the transaction and the company involved, e.g., the extent ofthe delegation of the administrative powers of the centralized company, among other things.Under Japanese law, the Articles of Incorporation and the rules of the board of directors of thecompany both may identify the matters which require board approval. Such provisions willbe taken into consideration when determining if a certain transaction requires board approval.

Please note that not all of the cash management systems in Japan are all-encompassing,requiring the centralized entities to concentrate their entire cash surplus in the centralizing

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entity. Rather, in practice, there is room for the centralized entities to manage at least part oftheir own cash, even if subject to a cash management agreement. One main reason for thisis that the centralized entities, especially regional entities, often have a strong desire tomaintain good relationships with their local banks. Thus, it would be difficult for such entitiesto withdraw all their deposits from the local banks and concentrate their entire cash surplusin the centralizing entity. In such a case, cash management agreements do not necessarilyimpose an obligation on the centralized entities to extend loans to the centralizing entitywhenever there is cash surplus nor do such agreements impose an obligation to procure loansexclusively from the centralizing entities. Even though the cash management agreementgrants a certain amount of discretion for the centralized entities as to the management oftheir own cash as above, the execution of the cash management agreement would usually beconsidered important enough to the administration of the company to require board approvalin light of its nature. In addition to the above requirements, in the event of a conflict of interest between a directorand the company, e.g., the same person is serving as representative director of both thecentralized entities and the centralizing entity board approval should be obtained (Article356). In the case of a company which does not have a board of directors, the business of thecompany must be approved by shareholders’ meeting (Article 295). Also, any transactionsthat involve a conflict of interest between the director and the company must be approvedby the shareholders at the shareholders’ meeting. The Companies Act provides for other formsof companies (“goushi kaisha », «gomei kaisha » or «godo kaisha »), but such companies areunlikely to be involved in cash management systems.

2.7 Specific aspects relating to acquisition financing exitAre there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement of the purchaser involvingthe target modify the rules? No. The use of the cash is at the discretion of the centralizing entity to the extent permittedunder the cash management agreement.

2.8 TerminationDoes any company law restriction prevent the centralizing entity from exercising itscontractual right to terminate the agreement?No.


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3. BANKRUPTCY

What are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)? Would this limit the centralizingentity’s ability to exercise its contractual right to terminate the Agreement? Are there any risksthat bankruptcy proceedings issued against the centralizing entity or a centralized entity couldbe extended to other participating group entities?Bankruptcy proceedings would be undertaken by each legal entity individually. Proceedings byor against one company cannot be extended to another company even if the companiesbelong to the same group or are under a common management arrangement (regardless ZBAand notional). If the centralizing entity goes bankrupt while holding cash loaned by thecentralized entities, those centralized entities would be considered creditors of the bankruptcompany and their loans would be recouped in accordance with the bankruptcy procedures.

4. TAX ISSUES

4.1 Value added tax (VAT)Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?Assignment or loans of certain assets or provision of services, etc. within the territory of Japanare generally subject to a consumption tax at the rate of 5% (national 4% Article 29 of theConsumption Tax Law) and regional 1%) However, financial transactions, including theprovision of loans with interest, are exempted from the taxable transactions (Article 6 of theConsumption Tax Law). Therefore, the provision of loans and the payment of interest are notsubject to consumption tax. However, if the centralizing entity charges the centralizedentities for other services, such as accounting or payment services such services fees wouldbe subject to consumption tax. Payments to non-residents are generally exempt fromconsumption tax.

4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?The interest paid to a Japanese company or a foreign company with a permanentestablishment in Japan is generally subject to a corporation tax at the rate of 30% (Article 66of the Corporation Tax Law, not including the corporate enterprise tax and inhabitant tax). Theaccrued interest is aggregated with other income of the company. There is no distinctionbetween the interest accrued within Japan and outside of Japan.

Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?Interest paid to a foreign company for a loan provided by the foreign company for a businessconducted within Japan is subject to Japanese income tax. The withholding income tax ratio

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on interest paid is generally 15% (Article 161 of the Income Tax Law, but is reduced under taxtreaties as follows:

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 10% 10% 12,5% 10% 10% 10% - 10% 10% - 10% 10% 10% 10% -

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 10% 10% 10% - 10% 10% 10% 10% 10% 10% - 10%

15% (general)

10%(banks)

15% (general)

10%(banks)

A foreign company with a permanent establishment in Japan may be exempt from thewithholding tax at the source by showing the certificate of the tax authority. The withheldamount can also be deducted from the corporation tax of such foreign company.

4.3 Stamp duty


A stamp duty is imposed when the written agreement on the cash management system isprepared in Japan. In the case that the written agreement is prepared outside Japan, even ifthe implementation or keeping of such written agreement is conducted in Japan, suchagreement will not be taxed.



If interest is advantageous to the centralizing entity in light of the cost of procurement offunds incurred by the centralized entity or the interest rate utilized by regular financialinstitutions, such excessive interest paid to the centralizing entity would be deemed adonation to the centralizing entity and would not be deductible for the centralized entities.

If a Japanese company owes a debt, with interest, to a foreign controlling shareholder (whodirectly or indirectly holds 50% or more of the capital share) totalling an amount exceedingthree times the equity shareholding ratio of such foreign shareholder into the net assets ofthe Japanese company, the interest paid to the foreign shareholder is not deductible to theextent that it exceeds the above ratio. Instead of the above ratio, the company may use the


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ratio of all the debts bearing interest against the capital and reserves of other similar Japanesecompanies.


With regard to transfer pricing issues, advance ruling is provided by the tax authority underthe National Tax Agency’s Guideline on the Administrative Affairs Regarding Transfer Pricing.A company may request that the tax authority issue a written confirmation that a certaintransaction to be conducted within the next three fiscal years would be regarded as arm’slength. To obtain such a written confirmation, the company is required to disclose to the taxauthority information about the transaction including details about the parties, theconditions of the transaction and other relevant facts. The written confirmation shall bebinding upon the tax authority so long as said transaction is subsequently conducted inaccordance with such confirmation.

In other fields, the tax authority has also issued the Guideline on the Administrative AffairsRegarding Written Replies to Advance Inquiries. Under the Guideline, the tax authorityresponds in writing to inquiries based on the established facts but which are not clear fromthe laws, official notifications or other such materials published in the past, and the responseto which may relate to an unspecified number of taxpayers. The tax authority may requestrelevant information and materials and, if the authority deems it appropriate, will provide awritten response. The inquiry and response will subsequently be published. However, theabove Guideline does not clarify whether such written response will be binding on the taxauthority.

4.5 Tax havens


In the event that a Japanese company holds 5% or more of the capital shares of a foreigncompany located in a tax haven country (and 50% or more of its capital shares is held byJapanese companies and/or individuals), undistributed profits of such foreign company shallbe included in the income of the Japanese company in proportion to its shareholding ratio.



No



Cash management operations, such as payment of the interest on loans, may raise transferprice issues if any of the transactions between a Japanese company (including foreigncompany which pays corporate tax in Japan) and a foreign company with which the Japanesecompany has a special relationship (i.e., where either of the two companies directly orindirectly owns 50% or more of the capital share of the other, or the same entity owns 50%

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or more of the capital shares of the two companies, or either of the two companies controlsthe management of the other company, etc.) diverges from what would be considered anarm’s length transaction. If such divergence from the arm’s length price results in a reductionof the amount of the Japanese company’s taxable income, the difference between the twoamounts would either be included in or not be deducted from the taxable income of theJapanese company. Whether or not a certain transaction was conducted at arm’s length willbe determined by examining the uncontrolled market price, the resale price to independentcustomers, the cost plus normal profit, or by use of any other acceptable method.


A Japanese resident i.e. a Japanese corporate entity is required to submit a notification to theBank of Japan regarding certain kinds of transactions between a Japanese resident and aforeign resident (See section 6.). Other than this notification requirement, operations underthe cash management system are not subject to any reporting obligations to the central bank.


Provision of loans between a Japanese resident and a foreign resident under the cashmanagement system are subject to a notification obligation under the Foreign Exchange andForeign Trade Law. A loan between a non-resident and a resident is categorized either ascapital transactions, direct inward investments, or direct outward investments, depending onthe amount or payment period of the loan. As a rule, the Foreign Exchange and Foreign TradeLaw requires post facto notification subsequent to the execution of the loan. However, priornotification and approval are required for transactions which would affect national security,such as transactions with entities in certain foreign countries or in certain businesses relatedto national security, etc. Loans which would have a small impact, such as loans in the amountof 100 million yen or less or loans in yen currency with a term of 1 year or less, are exemptedfrom the post facto notification obligation.

Cross-border offsetting of credits and liabilities are not subject to the notification obligationunder the Foreign Exchange and Foreign Trade Law.


There are no specific accountancy obligations and standards for entities in a cash poolingarrangement.


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8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?The Unlawful Computer Access Prohibition Law requires a person who is in a position tomanage the computer access control system to take appropriate measures to protect thecomputer network (Article 5). Because banks are usually the parties that provide thecomputer system used to implement cash management systems, they would be required totake the appropriate security measures, such as the establishment of firewalls or securepasswords. However, there is no sanction in the event this provision is breached. Other than the above, if the centralizing company, the centralized companies, or the banks failto take due care to protect the data as normally expected for their respective positions,remedies under the general rules of tort or breach of contract may be available.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?The Securities and Exchange Law requires an entity which reports financial conditionsperiodically to disclose cash management arrangements if such arrangement is deemed an“important contract”. Whether such arrangement is deemed an important contract iscontingent upon whether the arrangement is an item which required the approval of theboard of directors etc.

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UNDER LUXEMBOURG LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in the grand Duchy of Luxembourg. The principles setout below should be considered in relation to individual circumstances, with legal and tax counsel.

Jean-Marc Delcour Loyens & loeff Luxembourg 14, rue Edward SteichenL-2540 Luxembourg


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Intra-group cash management activities are prima facie within the scope of the law of the 5th

of April 1993 as amended (the 1993 Law) regulating access to professional activities of theLuxembourg financial sector.

According to the provisions of article 1 of this law, the granting of loans, the acceptance ofpublic deposits and certain other financial activities, such as brokering, investing, advising, etc.,are subject to governmental authorisation. Due to the structure of the applicable law, it isnecessary to analyse the ability (a) to grants loans and (b) to provide investment servicesseparately:

a) Deposits and Loans

The financial sector law does not expressly address the granting of intra-group loans and thereception of deposits. The supervising authority for financial activities, the Financial SectorSurveillance Commission (the CSSF), generally admits that intra-group cash management isnot a banking activity unless, among other requirements, deposits or other refundables arereceived from the public.

As a result, intra-group loans are generally exempt from the authorisation requirement forbanking activities.

A Luxembourg company, member of a group, may issue bonds in order to finance the group’sactivities. Investors may be third party or companies of the group (usually, there areshareholders of group companies).

Luxembourg legislation provides that, in principle, every public offer of securities is subject toprior authorisation of the offering documents by the CSSF, as well as required publications inaccordance with the law on commercial companies dated 10 August 1915 as amended (the1915 Law)

The characterisation of the offered securities whose issue or sale is offered as shares, bonds,PEC or any other type of securities is irrelevant. The authorisation from the CSSF for publicoffers is required should securities be listed or not.

The notion of “public offer” is not defined by the law. Therefore, uncertainties remain in thisfield, and in practice companies which are willing to carry on private placement of securities

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(e.g. to banks of the group, institutional investors or companies linked to the group) requireprior authorisation from the CSSF.Despite these uncertainties, it is possible to consider that, in principle, the issuance ofsecurities to a controlled subsidiary or an important shareholder is not to be regarded aspublic offer under Luxembourg law.

b) Investment servicesThe Annex 2 of the 1993 Law as amended provides with the legal definition of an "investmentservice".According to the 1993 Law, companies providing investment services exclusively in favour oftheir parent company, their subsidiaries or to other subsidiaries of their parent company areexempt from obtaining a governmental authorisation (article 13 (2) c) of the 1993 Law). Nonotification to the authorities by the cash manager is expressly required.The CSSF can however control at all times the compliance of any financial activity with theprovisions of the 1993 Law.



Notional pooling is a technique, which allows the virtual grouping of account balances ofparticipating entities. The latter continue to operate their accounts and the account balancesare not transferred to the centralization structure. Contrary to ZBA cash pooling, notionalpooling does not entail a physical transfer of cash. However, the interest remuneration ofexcess cash or the charge of cash needs of centralized entities are carried out on a net basis,i.e. taking into account the credit or debit positions of each participant. Generally, given thedifference between the rate of deposit of excess cash, and that of short-term loans, thegrouping of the account balances optimizes the resources of the group. When notional pooling is implemented by way of merging current account balances of thecentralizing entity and centralized entities, such merger gives rise to a single balance, whetherpositive or negative, for all participants and therefore to a single credit or debit interestposition. In this respect, each participating company bears overdraw charges and benefitsfrom interest gains.In notional pooling by way of bank margins reductions, each participating company isallocated the positive adjustment on the margin rate included in the interest rate applied tocredit and debit balances of its account. The adjustment is calculated on the basis of the lowermargin, which would be applied by the bank if credit and debit balances of all participatingcompanies were merged and therefore entailed larger movements and a larger balance.However, the merger is fictitious and each company continues to operate its bank account.There is no general provision with respect to the merging of balances of current accounts ofthe participating group companies. Common law applicable to the set-off of claims (Articles1289 and following of the Luxembourg Civil code) should apply in such situation: set-off by


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agreement (reciprocal debts and claims) or automatic legal set-off (liquid, outstanding andreciprocal debts and claims, having the same object).However, cash-pooling agreements raise some difficulties as regards the corporate objectsand the corporate interest of the companies of the group.



Centralisation of exchange rates and risks involves the selling and purchasing of foreignexchange currency and hedging of foreign exchange and rates hedging transaction. Theygenerally take place after an express consent of each participant. The centralizing entity willinvoice to the participants, the exact amount of the selling/purchasing commissions.



Banks are bound by the professional secret in Luxembourg. Any violation of this professionalsecret is sanctioned by criminal law.However, case law provides that the client has the control of his/her information and the bankshall sue the instruction of its clients.Therefore, under written instructions and confirmation of the centralized entities, the bankcan provide the centralizing entity with all the information required to the performance of thecash pooling management



In order to enable the fight against money laundering and based upon its obligation ofvigilance, the credit institution shall, before entering into a contractual relationship orassisting a client with the preparation or execution of a transaction, confirm the identity ofthe co-contracting party (KYC obligation) through production of any probative documentwhich can take the form of an original or an expedition or a certified true copy of any deedor extract from an official registry, establishing the denomination, form structure and headoffice, along with the powers of the persons acting on behalf of the legal entity.

1.4 Outsourcing


The execution of cash management/cash pooling operations is exempt of any bankauthorities’ authorization.Outsourcing these operations outside the group shall be considered as lawful.

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2. CORPORATE LAW



There is no legal restriction in relation to the form of either the centralizing entity or thecentralized entity.

Therefore, the centralizing entity or the centralized entity could take the form of an unlimitedcompany, a private limited company, a public limited company, a corporate partnershiplimited by shares, a co-operative society, a European company or a civil company.

The law of 25 March 1991on the economic grouping (groupement d’intérêt économique,“GIE”) provides that the GIE, as legal entity, cannot:

- have directly or indirectly, the control of the activities of its own members or the activitiesof another company, especially in the areas relating to finance, human resources andinvestments;

- hold, directly or indirectly, any unit or share in a member company; the holding of unit orshare in another company by the GIE is permitted only if such holding is necessary torealize the corporate object of the GIE and in the case of the GIE is acting on behalf of itsmembers;

- research benefits for its own purpose.

Furthermore, the choice of civil companies as centralizing entity shall be avoided regardingthe commercial nature of the operation made by the centralizing entity.

The choice of the entity’s form will rely on the advantages provided by such entity.



Article 1832 of the Luxembourg Civil Code provides that “a company can be incorporated bytwo or several persons who agree to pool resources in order to share the benefits which couldarisen or, in the case specified by law, by one person who allocates assets to a determinedobject”.

Article 1833 of the Luxembourg Civil Code adds that “any company shall have a lawfulcorporate object and shall be run according to the common interest of its members”.

As regards the centralizing entity, cash pooling is one of its principal activity and has to beexpressly determined in the company purpose of the centralizing entity’s corporate object. For the centralized entities, their participation in cash pooling is considered as normal treasuryoperations, needed to accomplish their principal activities.

Therefore such activities need not be expressly mentioned in the bylaws.


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Corporate interest -or corporate benefit- is not defined under Luxembourg statute.Luxembourg law doesn’t recognize the existence of groups, except in labor law.

Luxembourg doctrine and case law rely upon the French case law, especially the caseRozenblum, dated 4 February, 1985.

According to such case law, the interest of the group may in some instances prevail over ormitigate the corporate interest of the group participants. The group interest should not beconfused with the interests of the parent company, which defines the policy of the group.

In order to permit the interest of the group to prevail over the corporate interests of thesubsidiaries, the following tests set forth by Rozenblum case law should be verified:

The companies must belong to the same group shown by both equity interest and a commonstrategy, a mere group of financial participations not being sufficient;

- The group must have a "group policy" under which the courts will determine whether therequested effort was truly dictated by a common economic, equity or financial interest;

- Any sacrifice requested must maintain a balance between the financial commitments ofthe concerned affiliates and must not exceed the net worth of the company, which bearsits charge.

There is no obligation to offer specific favorable financial conditions to the participatingcompanies as to the cash pooling transactions. Nevertheless, the transactions must beentered into at fair market value, taking into account the financial capacities of thesubsidiaries.

Furthermore, the participation of an entity in the cash management scheme must not exposesuch entity to a liquidity risk. Therefore, it should be verified that draw down rights of eachcentralized entity are determined in consideration of its net worth and its indebtedness. Thecentralizing entity should on its part take appropriate precautions to avoid liquidity risk, inparticular by setting draw down threshold; requiring cash need projections and investingexcess cash in non volatile financial instruments and respect the thin capitalization rules.

Agreements and obligations violating the corporate interest of the company shall be declaredvoid.

In addition, directors may be personally liable for mismanagement (article 59 al.2 of the lawof 10 August 1915 on commercial companies, as amended (the “LCC”)).

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The remuneration of loans to the centralising company by the participating group companiesis not prohibited according to Luxembourg company or banking legislation.

However, there may be a number of restrictions regarding the amounts and rates of suchremuneration resulting from Luxembourg tax and company law, particularly with respect toholding companies.



There are no particular investment rules applying neither to the centralizing entity nor to thecentralized entities. The companies which have entered into cash pooling management shallonly respect the indebtedness ratio required to avoid thin capitalization.



The activities involved by a cash management agreement must be within the legal andcorporate purpose of aIl concerned companies and especially of the centralising entity.

No particular authorisation needs to be granted from the shareholders of the involvedcompanies unless their respective articles of incorporation provide for such a procedure. Adecision of the board of directors in favour of the agreement is required to the extent thatLuxembourg public companies ("sociétés anonymes") usually act and are represented throughthis body.

If certain directors are members of the board of both the subsidiary and the centralisingentity, such directors cannot take part in decisions relating to questions in which they have aconflict of interest.

Besides, any limitations to the powers conferred upon the board of directors either by thearticles of the company or by a decision of the competent corporate bodies are not valid vis-à-vis third parties, even if they are published. Such provision does not preclude any director’sliability in case of violation of the clauses of the articles of the company.


Are there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement involving the target modifythe rules?

The use of the cash of a target company to repay an acquisition loan may fall under theprohibition of financial assistance. Pursuant to Article 49 (6) LCC "a company may notadvance money, grant loans or grant a security in order to assist a third party to subscribe toor purchase its own shares".Violation of financial assistance prohibition is a criminal offence, which exposes management


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to fines and imprisonment1 notwithstanding the fact that the courts can declare the loangranted null and void. Moreover, the transaction may also be qualified a misappropriation of corporate assets.Financial assistance only prohibits loans or advances "in order to assist…" i.e. granted prior toor at the same time as the transfer of the shares consummating the acquisition. However, onecan argue that, what it considered is the purpose of the loan. In case of the target enters into the cash pooling agreement with the parent right after thecompletion of the share purchase agreement, or any similar operations executed to avoid theprohibition set forth by article 49 (6) LCC could most likely fall under the ambit of financialassistance prohibition.All loan and advances granted by the centralizing company and all payment or repaymentmade by the centralized entities shall be pooled and only a balance of those sums will comeout. One can argue that it will be difficult (in case of a lot of participant) to assign the target’sdividend to the reimbursement of the loan granted to the parent.The participation of the target in the cash management scheme will be subject to carefulscrutiny to make sure that the purpose of the advances made by the target is not to repaythe acquisition loans, and that the target may borrow funds from the centralising at similarterms as other companies. If the cash pool funds are lent to the borrower under the acquisition loan, which is not amember of the arrangement, or which joined the arrangement at the time of the acquisition,the arrangement will trigger more concern. The same will apply if the participation of the target in the arrangement has taken placeshortly before or shortly after the acquisition. Nevertheless, the involving of the target in the cash pooling arrangement could be valid if:- it is not contrary to the corporate interest of the target,- the cash pooling arrangement is set up in the group interest (and not the parent company

interest), - the target can realise its compulsory investments for its activity, - there is a relevant/ sufficient interest rate2.Such conditions are required under the French case law, which one can consider thatLuxembourg courts will likely to refer.

2.8 TerminationDoes any company law restriction prevent the centralizing entity from exercising itscontractual right to terminate the agreement?As regards the centralizing entity’s contractual right to terminate the agreement, there are nocompany law restrictions preventing the centralizing entity from exercising its right.

1 Article 171-1 LCC.2 Cass. Crim., 10 juillet 1995 : affaire SIFB-Delattre-Levivier.

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3. BANKRUPTCYWhat are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)? Would this limit the centralizingentity’s ability to exercise its contractual right to terminate the Agreement? Are there any risksthat bankruptcy proceedings issued against the centralizing entity or a centralized entity couldbe extended to other participating group entities?Each member of the group constitutes an independent legal entity. Therefore each entity of thegroup should suffer an independent insolvency filing and procedure.In the event a participating entity becomes insolvent, any payment received by the insolventcompany is null and void. Moreover, are null and void any payments, sale, set-off which happened during the suspectedperiod as defined by the insolvency ruling.Nevertheless, as an exception to the prohibition is the set-off procedure in case of thecentralizing entity and the centralized entity have reciprocal claims under the cashmanagement arrangement, provided that the two claims were certain, liquid and payablebefore the judgment declaring the insolvency procedure opened; or in the event the reciprocalclaims, derived from a single agreement3.The cash pooling arrangement may provide a uniqueness of accounts. In such case, thecentralizing entity and the centralized entities agreed that all the different accounts constitutesone unique account, indivisible, allowing the set-off procedure. The balance of this uniqueaccount is opposable to third parties. It is also opposable to the administrator of the insolventcompany unless such cash pooling has been set up in an obvious and fraudulent perspective.However, in respect of a cash pool agreement, the centralizing entity or any bank in relationwith a company may be held liable (article 1382 and 1393 of the Luxembourg Civil Code) whilegranting loans and advances to a participating entity, if such loans and advances are grantedwhen the centralized entity is insolvent or nearly insolvent. This constitutes, under case law4, an abusive support resulting in the aggravation of theliabilities of the insolvent company at the detriment of its creditors. The abusive support ischaracterized pursuant to the said case law when: - there is a granting of a loan/advance by the bank to a company,- the bank was aware of the compromised situation of such company, or otherwise,- the bank failed to comply with its duty to keep itself informed.Such abusive support creates a fake appearance of the company’s good health and thereforecould induce third parties in error regarding the effective and relevant capacity of the company.A recent French case law decided the same in the case of a parent company and its subsidiaries.Moreover, the insolvency procedure opened against a company may be extended to thecentralizing entity if the latter can be seen as de facto directors5, provided however that it isheld liable for mismanagement6.

3 Tribunal d’Arrondissement de Luxembourg, 14 mar 19864 Tribunal d’Arrondissement de Luxembourg, 7 décembre 1990 + Metal europe5 Article 495 of the Luxembourg Commercial Code.6 First Instance Tribunal of Sens, 22 August 2000.


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4. TAX ISSUES

4.1 Value added tax (VAT)Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?From a Luxembourg VAT perspective, cash management services are exempt from VAT, beingconsidered as transactions concerning deposit, current accounts, transfers, debts, cheques andcredits7. As a result, no Luxembourg VAT will have to be added by a Luxembourg centralizingentity for cash management services supplied to centralized entities established inLuxembourg or abroad. Similarly, no VAT would need to be self assessed8 in Luxembourg bylocal centralized entities (VAT entrepreneurs) on cash management fees invoiced by a foreigncentralizing entity. Similarly to other financial services, these activities will not open an input VAT deduction rightat the level of their supplier (centralizing entity) on expenses incurred in that frame, except incase such services are rendered to customers (centralized entities) established outside theEuropean Union9. In that event, the centralizing entities will in principle exercise its inputdeduction right through the general pro rata method10, which is equal to a fraction of which:- the numerator consist of the total yearly amount of turnover in respect of transactions for

which VAT is deductible (taxed transactions as well as VAT exempt transactions whichnevertheless open an input deduction right);

- the denominator is the yearly amount of all transactions within the scope of VAT (taxed andexempted activities).

The pro rata must be calculated on a yearly basis. During the year, provisional pro rata isapplied on the basis of the preceding year’s transactions. The deductions made on the basisof such provisional pro rata will be adjusted when the final prorate is fixed during the nextyear. Regularization is made through the yearly recapitulative VAT return. The percentage ofdeduction is rounded up to a higher figure. For instance, a pro rata of 11.1 % is rounded up to12 % input deduction right.As a simplification measure, input VAT is fully deductible under the condition that thecalculated pro rata is 90 % or more and the fiscal advantage for VAT payers resulting from anon-application of the pro rata method does not exceed EUR 250 for the calendar year inquestion.

4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?In principle interest forms part of the taxable income of a Luxembourg company. Interestexpenses are in principle deductible, provided that no special provisions aiming at limitation

7 According to Article 44, 1, c) of the Luxembourg VAT Law. Please however note that this exemption does not apply.8 Based on the reverse charge principle as cash management services are considered as intellectual/immaterial services; Article 17, 2, e) and Article 26, 1, d) of the

Luxembourg VAT Law.9 According to Article 49, 2, d) of the Luxembourg VAT Law.10 According to Article 50, 1 of the Luxembourg VAT Law.

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of interest deduction are applicable. Interest income and expenses are included in the taxableprofits of a Luxembourg company on an accruals basis. In other words, the interest does nothave to be paid in fact; it may also be capitalized and remain taxable or deductible, as the casemay be, if the obligation to pay the interest remains. There is no special rate for interest,irrespective of the terms and conditions of the loan. Hence, the income is taxable at a rate of29,63.11

A Luxembourg company is furthermore subject to an annual net worth tax, which is levied ata rate of 0.5% on the company's worldwide net worth on January 1. Receivables and debtsform part of the taxable basis.

Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?Luxembourg does not impose any withholding tax on interest paid to non-residents, unlessthe savings income directive (2003/48/EC) applies to the payment of interest. The directiveis, however, only applicable to certain interest payments to individuals and to certain entitieswithout legal personality. Moreover, as the directive aims to tax personal savings income, itshould not apply to payments under cash pooling arrangements. Furthermore, it is under certain circumstances possible that interest is (partly) requalified asdividend if the debtor and the creditor are affiliated. Consequently, dividend withholding taxwould apply, imposed at a rate of 15% (which rate is generally reduced by tax treaties). Inparticular such circumstances could be under-capitalization of the debtor, or not at arm’slength pricing of the interest. It is questionable whether requalification and taxation ofinterest as a dividend is possible under double tax treaties. Furthermore, the corporation taxact mentions certain types of profit participating interest as taxable for withholding taxpurposes.

4.3 Stamp dutyDo cash pooling operations raise any stamp duty? If a loan note is registered, certain registration rights may be due in Luxembourg. However, asthere is no obligation to register debt, the payment of such right can easily be circumvented.

4.4 Deductibility of interestAre there limitations to the deductibility of interest paid by the centralized or the centralizingentity (such as a thin capitalization rule - debt / equity capital ratio)?Under limited circumstances, a thin capitalization may be regarded as abusive. For instance,when financing the acquisition of a participation, the tax authorities apply a ratio of 85% debtto 15% equity as a safe harbor in this regard. Financing with an amount of debt exceeding the85% threshold is possible, if the total interest paid does not exceed the at arm’s lengthinterest due when the company is financed with 85% interest. For an in and on-lendingactivity, up to 100% debt financing is accepted, provided that the in and on-lending is doneon such terms that the risk on such activity is minimal. Such an approach may also be appliedto cash pooling activities.

11 This is a combined rate: 22% corporation tax; 6,75 municipal business tax (applicable in the city of Luxembourg); and a 4% surcharge for the employment fund.


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Furthermore, the corporation tax act mentions certain types of profit participating interestthat are non-deductible. These are in particular, profit participating bonds and paymentsunder so-called “bailleur de fonds”, a kind of silent partnership. Profit participating interestthat will strip all taxable income at the level of the debtor, could very well fall under this term.

Is it possible to obtain a ruling from the tax authorities as to the deductibility of interest? If so,at what conditions may it be obtained?Rulings can be obtained with the tax authorities. In the event that a participation is financed,the aforementioned safe harbor ratio of 85%-15% must be observed. Furthermore a detaileddescription of the structure and information on the client needs to be produced. Rulings areon a personal basis and the tax authorities are obliged to observe secrecy.

4.5 Tax havensAre there specific provisions as to the interest accrued in tax havens?In the event that a Luxembourg company does not have a permanent establishment in aforeign jurisdiction all interest accruing will be attributed to the Luxembourg company, and assuch constitute taxable Luxembourg source income.12

Should a Luxembourg company have a permanent establishment in a tax haven and interestis accruing on the account of such permanent establishment, the interest income is taxablein Luxembourg as well. In Luxembourg the profits of a permanent establishment are onlyexempt on the basis of a double tax treaty. Tax treaties are generally not concluded with taxheavens, hence, all income, including interest income, arising in the tax haven remains taxablein Luxembourg.13 If no treaty is concluded, a credit is available for offset.If a Luxembourg company sets up a subsidiary in a tax haven and interest accrues at the levelof that subsidiary, then this income is not taxable in Luxembourg. It should be noted that theparticipation exemption will most likely not apply, and that therefore distributed dividendsand realized capital gains will form taxable income at the level of the Luxembourg parentcompany.

4.6 Favorable tax regimeIs there a favorable tax regime for (i) corporate tax of centralizing entities, (ii) taxation of cashpooling operations (VAT, interest)?In principle there are no qualified regimes special to cash pooling available for centralizingentities. However, there are many ways to create a tax efficient structure In Luxembourg andrulings have been obtained in that respect in the past.

4.7 Transfer price issuesDo cash pooling operations raise transfer-pricing issues? Interest paid to an affiliated entity needs to be at arm’s length. If interest is not at arm’s

12 This for instance the case if a Luxembourg company has an account with a bank on the British Virgin Islands: the interest accruing on such account is taxable in Luxembourg

13 In general there is no special anti-abuse provision relating to tax havens. The only difference is, as mentioned, that if a permanent establishment is situated in a normally taxed environment, such income may be exempt, provided that a double tax treaty that safeguards the exemption is in force.

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length, a correction may follow. Consequently, part of the interest is requalified as a deemeddividend, or an informal capital contribution, as the case may be. The requalified amount isnot deductible.14 Generally the Luxembourg tax authorities consider the 12-month Euriborrate, increased with 200 basis points to be a safe harbor. Should the interest in a certain eventexceed this rate, then the tax payer may be requested to substantiate the arm’s lengthcharacter (with for instance a transfer pricing report). Furthermore, if, and to the extent that,a Luxembourg company is in an in- and on-lending position, it needs to apply an at arm’slength taxable margin. The margin varies between ½% and 1/64%, depending on theamounts involved and the risk profile of the activity.


Reporting obligations are aimed at elaboration of the balance of payments and the followingof the overseas position of Luxembourg. However, there are no specific reporting obligationsin Luxembourg bearing upon the centralizing entity, each centralized entity or the bank.


There are no exchange control regulations in Luxembourg.


The specific accountancy obligations depend on the form of the entities participating in thecash pooling arrangement.Article 8 of the Luxembourg Commerce Code provides that the commercial companies shall,once a year, draw annual accounts for the purpose of their business.Public companies (as the public liability companies and the partnership limited by shares) arebound by the provisions of articles 72 to 75 of the 1915 Law, as well as cooperativecompanies and private limited companies.

The credit establishment, the professional of the financial sector, the insurance companies andthe investment companies are regulated by specifics provisions.

14 Hence, the remaining part remains deductible. As mentioned under 4.2, withholding tax may be imposed on requalified interest, against a rate up to 15%.


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8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?The law of 27 July 2007 amending the law of 2 August 2002 on the protection of individualsagainst data proceedings in Luxembourg establishes an obligation to the person (in charge ofthe processing as soon as a system of date collection is carried out in Luxembourg) ofnotification (or authorization as the case may be) to the National Commission to DataProtection15. There are also specific requirements in case of a transfer of data processing toanother country.The use of Internet for purposes of communication between participating companies, andbetween the latter and banks relating to bank accounts information, reporting and transferorders require high security technical measures. Usually the banks provide the companieswith a high secured systems and takes into account the requirements specified above.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?There are no there financial reporting, evaluation and control obligations associated with cashpooling arrangements in Luxembourg.

15 Article 12, 14 and 18 of the law of 27 July 2007

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UNDER MAURITIAN LAW

This contribution does not constitute a legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Mauritius. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Iqbal RajahbaleeBarrister and Head of ChambersTel: + (230) 2137920Email: [email protected]

Joel LambertLegal ConsultantTel: + (230) 2137920Email: [email protected]

BLC5th Floor Unicorn Building - 18N Frère Félix de Valois Street

Port Louis, Mauritius


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The provision of credit is not in Mauritius the exclusive prerogative of banks. Mauritius lawdistinguishes between the grants of loan made in the course of a business activity, and thosemade as a business activity. Loans can be freely made if they are necessary and incidental tooperations of a business, in which case no license or authorization from a regulator is required.A license is required when the granting of loans is the primary purpose and object of the lenderand it is done by way of a business activity proposed to the public. Where the loans are madeby deposit taking institutions from deposits raised from the public, the lender is required to belicensed as a bank or a financial institution under the Banking Act 2004. Where the lender usesits own private fund to provide credit financing, it is licensed as a non-bank financial institutionby the Financial Services Commission (“FSC”) and is governed by the Financial Services Act 2007(“FSA”). The list of financial services which are governed by the FSA is set out in the SecondSchedule to the Act and includes “Credit Financing” and “Treasury Management” among others.Institutions and person providing credit and loans by way of business activity other than banksand licensees under the FSA are subjected to the provisions of the Money Lenders Act whichregulates in practice micro-financing. Lending operation within a cash pooling arrangement organized and monitored by a person orcompany whose business is to provide treasury management services shall be considered as aregulated financial activity which could only be exercised under a license delivered by the FSC.New licensing conditions have been announced in the wake of the promulgation of the FSAwhich came into force on 28th September 2007. For the time being the criteria rest essentiallyon a minimum capital requirement, adequate human and technical resources and qualificationsof its promoters and executive cadres as “fit and proper” persons. Typically cash poolingarrangement between and among related companies, that is to say companies that stand asparent or subsidiaries to one another, would attract less stringent licensing conditions whereasthose between and among unrelated companies would be more heavily regulated. A companyparticipating in a cash pooling scheme without a license commits an offence under the FSA andis liable to a fine not exceeding one million rupees (around EUR 25,000) and to imprisonmentfor a term not exceeding 8 years. No distinction is made between the types of the loans whether short/mid/long term loans. It isopen to invest in all variety of investment products including derivatives without any restriction.

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On the assumption that the notional pooling will be construed as an arrangement to allowfor treasury management, it will require a license which once granted does not imply anyprohibition/restriction regarding the implementation of notional pooling whatever theinterest calculation or other technique utilized. To the extent notional pooling as opposed to ZBA cash pooling does not give rise to physicaltransfer of cash, banks may require cross guarantees from each centralized entity to limit theircredit risk in the case of an insolvency of any of the centralized entity.



The centralization of exchange rates and risks by way of any arrangement to buy from andsell to the centralizing entity all the foreign currencies of a given participating entity does notrequire any approval or consent insofar as such activity is encompassed by the licensedelivered by the FSC to operate as treasury manager. There is no exchange control regulationin Mauritius.



There is no distinction being made under Mauritian laws between cash pooling arrangementsand centralized cash management insofar as both transactions could be performed under thesame license for treasury management purposes. As a consequence, should the centralizingentity operate a management of payments and collective program, the latter shall be deemedto conduct treasury management activity and may be required to apply for a license with theFSC.



Can/must the banks disclose the account statements of centralized entities to the anti-moneylaundering agency? Can/must a bank disclose account statements to the tax authorities?

In Mauritius, banks and financial institutions1 shall comply with a duty of confidentiality setforth under the Banking Act. Such duty of confidentiality prohibits banks to disclose directlyor indirectly to any person any information relating to the affairs of any of its customers

1 Financial Institution means under the Banking Act 2004, any bank, non-bank deposit taking institution or cash dealer licensed by the central bank.


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including any deposits, borrowings or transactions or other personal, financial or businessaffairs, without the prior written consent of that customer or his personal representative.Accordingly, the centralizing entity may obtain from the banks holding the accounts ofcentralized entities information on such accounts provided that such centralized entities gavetheir express written consent for such disclosure to their respective banks authorizing thecentralizing entity to access the requested information.

Further exceptions to this duty of confidentiality are carved out, namely with respect to thefight against money laundering. To this end, the Banking Act provides that the duty ofconfidentiality imposed hereunder shall not apply where the bank is required to make a reportor provide additional information on a suspicious transaction to the Financial Intelligence Unitunder the Financial Intelligence and Anti-Money Laundering Act 2002. Equally, suchconfidentiality cannot be opposed to any competent authority in Mauritius2 or outsideMauritius who requires any information from a bank relating to the transactions and accountsof any person and may apply to a Judge in Chambers for an order of disclosure of suchtransactions and accounts or any part thereof as may be necessary. Such judicial order fordisclosure of bank information is not granted except where the information is legitimatelyrequired for the purpose of a suspected offence or to protect some valid interest and onserious evidence to that effect3.



“Know your client” obligations apply to all areas of financial services. Under the FinancialIntelligence and Anti-Money Laundering Act 2002, and the specific code of business applicableto each sector of the financial services industry, the identity of the applicant for the openingof a bank account must be obtained and verified prior to the opening of the account or theundertaking of a transaction where; (i) a business relationship is to be established, (ii) a one-off transaction exceeding Rs350,000 (around EUR 8 000), (iii) a series of linked one-offtransactions which together exceed Rs350,000, or (iii) the one-off transaction is suspicious forany reason. Thus, the financial institutions shall verify:

i. the identity of those who have control over the company’s business and assets, moreparticularly a) their directors,b) their significant shareholders andc) their authorised signatories.

ii. the legal existence of the company.

The financial institution shall made enquiries and call for proof particularly form publicauthorities like the Registrar of Companies, that the company continues to exist and has notbeen, or is not in the process of being, dissolved, wound up or terminated and by conducting

2 Including the Chief Executive of the FSC, the Director-General of the Mauritius Revenue Authority etc.3 See section 64 of the Banking Act 2004.

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in cases of doubt a visit to the place of business of the company, to verify that the companyexists for a legitimate trading or economic purpose. It would also seek to have on its recordpublic evidence of the company’s incumbents.

1.4 Outsourcing


Treasury management is considered as a regulated financial activity in reason of the natureof the activity carried out, irrespective of the person operating such activity whether within agroup or outside that group. An outsourcing of the cash pooling function to a person notbeing a group member is feasible provided always that the person to whom has beenentrusted such cash pooling function is licensed by the FSC in accordance with the FSA.

2. CORPORATE LAW



Mauritian laws provide for the setting up of different legal corporate bodies organized invarious forms including classic public and private companies which are deemed to carry outcommercial activities and “sociétés” under Mauritian Civil Code which are normally meant tocarry out civil activities. Further, the Companies Act 2001 (Companies Act) provides for thesetting up of offshore companies conducting qualified global business4 holding either acategory 1 global business license or a category 2 global business license. Trading Trusts maybe set up under the Trusts Act 2001.

There is no legal restriction regarding the form of either the centralizing entity or thecentralized entities. Hence, choosing one form of body corporate compared to another willdepend more on the type of organization and operations to be carried out (local business orglobal business) or the advantages provided by one type of legal vehicle as opposed toanother.



Under the Companies Act 2001, a company may, but does not need to, have bylaws (knownunder Mauritian law as the constitution). The activities to be carried out by that company,

4 For category 1 global business licence among others; aircraft financing and leasing, asset management, consultancy services, employment services, financial services, funds management and for category 2 global business licence; trading (non financial), passive investment holding, non financial consultancy, IT services, logistics.


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known as the objects of the company need not to be included in its constitution where thecompany opted for same. Accordingly, cash pooling activities need not to be contemplated inthe company’s constitution.


How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities? Is there an obligation to offer theparticipating entities market financial conditions (i.e. the “arm’s length principle”)? What arethe liabilities and sanctions in case of violation of the corporate benefit of a participating entity(cancellation of the agreement, management liability, extension of bankruptcy proceedingsetc.)? Do they apply to directors, officers and shareholders?

Companies under the Companies Act are managed in their day to day affairs by a Board ofDirectors. The Act provides for a set of duties and obligations the directors of a company shallobserve and complied with. In its section 143 (1) (c), it particularly provides for the overridingprinciple which states that directors shall exercise their powers honestly, in good faith, in thebest interests of the company and for the respective purposes for which such powers areexplicitly or impliedly conferred.

However, such duty of directors to act in the best interests of the company may be carvedout where the company is a wholly-owned subsidiary. In such a case when exercising thepowers or performing the duties as a director, if expressly permitted to do so by theconstitution of the company, a director may act in a manner which he believes is in the bestinterests of that company's holding company even though it may not be in the best interestsof the company of which he is a director. The foregoing shall not however be construed asassimilating the holding company to its subsidiary for liability purposes. Under Mauritian laws,the two entities shall be distinguished insofar as they are distinct and have independent legalpersonality known as the corporate veil.

Should the director act in breach of the above-mentioned duties, he shall (i) be liable tocompensate the company for any loss it suffers as a result of the breach (ii) be liable toaccount to the company for any profit made by the director as a result of such breach, and(iii) any contract or other transaction entered into between the director and the company inbreach of those duties may he rescinded by the company.

Regarding the market financial conditions, from a corporate standpoint there is no obligationto offer to the centralized entities market financial conditions, such arm’s length principleshall merely apply for tax purposes.



Mauritian set of laws do not provide for the remuneration of the centralizing structure. Suchremuneration is therefore left to contractual arrangements which could include differential

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rate between the upstream and the downstream of loans/advances, lump sum fee and equallyany management fee.

2.5 Investment of excess cash by the centralizing entityAre there prudential investment rules? As a general rule, investment of excess cash shall comply with all the relevant legislation andenough money shall be left in the participating entities to enable them to meet theiroutstanding payments so as to preclude any liquidity risk. The investment of excess cash ispermitted, subject to the above restriction, as long as the cash invested, is the group own cash.For instance, if there is within a group a participating entity which is in fact is an insurancecompany, the money invested via the centralizing entity may be construed as not being itsown cash and in such a case, the FSC may exercise its supervisory oversight and take theappropriate sanction insofar as the investment of such money could be prejudicial to theconsumers of that participating entity or to its overall prudential status.

2.6 Approval of cash pooling arrangementDoes the cash pooling arrangement need to be approved by the management board /supervisory board or the shareholders? Under the Companies Act, the business and affairs of a company is managed by, or under thedirection or supervision of the Board of Directors which is deemed to have all the powersnecessary for managing, directing and supervising the business and affairs of the company.Thereby, subject to the delegation of such powers to a particular director, any agreement,including a cash pooling arrangement shall be approved by the Board of Directors of, theparticipating entity or the centralizing entity.

2.7 Specific aspects relating to acquisition financing exitAre there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement involving the target modifythe rules?The repayment of the acquisition loan by the target is considered under Mauritian laws as afinancial assistance for the purpose of or in connection with the acquisition of this companyown shares. Financial assistance is permitted only if the Board has previously resolved that (i)giving the assistance is in the interests of the company, (ii) the terms and conditions on whichthe assistance is given are fair and reasonable to the company and to any shareholders notreceiving that assistance and (iii) immediately after giving the assistance, the company isenable to satisfy the solvency test5. However, if the amount of any financial assistance together with the amount of any otherfinancial assistance which is still outstanding exceeds 10 per cent of the company's statedcapital, the company shall not give the assistance unless it first obtains from its auditor acertificate that the latter has inquired into the state of affairs of the company and there isnothing to indicate that the opinion of the Board that the company shall, immediately after

5 A company shall satisfy the solvency test where (i) the company is able to pay its debts as they become due in the normal course of business and (ii) the value of the company's assets is greater than the sum of the value of its liabilities and the company’s stated capital.


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giving the assistance, satisfy the solvency test, is unreasonable in all the circumstances. Itshould be further stressed that in a private company, where all the shareholders agree to orconcur in the giving of financial assistance for the purpose of, or in connection with, thepurchase of that company own shares, such action is deemed to be validly authorized by thecompany, notwithstanding any provision in the constitution of the company.

The implementation of a cash pooling arrangement does not modify the abovementionedstatutory obligations unless the resolution of the Board approving that cash poolingarrangement approves equally such financial assistance in compliance with the aforesaidconditions.

2.8 Termination


The termination of the cash pooling arrangement is admitted as a matter of contract forsolvent companies and no company law restricts such contractual termination.


On the assumption that there is nothing to the contrary in the contractual arrangementunderpinning the notional or ZBA pooling, the insolvency of one of the participating entitydoes not trigger the termination of the pooling arrangement. All trading or operations onbehalf of or in the name of the insolvent company must cease. Insolvency does not limit theright of the centralizing agency to terminate the Agreement. To the extent that there arecertain unsettled liabilities or assets between the insolvent company and any other party tothe pooling arrangement, the liquidator of the insolvent company may claim any benefit dueto the company but insolvency per se shall not extend automatically to the other participantsin the arrangement.

4. TAX ISSUES



Like most financial services, the issue, transfer or receipt of, or dealing with money, anysecurity for money or any note or order for the payment of money and the operation of anycurrent, deposit or savings account are excepted from the Mauritius Value Added Tax (VAT).The current VAT charge bears a rate of 15 %.

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For instance, the Value Added Tax Act (VAT Act) stipulates expressly that the making of loansbetween entities within the same group is regarded as an exempted supply6. However, Section21 (2) (a) of the VAT Act provides that no input tax shall be allowed as a credit in respect ofgoods and services used to make an exempt supply, i.e. no recovery of VAT shall be allowable.Nonetheless, where goods or services are used to make both taxable supplies and exemptsupplies, the credit in respect of those goods or services are allowed for deduction in theproportion of the value of taxable supplies to total turnover on the basis of either the actualfigures for the previous accounting year or the estimated figures for the current accountingyear in the case of a new business.

4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?Where interest is received by a Mauritian company in consideration for a loan under a cashpooling scheme, such interest is considered by the tax authorities as a chargeable income andas such is subject to normal corporate tax at a rate of 15% as from the 1st July 20087. If aMauritian company pays interest to the centralizing structure or to another participatingentity situated in a foreign country, there shall be, as the case may be, a withholding tax atthe rate and conditions set forth in the relevant double taxation agreement. Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries? 8

There is however no withholding tax to non resident out of interest payable from Mauritius.

6 Means a supply of such goods or services exempted from the payment of VAT.7 The actual rate for the current year of assessment (1st July 2007 to 30 June 2008) is 22.5% 8 It should be noted that 8 treaties await ratification with Bangladesh, Malawi, Nigeria, Russia, Tunisia, State of Qatar, Vietnam, Zambia and 6 treaties are being

negotiated with Canada, Czech Republic, Egypt, Greece, Portugal and Republic of Iran.

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Fran

ce

Ger

man

y

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate - 0% - - 0% - 0% 0% 0% 0% - 0% - 0% -

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 0% - - - - - 0% - 0% - - - - -


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4.3 Stamp duty


The loan agreements to be entered into for the granting of loans/advances within a group aresubject to a stamp duty of Rs.500. (around EUR 13) payable to the Registrar General onregistration. But registration is not compulsory and is optional for proof of effective date.



The Income Tax Act 1995 (Income Tax Act) does not provide for a thin capitalization rulestricto sensu. However, if the tax authorities are satisfied that there is an excess debt (due tointra-group loans) compared to the equity of a given company, the tax authorities maychallenge the deductibility of those excess interest on the ground of the anti-avoidanceprovisions9. In practice, the tax authorities apply a tolerance of three times the intra-groupdebt to the equity of a company and the interest paid thereafter are disallowed fordeductibility purposes.


Under the Income Tax Act, any person who derives or may derive any income may apply tothe Director-General for a ruling as to the application of the Income Tax Act to that income.The application for ruling shall be in writing and shall:a) include full details of the transaction relating to the income together with all documents

relevant to the transaction;b) specify precisely the question as to which the ruling is required;c) give a full statement setting out the opinion of that person as to the application of the

Income Tax Act to that income; andd) be accompanied by such fee as may be prescribed.It is useful to stress that the applicant for ruling may rely upon such ruling which shall bepublished as a statement binding on the Director-General as to the application of the IncomeTax Act to the facts (but only to those facts) set out in that ruling.However, the Director-General has discretionary powers under the Income Tax Act and mayby publication in the Mauritius Gazette notify that a ruling which has been published shallcease to be binding, with effect from a date which shall not be earlier than the date of thatnotice.

4.5 Tax heavens


There is no specific provision on income arising in tax havens. The Mauritian tax laws providefor a general device aiming to combat tax evasion named as the anti-avoidance provisions.Such provisions apply to transactions designed to avoid liability to income tax. Such piece of

9 See paragraph 4.5 (Tax heavens).

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legislation has been drafted in such broad terms so as to encompass any transaction10 thathas been entered into or effected and that transaction has, or would have had for thepurposes hereof, the effect of conferring a tax benefit11 on a company, having regard inter aliato:a) the manner in which the transaction was entered into or carried out;b) the form and substance of the transaction;c) the result in relation to the operation of the Income Tax Act that would have been achieved

by the transaction;d) whether the transaction has created rights or obligations which would not normally be

created between persons dealing with each other at arm's length under a transaction ofthe kind in question; and

e) the participation in the transaction of a corporation resident or carrying on businessoutside Mauritius.

Where the Director-General is satisfied of the above, he may conclude that these transactionshave been entered into or carried out for the sole or dominant purpose of obtaining a taxbenefit. In such a case, the Director-General may assess the liability to tax of that companyas if the transaction or any part thereof had not been entered into or carried out or in suchother manner as the Director-General considers appropriate to counteract the tax benefitwhich would otherwise be obtained.

The practice of the Mauritius Revenue Authority is not to resort abusively to the anti-avoidance provisions of the Income Tax Act.



Except as stated above in respect of V.A.T, there is no favorable tax regime under Mauritiantax laws dedicated specifically to cash pooling and cash management operations for domesticcompanies. However the general offshore legislation and tax alleviation can be made toextend to cash pooling structures covering companies operating outside Mauritius. TheCentralized Entity would then seek a Global Business License. The tax would be reduced atworse to 3% by application of some generous unilateral tax credit provisions.



Cash pooling transactions as any other related party transactions may, where they are notentered into at arm’s length, give rise to transfer pricing issues which may be challenged underthe anti-avoidance provisions of the Income Tax Act. Again the Mauritius Revenue Authority isvery lenient on the application of pricing policy particularly in the financial services sector.

10 Transaction includes a transaction, operation or scheme whether or not such transaction, operation or scheme is enforceable, or intended to be enforceable, by legal proceedings

11 Tax benefit means the avoidance or postponement of the liability to pay income tax or the reduction in the amount thereof.


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The cash pooling and cash management operations carried out within a group need not bereported to the Central Bank insofar as such central bank reporting obligations apply only tobanks and financial institutions licensed under the Banking Act. As regards cash poolingarrangement licensed by the FSC, reporting would be required under the condition of thelicense to the FSC.


Following the suspension of the foreign exchange control by the Finance Act 1994, there is nolonger any restriction on foreign exchange. It is unlikely that these regulations will be re-introduced. There is a government undertaking that if ever this should occur, such exchangecontrol regulation shall not apply to global business companies carrying out offshore businessactivities.


According to the Companies Act, the financial statements and the consolidated financialstatements shall, in the case of public and private companies be prepared in accordance andcomply with the International Accounting Standards which includes the InternationalAccounting Standards issued by the International Accounting Standards Committee, theInternational Financial Reporting Standards issued by the International Accounting StandardsBoard, and any Standards, by whatever name called, issued by these bodies or their successorbodies. In the case of an offshore company holding a category 1 Global Business License, thefinancial statements could be prepared in accordance with any other internationally acceptedaccounting standards and for an offshore company holding a category 2 Global BusinessLicense, no accountancy obligations and standards are being imposed by the Companies Act.

Hence, the accountancy obligations and standards in force in Mauritius depend on the typeof company rather than its participation to a cash pooling and cash management program.


The Electronic Transactions Act 2000 (Electronic Act) proclaimed on August 1st of 2001provides for an appropriate legal framework to facilitate electronic transactions and

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communications by regulating electronic records and electronic signatures and the securitythereof. The Electronic Act establishes the authenticity and integrity of correspondence in anyelectronic medium and helps establishing uniformity of rules, regulations and standardsregarding the authentication and integrity of electronic records and further prevents theincidence of forged electronic records and fraud in electronic commerce and other electronictransactions. To facilitate and encourage the use of electronic transactions, Mauritian law ofevidence has accordingly been amended to take into account the recognition of electronicsignatures as evidence12 before the courts. While issuing a transfer instruction under a cashpooling scheme, the security of the electronic signature can be verified where it (i) is uniqueto the person using it; (ii) is capable of identifying such person created in a manner or usinga means under the sole control of the person using it (iii) and linked to the electronic recordto which it relates in a manner such that had the record been changed, the electronicsignature would be invalidated. A Data Protection Act voted in Parliament in 2004 is stillawaiting promulgation.


The financial reporting, evaluation and control obligations are governed in Mauritius by the Financial Reporting Act 2004 which aims to regulate the reporting of all financial matters.However, those obligations are not associated with cash pooling arrangements.

12 Article 1316-2 of the Code Civil Mauricien


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UNDER MEXICAN LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Mexico. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Jorge A. Sánchez Dávila Direct Dial: (52) (55) 55 11 07 38 Switchboard: (52) (55) 55 33 00 40 Ext. 287 Fax: (52) (55) 55 25 12 27 [email protected].

Jorge A. Sánchez-Dávila is a partner at the Goodrich,Riquelme y Asociados international law firm in MexicoCity in the Corporate, Mergers and Acquisitions, Bankingand Financing, Antitrust and Regulated Sectors areas.

Rosario Huet CovarrubiasDirect Dial: (52) 55 52 07 52 03Switchboard: (52) (55) 55 33 00 40 Ext. 287Fax: (52) 55 55 25 12 [email protected]

Rosario Huet is a partner at the same law firm in theareas of Taxation, International Fiscal Law, CapitalGains Tax, Goods and Services Tax, Income and AssetTax, Tax Appeals, Tax Controversies, Tax Planning, ValueAdded Tax (VAT), Administrative Tax Law, ExpatriateTax, Estate Taxation, and Trusts Taxation.

GRAPaseo de la Reforma 265 - Col. y Del. Cuauhtémoc - 06500 México, D.F. México

GOODRICH, RIQUELME Y ASSOCIADOSGOODRICH, RIQUELME Y ASSOCIADOS

GRAGRA


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1.1.1 ZBA cash poolingDo loans/advances to other group entities require banking authorities’ approval for thecentralized entities or the centralizing entity? Is a distinction to be made between short term,mid term and long-term loans/advances? In Mexico ZBA Cash Pooling implies an arrangement whereby the credit/debit positions ofdifferent accounts are viewed from a single summary perspective, at the same time allowingaffiliates (centralized entities) to utilize their collective liquidity more effectively (i.e., insteadof one subsidiary borrowing while the other is flush with cash). Usually, key features of ZBApooling arrangements imply having a same bank, same country, same currency, segregationof sub-accounts which are then linked to a main account, completely automatic (bank), nomanual transfers required and inter-company lending if separate legal entities participate,which means an arm’s-length interest rate must be assessed. ZBA Balancing aims at optimizing interest result, as all liquidity is ‘swept’ from theParticipating Account(s) to the Master Account and available to be invested with the highestpossible return. The Participating Accounts are left with a Zero Balance, so no interest is dueto the bank.This sort of cash management structure tries to minimize the tension between the two goalsliquidity and profitability. Additionally, it tries to avoid overdraft charges, interest paymentsand costly short-term borrowing thus strengthening the centralized entities balance sheet.In Mexico, loans/advances to other group entities do not require banking authorities’ approvalfor the centralized entities or the centralizing entity as ZBA cash pooling transactions are notregulated activities per se. In light of this, there is no need to draw a distinction between shortterm, mid term and long-term loans/advances. Notwithstanding the foregoing, it must bestressed out that ZBA cash pooling transactions are regularly linked to other banking andfinancial products offered by a credit or financial institution such as a revolving credit line usedby the centralizing and centralized entities in case of an over draft for instance.

Do investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized entities require banking authorities’ approval forthe centralized entities or the centralizing entity? Is an exemption available in groupcompanies?Investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized entities do not require “per se” bankingauthorities’ approval for the centralized entities or the centralizing entity; however, they mightbe subject to certain regulatory requirements or authorizations depending on the type offinancial instrument in which funds are invested (i.e. forwards contracts, futures, options andswaps). Consequently, there is no exemption available in group companies. Attention shouldbe paid to the internal policies and regulations of the centralizing entity as the latter mayrestrict the investment ability of the latter.

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In both cases, is there an exemption available for operations within groups of companies? Whatare the sanctions, if any, for breaching this requirement? There are no exemptions.

1.1.2 Notional pooling Is there any prohibition/restriction on banks/participating entities implementing notionalpooling (i) by way of bank margins reductions, (ii) by way of merging current account balancesof the centralizing and centralized entities in order to create a single balance, or (iii) by way ofcalculating interest payable to each account based on merged scales of interest? Do banksrequire cross guarantees from participating entities? Can such guarantees be capped?Notional Pooling is a mechanism of calculating interest on the combined credit and debitbalances of the Participating Accounts, without physically transferring funds. Each of thecentralized entities will draw benefits from one global liquidity position, without giving up anyautonomy regarding their day to day cash management.In Mexico there are no prohibition/restrictions on banks/participating entities implementingnotional pooling (i) by way of bank margins reductions, (ii) by way of merging current accountbalances of the centralizing and centralized entities in order to create a single balance, or (iii)by way of calculating interest payable to each account based on merged scales of interest.However, internal policies and regulations of each bank may apply.Banks are not expressly required by law to require cross guarantees from participating entitiesor to cap such guarantees.

1.1.3 Centralized management of exchange rates and risksDoes the arrangement whereby a centralized entity agree to buy from and sell to thecentralizing entity all its foreign currencies require banking authorities’ approval or consent?The arrangement whereby a centralized entity agrees to buy from and sell to the centralizingentity all its foreign currencies do not require banking authorities’ approval or consent ascurrently in Mexico there are no exchange controls in effect. However, this can change if theMexican Central Bank (‘Banco de Mexico’) changes said policy.

1.1.4 Centralized management of payments and debt collectionsAre the centralizing entity’s activities as the operator of a management of payments/collectiveprogram subject to approval requirements under any applicable banking regulatory laws? Centralizing entity’s activities as the operator of a management of payments/collectiveprogram are not subject to approval requirements under any applicable banking regulatorylaws. The ‘netting’ rules that apply are those provided by the Federal Civil Code generallyapplicable to compensation.

1.2 Banks duty of confidentialityCan the centralizing entity obtain from banks holding the accounts of centralized entitiesinformation on such accounts?A centralizing entity cannot obtain from banks holding the accounts of centralized entitiesinformation on such accounts as each centralized entity is a separate, autonomous and


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independent entity from a legal standpoint and each entity is therefore protected by bankingsecrecy (bank-client privilege). In case the centralizing entity needs to obtain any informationfrom the bank it would need to have the express consent from the relevant centralized entityor from the latter’s legal representative, beneficiary, account holder or any other authorizedparty.

1.3 Other regulatory requirements Are there specific requirements in regulated financial activities (e.g. insurance industry, assetmanagement etc.)? Is there a requirement that the global effective rate be stated in thecentralization agreement? Are there specific requirements in connection with the opening ofbank accounts (KYC, language…)?There are no specific requirements in regulated financial activities and there is no requirementthat the global effective rate be stated in the centralization agreement; however, it isconvenient and common practice to designate the source where the applicable rate ispublished. Specific requirements in connection with the opening of bank accounts such as ‘Know yourClient’ policies exist and are basically provided for in the Law of Credit Institutions whichprovides that banks and financial institutions must:(a) create procedures to prevent anddetect any act which may constitute a crime; (b) report any such act to the Ministry ofFinance through the National Banking and Securities Commission, including operations withtheir clients and internal actions of officers or employees of the bank;(e) keep identificationinformation of clients, and information regarding any acts reported to the authorities, for 10years. The regulations also include an assessment of the risk that each client may representfor the institution. Other Guidelines issued by Ministry of Finance define the different typesof operations, according to the risk that each operation may pose, and provide that“Suspicious Operations” and “Unusual Operations” are to be reported to the authorities. Areport of “Relevant Operations” must be submitted quarterly, and must include all operationsexceeding USD 10.000.00.

1.4 OutsourcingCan the cash pooling function be entrusted in whole or in part to an agent that is not memberof the group? Since cash pooling is not regulated in Mexico per se then it is feasible that such function beentrusted in whole or in part to an agent that is not member of the group unless said functionimplies or comprises a regulated banking or financial activity or product.

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2. CORPORATE LAW

2.1 Form of participating entitiesAre there restrictions as regards the form of entities that can participate in cash poolingarrangements, either as a centralized or centralizing entities (certain forms of entities,groupings, partnerships…) and/or the form or the nationality of shareholders (state ownedentities, foreign shareholders…)?Under Mexican Law there are no restrictions as regards the form of entities that canparticipate in cash pooling arrangements, either as a centralized or centralizing entities and/orthe form or the nationality of shareholders, except for non-profit associations, civilpartnerships and any other forms of entities whose corporate purposes or the law restricts orprevents them from engaging in transactions for speculation purposes.

2.2 Corporate purposeDo the activities carried out in cash pooling arrangement need to be expressly contemplated inthe bylaws?Activities carried out in cash pooling arrangement do not need to be expressly contemplatedin the bylaws as long as said activities are deemed to be operations within the ordinary courseof business of the relevant entities and as long as the entity is not a non-profit associations,a civil partnerships (in case of transactions having speculation purposes solely) or any otherform of entity whose corporate purposes or the law restricts the entity from engaging intransactions for speculation purposes. In case the activities entail the creation of a collateralto secure obligations of third party including centralized entities pertaining to the same group,then the corporate bylaws must expressly authorize it.

2.3 Corporate benefit How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities? Is there an obligation to offer theparticipating entities market financial conditions (i.e. the “arm’s length principle")? What arethe liabilities and sanctions in case of violation of the corporate benefit of a participating entity(cancellation of the agreement, management liability, extension of bankruptcy proceedingsetc.)? Do they apply to directors, officers and shareholders?A corporate benefit is generally defined as a result having a positive effect on the company’sfinancial results or accounting. There are no restrictions on the participation of certain entitiesdue to their financial structure (ratios, etc.) and no obligation exists to offer all participatingentities equivalent terms and conditions.Certain restrictions on the type of operations that the centralizing entity may undertake withthe cash of the centralized entities may apply depending on the financial product or servicethat the centralizing entity intends to engage. Banks are required by law to offer theparticipating entities market financial conditions while centralizing entities are also requiredto offer market conditions (i.e. the “arm’s length principle") as explained below.


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2.4 Remuneration of the centralizing entityAre there any prescriptions as to the remuneration of the centralizing entity difference oflending/borrowing rates, lump sum fee…)?No prescriptions as to the remuneration of the centralizing entity difference oflending/borrowing rates or lump sum fee exist and therefore these may be freely agreedamongst the centralizing and centralized entities.

2.5 Investment of excess cash by the centralizing entityAre there prudential investment rules? Prudential investment rules apply to the financial and credit institutions managing cashpooling arrangements. Internal rules of the participating credit and financial institutions mayapply.

2.6 Approval of cash pooling arrangementDoes the cash pooling arrangement need to be approved by the management board /supervisory board or the shareholders? A cash pooling arrangement does not need to be approved by the management board /supervisory board or the shareholders, unless it is expressly required by the corporate bylaws.

2.7 Specific aspects relating to acquisition financing exitAre there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement involving the target modifythe rules? No restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan exist per se.

2.8 TerminationDoes any company law restriction prevent the centralizing entity from exercising itscontractual right to terminate the agreement?No company law or regulation restricts or prevents the centralizing entity from exercising itscontractual right to terminate the agreement; however, agreements are governed bycommercial and civil laws that usually prevent any party to unilaterally terminate a contractwithout a justified cause.

3. BANKRUPTCYWhat are the legal consequences of a participating entity being insolvent or nearly insolvent onthe operations involving the entity (ZBA and notional)? Would this limit the centralizingentity’s ability to exercise its contractual right to terminate the Agreement? Are there any risksthat bankruptcy proceedings issued against the centralizing entity or a centralized entity couldbe extended to other participating group entities?A participating entity being insolvent or nearly insolvent on the operations involving theentity (ZBA and notional) could limit the centralizing entity’s ability to exercise its contractual

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right to terminate the Agreement. For instance, under the Mexican Business ReorganizationLaw (‘Ley de Concursos Mercantiles’) any contractual provision that may trigger negative ormore onerous consequences on an entity requesting its reorganization are deemed null andvoid. Bankruptcy proceedings may on the other hand, have several consequences and legaleffects over an entity being reorganized such as declaring its debts due and payable as of thedate the reorganization is declared, interest cease accruing, loans and credits denominated inforeign currency which are converted into local currency and certain compensation rulesapply.

In principle, there are no risks that bankruptcy proceedings issued against the centralizingentity or a centralized entity could be extended to other participating group entities; however,if there are inter-company transactions or loans these could be affected by virtue of thebankruptcy proceedings in which the entity being reorganized is involved.

4. TAX ISSUES



a) For ZBA cash pooling with a Mexican resident centralizing entity and Mexican residentcentralized entities.

Services performed by a Mexican resident within Mexican territory are subject to Value AddedTax. The general tax rate of the Value Added Tax is 15%.

If services are provided by residents in the border area to other residents of said border area,according to the definition of the Value Added Tax law, the applicable rate is 10%.

Some financial services that generate interests are exempted from Value Added Tax purposes.This is the case of financial services generating interest received or paid by credit institutions(Mexican banks), credit unions, financial entities with limited purpose, saving and lendingcompanies, and financial factoring companies, in transactions in which said entities requireauthorization as well as for discount of documents pending collection; financial servicesgenerating interests received and paid by financial entities of multiple purposes when saidentities are part of the financial system according to the definition of the law, for the grantingloans, and performing transactions of financial factoring or discount of documents pendingcollection; those received by the general warehouse for credits granted guaranteed withpledge securities; as well as commissions of agents and brokers of credit institutions for saidtransactions.

Services related to derivatives as regulated in Article 16-A of the Federal Tax Code areexempted of Value Added Tax as well.

It is very important to bear in mind that amounts of money owned by an entity may betransferred to the bank account of any other entity as payment, loan, deposit or gift, andtherefore, flow of the cash in cash pooling agreements falls within the scope of loans anddeposits.


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b) For ZBA cash pooling with a centralizing entity residing abroad and centralized entitiesresiding in Mexico.If services are not rendered by a Mexican resident but by a non-resident entity, thecorresponding Value Added Tax if caused, is an importer’s liability (Mexican entities), andcreditable in its monthly tax return against any Value Added Tax caused from the sale or leaseof goods and rendering services.

4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?Interests are taxable income for Mexican resident companies and must be accrued to theworldwide income of any Mexican resident entity. The general corporate tax rate is 28%.There is no different rate for fixed term loans and current account advances.For non-resident companies there are different withholding rates depending on the nature ofthe entity paying or receiving interests (banks, reinsurance companies, suppliers of fixedassets) and the destination of the corresponding credit or loan. If no special rate applies, thegeneral rate is 28% on the amount of interest without any deduction.The above mentioned rates are modified by the double taxation treaties’ rates.

Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?Yes, there is withholding income tax on interest paid to foreign entities related parties.

* The 40% rate is applicable to payments made to related parties with income subject to a preferential tax regime. Thedefinition of income subjected to a preferential tax regime includes income which is not subject to tax in a jurisdiction or ifthe corresponding tax in said jurisdiction is less than 75% of the income tax that said income would have caused in Mexico.

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4.3 Stamp duty


There is no stamp duty in Mexico.



As of 2005 there are “thin capitalization” rules in the Mexican Income Tax Law. According tothe rules currently in force, interests paid to non-resident related parties are non-deductiblewhen the ratio between the debts of a Mexican entity and the net worth of it exceeds a 3 to1 proportion.

In the calculation of non-deductible interest, it is now necessary to include the average annualoutstanding sum of debts contracted among related parties which are foreign residents, andthe total of the taxpayer’s interest-bearing debts.

When the annual average outstanding sum of the taxpayer’s debts towards related partieswhich are non-residents is less than the excess between the total of the average interest-bearing debts and the net worth multiplied by three, the total of interest accrued from debtscontracted with related parties shall be non-deductible. In the opposite case, the non-deductible interest shall be the result of multiplying the total interest by the number resultingfrom dividing the excess amount, between the average outstanding sums of debts contractedwith related parties.


Yes, according to the provisions of the Income Tax Law it is possible to obtain a ruling in orderto extend the equity ratio, when the taxpayer proves that the activity performed needs moreleverage and the taxpayer applies for an advance price agreement in terms of the provisionsof the Federal Tax Code.

4.5 Tax havens


a) For withholdings:

The withholding rate on interests paid to residents whose income is subjected to preferentialtax regime is 40%, unless the entity who receives the payment is a bank and said bank isregistered before the Mexican tax authorities. In this latter case the applicable rate is 10%.

There is an administrative provision issued by the Tax Administration Service according towhich the general withholding rates applicable to payments made to residents in preferentialtax regimes from source of income located in Mexico are applicable if said payments aremade to non-related parties.

b) For investments made by Mexican residents:

Mexican residents must account for their income, dividends and profits originating inpreferential tax regimes and inform the tax authorities in February of each year. Income


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derived from preferential tax regimes is deemed to be received at the time it is generated. Theincome may not be commingled with other income; the profit will be taxed separately andsuch tax is paid annually.

For said purposes, on one hand, there is a list of jurisdictions which are deemed preferentialtax regimes but the definition of income subjected to a preferential tax regime includesincome which is not subject to tax in a jurisdiction or if the corresponding tax in saidjurisdiction is less than 75% of the income tax that said income would have been generatedin Mexico.

Furthermore, it is considered income subject to a preferential tax regime that generatedthrough one or more foreign structures or entities transparent for tax purposes, in which thetaxpayer has an indirect participation through any structures or entities transparent for taxpurposes.

There are administrative rules that exclude from the scope of preferential tax regimes directand indirect investments that imply a shareholding inferior to 10% on the capital of theforeign entity if certain requirements are met.



(i) There is no favorable tax regime for corporate tax of centralizing entities.(ii) See answer to 4.1 for VAT purposes.

The rate of 4.9% applies to interests paid to residents from securities placed in the stockmarket, as well as the gain obtained from the transfer of said securities, and from thosecoming from certificates, acceptances, securities, loans or other credit rights against a Mexicanbank, financial entities of limited purpose, financial companies of multiple purpose or fromancillary credit activities’ enterprises, as well as those placed through banks or stock housesin a country that has in force with Mexico a treaty to avoid double taxation, as long as thenotice related to said instruments has been filed before the National Banking and SecurityCommission provided in the Security Market Law, and some requirement are met.

Said rate is not applicable when the beneficial owner of the interests, receives more than 5%of said income and has more than 10% of the capital stock of the securities’ issuer, or whenits capital is held in more than 20% by the securities issuer.

There is an exemption for non-residents companies on interest obtained from derivativesrelated to rates. This is the case of derivatives referred to the Inter Bank Equilibrium InterestRate (Tasa Interbancaria de Equilibrio T.I.IE.), or securities issued by the Mexican FederalGovernment and any other determined by the Tax Administration Service through generalrules, placed in Mexico in the stock market, as long



All considerations between related parties are subject to transfer pricing regulations butparticularly those between related parties residing abroad.

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5. CENTRAL BANK REPORTINGAre there central bank reporting obligations (balance of payments), bearing upon thecentralizing entity / each centralized entity / the banks?No central bank reporting obligations (balance of payments), bearing upon the centralizingentity / each centralized entity / the banks apply.

6. EXCHANGE CONTROL REGULATIONSAre there any restrictions to the transfer of cash to foreign entities of the same group or theconversion of the local currency in other currencies?There are no restrictions to the transfer of cash to foreign entities of the same group or theconversion of the local currency in other currencies; however, the Mexican Central Bank mayimpose restrictions in the future as it has the authority as a sovereign entity to do so, althoughthis is unlikely.In order to determine the tax caused in cash pooling transactions, the Federal Tax Codeincludes a general rule for conversion of foreign currency into local currency.

7. ACCOUNTANCY OBLIGATIONS AND STANDARDSWhat if any are the specific accountancy obligations and standards for entities participating ina cash pooling arrangement?According to the Mexican laws, there are no specific accountancy obligations and standardsfor entities participating in a cash pooling arrangement.In any case Mexican GAAP rules must be applied by entities.

8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?Certain data securitization aspects should be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks such as data protection, bankingsecrecy (bank-client privilege) and regulations governing electronic transactions andcommerce.


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9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?As of the obligations for tax purposes, Mexican resident entities must file an annualinformative tax return before the tax authority no later than February 15th of each yearreporting loans obtained from or guaranteed by residents abroad and furnishing the followinginformation:

a) The unpaid balance, as of December 31 of the previous year, of loans obtained from orguaranteed by residents abroad; and

b) The type of financing, name of the beneficiary of the interest, type of currency, interestrate, and the due dates of the principal and accessories, of each one of the loansmentioned.

Additionally, in order to deduct interest paid to foreign residents, the informative tax returnsrelated to withholdings must be duly filed. Finally, in connection with investments in preferential tax regimes, an informative return mustbe filed in February of each year regarding investments corresponding to the prior tax yearmade or maintained during the prior year in countries or territories with preferential taxregimes, or with companies or entities which are resident of or located in said jurisdictions,together with statements of accounts regarding deposits, investments, savings and others, asapplicable, or the documents which are subject to the general rules established by the TaxAdministration Service.

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UNDER DUTCH LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in the Netherlands. The principles set out below shouldbe considered in relation to individual circumstances, with legal and tax counsel.

[email protected]

R.L.S. [email protected]

S.W.A. [email protected]

S. den [email protected]

C. [email protected]

Simmons & SimmonsPostal adress: PO Box 79023

Visiting adress: WTC H Tower - Zuidplein 100 - 1077 XV Amsterdam

Tel: +31 (0)20 890 99 00 - Fax: +31 (0)20 890 99 99


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1.1.1 ZBA cash poolingDo loans/advances to other group entities require banking authorities’ approval for thecentralized entities or the centralizing entity? Is a distinction to be made between short term,mid term and long-term loans/advances? Under the Dutch Financial Supervision Act (Wet op het financieel toezicht) (“FSA”) a centralizingentity (and/or the centralized entities) might under certain circumstances qualify as a “bank”. Under the FSA the term “bank” is defined as “the party which business it is to receive funds,outside a restricted circle, from parties other than professional market parties, and to grantcredits (i.e. loans/investments) for its own account”. It is prohibited for companies having theircorporate seat in the Netherlands to be active as a bank without a license from the DutchCentral Bank.Generally, centralizing companies (or centralized companies as the case may be) will beexempted from the prohibition provided that its activities are limited to receiving funds from (i)within the group of companies to which the relevant company belongs (this will usually beregarded as receiving funds from inside a restricted circle); and/or (ii) professional market parties(such as banks). We note that in specific cases it is advisable to obtain legal advice whether ornot the criteria described above have been complied with. From a regulatory point of view there is no distinction to be made between short term, mid termand long-term loans/advances.

Do investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized entities require banking authorities’ approval forthe centralized entities or the centralizing entity? Is an exemption available in groupcompanies?A centralizing entity carrying out investments in financial instruments on behalf of thecentralized entities can be deemed to provide investment services (as defined in the FSA). Noperson or company may provide investment services in the Netherlands without beingauthorized by the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten).The FSA provides for an exemption for investment firms that only provide services to groupcompanies. It should be noted that such firms are subject to certain behavioural rules.

In both cases, is there an exemption available for operations within groups of companies? Whatare the sanctions, if any, for breaching this requirement? With respect to the various exemptions see the answers to the questions above. Acting inviolation of the prohibitions to act as a bank or an investment firm without the appropriatelicense can lead to severe sanctions such as high fines up to EUR 450.000 per violation or evenimprisonment (although the latter is not customary). Violations of the FSA do in principle not have civil effect (i.e. existing agreements are notsubject to annulment merely because of a violation of the FSA). However, there are certainexceptions to this general rule.

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Banks that are allowed to conduct business in the Netherlands are not prohibited fromimplementing notional pooling schemes with the centralizing and centralized companies.Implementing such arrangements is regular business for Dutch banks. There may be specificregulatory restrictions with respect to certain banks, limiting their possibilities to implementnotional pooling or other cash management arrangements. Generally, banks will require thatthe participating entities provide security. Such security package will often consist of a pledgeof all credit balances of the centralized entities from time to time as security for the debitbalances held by the centralized entities from time to time.



The arrangement whereby a centralized entity agrees to buy from and sell to the centralizingentity all its foreign currencies is from a Netherlands perspective not subject to banking’authorities approval or consent.



The centralizing entity’s activities as operator of a management of payments/collectiveprogram are in principle not subject to approval requirements under applicable Dutch bankinglaws (provided that the prohibitions under 1.1.1 are not violated).




Can/must a bank disclose account statements to the tax authorities?

Generally, the centralizing entity can obtain account information of centralized entities if thishas been agreed upon in the cash pooling documentation.

According to Section 9 of the Disclosure of the Unusual Transactions (Financial Services) Act(Wet melding ongebruikelijke transacties) a bank needs to disclose to the Office for theDisclosure of Unusual Transactions (Meldpunt Ongebruikelijke Transacties) each unusualtransaction of an accountholder. This will inter alia be the case if there is a reason to considerthat the transaction could involve laundering of money or financing terrorism.


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In addition, every corporation which is liable to pay tax in the Netherlands, should keep properrecords according to article 52 of the State Tax Act (Algemene Wet inzake Rijksbelastingen)and disclose the same to the tax authorities. According to article 53 of this act the bank hasto disclose account statements of third parties to the tax authorities (in this case the accountstatements of the centralising/centralised entities).



There are many specific requirements based on inter alia the FSA. It falls outside the scope ofthis article to discuss all such requirements.

As opposed to other European jurisdictions there are no requirements to publish the globaleffective rate in (cash pooling) agreements between non-consumers. Of course, it is possibleto incorporate a rate in the centralization agreement. The Identification Financial Services Act (Wet identificatie bij dienstverlening) provides forcertain KYC procedures in connection with the opening of a bank account.

1.4 Outsourcing


This is possible, provided that the outsourcing entity will always be responsible for compliancewith applicable laws. However, it should be noted that outsourcing might lead tocomplications with respect to the prohibitions and intra-group exemptions described under1.1.1 above.

2. CORPORATE LAW



From a Dutch regulatory point of view there are no formal restrictions. However, it iscustomary that parties participating in cash pooling arrangements have the form of a publiclimited liability company (“Naamloze vennootschap”, hereinafter referred to as “NV”) or aclosed limited liability company (“Besloten vennootschap”, hereinafter referred to as “BV”). Inconnection with inter alia liability aspects it is recommended to use either a public limitedliability company or a closed limited liability company.

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Do the activities carried out in cash pooling arrangement need to be expressly contemplated inthe bylaws? Does the cash pooling arrangement need to be approved by the managementboard/supervisory board or the shareholders?

The articles of association do not have to expressly contemplate the activities carried out inthe cash pooling arrangement. However, the purpose of the arrangement has to be inconformity with the statutory objectives of all companies participating in the cash pool.Under Dutch law a juridical act which is not performed in conformity with the statutoryobjectives of a company is in principle subject to annulment. Therefore, it is advisable toreview (and if necessary amend) the statutory objectives of each participant before enteringinto a cash pooling arrangement.

Usually, the management board of a company is the authorized corporate body to enter intothe cash pooling arrangement on behalf of such company. The management board, howevermay require approval of the supervisory board or another corporate body (e.g. the generalmeeting of shareholders). This will in any event be the case if the articles of the relevantcompany expressly state so.


How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities?

As stated above the purpose of the cash pooling arrangement has to be in conformity withthe statutory objectives of each participant.

In addition, it is advisable that the companies participating in the cash pool each candemonstrate that the arrangement is in their best interest. The management board of eachparticipating company is responsible for acting in the interest of all parties related to thecompany (such as creditors) and the protection of the corporate interest of the company. Themanagement boards of both the centralizing company and each of the centralized companieshave the duty (and autonomy) to consider these aspects, although the shareholder(s) of suchcompanies can issue general guidelines to the management board.

There are some verdicts of Dutch courts indicating that cash management structures may bedeemed to benefit all companies within the same group because such structures result inlower financing costs for the group as a whole. However, it is not advisable to rely too muchon these verdicts because they are to some extent multi-interpretable and do not relatespecifically to cash pooling. It is advisable that each participant can to some extentdemonstrate its own individual benefit.

Is there an obligation to offer all participating entities market financial conditions? (i.e. the“arm’s length principle")?

Dutch law does not foresee in a specific legal obligation to offer “arm’s length” conditions.

However, it should be noted that creditors wishing to affect the validity of (a part of) the cashmanagement arrangement shall try to emphasize that the entering into the arrangement is anon-obligatory (legal) act. The legal act of entering into the arrangement might be subject to


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annulment if the participating entity entered into the arrangement without any (legal)obligation to do so while realizing that the conditions of the arrangement aredisadvantageous to itself (and therefore also to its creditors).


When a managing director carries a personal responsibility because he failed to observe duecare, the directors of the participating companies can be held liable. One example which canlead to liability of the managing directors is the entering into a cash managementarrangement knowing that the company cannot fulfill its obligations under thedocumentation. Liability of the managing directors and/or shareholders can to some extentbe limited by using a NV or a BV. The shareholders cannot be held liable for acts performedby a company with a limited liability structure. Nevertheless, shareholders can be held liableon the basis of tort, despite the fact that the company structure protects them againstliability, on the following grounds:

1. when the parent company has influence on the management of the subsidiary, i.e. decideson the corporate purpose, has influence on the course of action etc.

2. when the parent company is aware of the fact that the subsidiary will not be able to meetits obligations under the cash management agreement.

3. when the parent company violates the responsibility of its subsidiary towards its creditors.



From a Dutch regulatory point of view, there are no such prescriptions.



There are no specific prudential investment rules with respect to centralizing entities.



The Dutch Civil Code provides for restrictions on financial assistance. A Dutch BV or NV isprohibited from giving security, price guarantees or providing any other assistance to anyparty acquiring its shares. If there are cash pooling arrangements in place, with a groupcompany that has been acquired (the "Target") by debt incurred by another group company,the Target cannot be liable, or provide security for such debt. This means that credit balancesof the Target cannot be used to settle debit balances of other group companies, to the extentsuch debit balances were incurred in connection with the acquisition financing.

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2.8 Termination


In principle, the centralizing entity will have the contractual right to terminate the agreement.


A cash pooling agreement will usually stipulate that the agreement automatically terminatesupon the insolvency of (one or more of) the participating companies.

It should be noted that according to the Dutch Bankruptcy Act (Faillissementswet) thedelegated-judge (rechter-commissaris) may, on request of each party or on his own motion,issue a written order stipulating that, for a period of maximum two months, each right of thirdparties to recourse against property belonging to the estate may only be exercised with thejudges authorization. This will be particularly relevant for the bank offering the cash poolingarrangement. The delegated-judge may extend this period once for no more than another twomonths. Furthermore the delegated-judge may restrict his order to certain third parties andattach conditions both to his order and to the authorization of a third party to exercise a rightto which the third party is entitled.

Furthermore, it should be noted that the participants are usually jointly and severally liableand/or obliged to provide security for debit balances of the other participants. If a participantis declared bankrupt the bank will usually try to recover any debit balances due by suchparticipant from the other participants by invoking the joint liability and/or the security. Thismight result in an insolvency scenario with respect to the other participants.

Finally, it should be noted that in the event of bankruptcy of a participating company, thedirectors of NV’s or BV’s can, under certain circumstances, be held liable. This will be the casewhen the directors have managed the company manifestly improper and this impropermanagement is a significant cause of the bankruptcy. The burden of proof is with the receiverin bankruptcy. Liability of a director will possibly arise from tort (onrechtmatige daad) (article6:162 of the Dutch Civil Code).

The term 'directors' also relates to entities having the effective control over the (bankrupt)company as if they were the official directors. The parent company, in a cash poolingarrangement may be deemed to be the entity with the effective control over the centralizedcompanies. The mere fact that the centralizing company is the parent is not sufficient toqualify as having effective control. The centralizing company must have "real" control over themanagement of the centralized company and in fact replace the management of thatcompany. When the centralizing company has effective control over the centralizedcompanies and does not take the interest of the creditors of the centralized companies intoaccount, liability of the centralizing company can arise.


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4. TAX ISSUES



In general, the subject financial transactions are VAT exempt. As a result, the operationsbetween the centralizing entity and the centralized entities should not be subject to VAT inthe Netherlands.



Accrued interest is in general subject to Dutch corporate income tax. The Dutch corporateincome tax rate (2008) is 20 per cent over the first EUR 40,000 of taxable income, 23 per centover any taxable income between EUR 40,000 and EUR 200,000 and 25.5 per cent over anytaxable income exceeding EUR 200,000.

Interest payments are in general deductible for corporate income tax purposes.

There is no different corporate income tax rate for fixed term loans and current accountadvances. Both are subject to the Dutch statutory corporate income tax rates.


Withholding tax on interest paid by a Dutch entity

The Netherlands do in general not levy withholding tax on interest payments made by aDutch entity to a Dutch or to a non Dutch entity.

For the sake of completeness, please note that withholding tax at a rate of 15% may be dueon any interest payments which are reclassified into dividend payments (as further describedin paragraph 4.4). However, in case of cash pooling it is unlikely that any interest paymentsare to be reclassified into dividend payments.

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Reduced withholding tax on interest paid to a Dutch entity

Interest payments made by a foreign entity to a Dutch entity may be subject to foreignwithholding tax. The Netherlands have concluded tax treaties with more than eightycountries worldwide. These tax treaties provide in general for significant reduction ofwithholding tax on interest payments, in most cases to zero per cent.

Taking into account the fact that the Netherlands do in general not levy withholding tax oninterest payments made by a Dutch company and the significant reduction of foreignwithholding tax on interest payments made to a Dutch company under the tax treaties, theNetherlands is a preferred jurisdiction for cash pooling.

4.3 Stamp duty


Cash pooling operations do not raise stamp duty or any other similar documentary tax orduty in the Netherlands.



Dutch tax laws contain certain limitations on interest deductibility, including:

Low interest bearing intra group loans

Interest is not deductible if the following cumulative conditions are met: (i) the interest is paidto a related party (ii) the loan is interest free or has an interest rate that is at least 30% belowthe interest market rate for comparable loans between unrelated parties and (iii) the loan hasa maturity of more than ten years or no maturity at all.

Hybrid loans

Interest paid on participating loans is not be deductible if the following cumulative conditionsare met: (i) the interest is fully or almost fully (i.e. 87.5% or more) profit dependent, (ii) theloan is subordinated and (iii) the loan has a maturity of more than fifty years or no maturityat all.

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Anti profit dilution rules

Interest paid on loans to related entities that are taken up to facilitate dividend distributionsor repayments of capital and interest paid on certain other ‘abusive’ loans is not deductible,unless there are sound business reasons for these transactions.

Thin Capitalization

Interest paid on (excessive) debt is not deductible if and to the extent the debt equity ratioof a company is in excess of 3:1 and any amount of this excess exceeds EUR 500,000. Debt isdefined as the difference between the company’s outstanding loan liabilities and itsoutstanding loan receivables. Further deduction may be granted on the basis of a group debtequity ratio.


The Dutch tax authorities are willing to discuss the deductibility of interest and to providecertainty in advance as to the deductibility of interest under Dutch tax law, subject to anumber of formal and administrative requirements being met.

4.5 Tax havens


The Netherlands do not have specific provisions as to the interest accrued in tax havens.However, any participation of at least 25 per cent in a foreign company: (i) whose assetscomprise for at least 90% free portfolio assets and (ii) whose profits are subject to corporateincome tax at a rate below ten percent (to be calculated in accordance with Dutch standards)must be valued at its fair market value in any given year. As a result the increase of the valueof such a participation is (in whole or in part) taxable.



(i) There is currently no favorable tax regime in effect for corporate income tax for centralizingentities.

However, subject to approval of the European Commission, legislation will be introducedwhich provides for an effective corporate income tax rate of five per cent on the balance ofgroup interest received and payable. Please note that this reduced corporate income tax rateis subject to certain conditions being met and limitations and it is uncertain whethercentralizing entities may also benefit thereof.

(ii) As already mentioned in paragraphs 4.1 and 4.2, interest payments are in general VATexempt and they are in general not subject to withholding tax in the Netherlands.

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Dutch tax law includes provisions on at arm’s length dealings between related companies.According to these provisions, related parties should engage in transactions under the sameconditions as if they were unrelated parties.

Any related centralizing entity / centralized entity should keep documents in its books andadministration to how these arm’s length pricing has been agreed upon to substantiate thatsuch arm’s length pricing is the same as the pricing between non related parties.


Pursuant to the FSA the centralizing company and the centralized companies have in principleno financial reporting requirements to the Dutch Central Bank.

However, pursuant to the External Financial Relations Act 1994 (Wet financiële betrekkingenbuitenland 1994) Dutch residents may be obliged to provide information to the Dutch CentralBank that is relevant to prepare the payment balance of the Netherlands.


There are no exchange control regulations in the Netherlands.


In general companies participating in a cash pool, which apply IFRS, will not be allowed to setoff accounts receivable or payable, unless :

- Parties have a right provided by law or a contractual right to settle accounts receivable orpayable on a net basis; and

- It is the intention of the management to settle on a net basis (actions in the recent pastshould demonstrate this).

For banks offering cash management solutions there are more detailed rules based on ahandbook of the Dutch Central Bank. It falls outside the scope of this contribution toelaborate on these detailed rules.


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With respect to the data securitization aspects of cash pool arrangements it should be notedthat the relations between the relevant entities are governed by the Personal Data ProtectionAct (Wet bescherming persoonsgegevens). This act only applies to natural persons and doesnot seem particularly relevant as far as cash pool arrangements are concerned. However, ifdata of natural persons are exchanged the Personal Data Protection Act might be applicable.

As mentioned in point 1.2 banks need to disclose to the anti-money laundering agency anyunusual transactions of accountholders. Every corporation, which is liable to pay tax in theNetherlands, should keep proper records and disclose to the tax authorities. In addition, thebanks have to disclose the account statements of third parties, in this case the accountstatements of the centralising/centralised entities, to the tax authorities.

It should be noted that the relationship between the bank and the centralizing entity and thecentralized entities (as customer) is governed by the general banking conditions ("GeneralConditions"), which were drawn up between Dutch Consumers' organisations and bankswithin the framework of Socio-Economic Council. On the basis of section 2 of the GeneralConditions the bank has a duty of care in relation to the customer, when providing services.The duty of care implies inter alia that the bank should treat information provided by itsclients confidential. This confidentiality is set aside by the legal obligations to provideinformation to certain authorities mentioned above.


In general there are no such requirements; however this will depend on the particular case.

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THE REGULATORY, LEGAL AND TAX FRAMEWORK FOR INTERNATIONAL CASH MANAGEMENT

UNDER POLISH LAW

This contribution does not constitute legal advice. Its purpose is to provide an overview of laws andregulations applicable to cash management in Poland. The principles set forth below should be consideredin relation to specific circumstances with legal and tax counsel.

Łukasz SzegdaLegal Advisere-mail :[email protected]

Michał BernatTax Advisere-mail :[email protected]

Aleje Ujazdowskie 1000-478 Warsaw, Poland

Tel: +48 (0) 22 437 82 00 - Fax: +48 (0) 22 437 82 01


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The law provides for a specified list of activities carried out by banks (so-called “bankingactivities”). Some of these may be undertaken exclusively by banks, unless another legal actclearly envisages the possibility of them also being performed by other undertakings (bankingactivities in a strict meaning). Other activities may also be undertaken by other undertakings,however, if performed by banks they qualify as banking activities (banking activities in a broadsense). Granting loans is treated as a banking activity in a broad sense. Therefore, it may becarried out by entities other than banks without the need to obtain banking authorities’approval for such activity. This rule applies regardless of loan term.

Do investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized entities require banking authorities’ approval forthe centralized entities or the centralizing entity? Is an exemption available in group companies?

Investment in financial instruments may be subject to a brokerage license under Polish law.According to the Trade in Financial Instruments Act, the following activities dealing withinvestment in financial instruments are, among others, treated as brokerage activity: receipt,transmission and execution of orders to acquire or transfer brokerage financial instruments, andportfolio management for one or more brokerage financial instruments.

The following financial instruments are treated as brokerage financial instruments: securities,participation titles in collective investment institutions, money-market instruments, financial-futures contracts and other equivalent cash-settled financial instruments, forward interest-rate contracts, share swaps, interest-rate swaps, currency swaps and options to buy or sellfinancial instruments, interest-rate options, currency options, options on the aforesaid options,and other equivalent cash-settled financial instruments.

However, entities carrying out the aforementioned acts exclusively for entities belonging to thesame capital group as the one undertaking these actions do not require a brokerage license forsuch activities. A capital group means the dominant entity and all its dependent entities1.

Therefore, if a centralizing entity engages in investment activity in financial instrumentsexclusively for centralized entities within a capital group, the centralizing entity does notrequire brokerage license.

1 A dominant entity shall mean an entity:a) which, directly or indirectly by other entities, holds a majority of votes in bodies of another entity, also on grounds of agreements concluded with other persons; orb) which is authorized to appoint or recall a majority of members of managing bodies of another entity; orc) in which more than half of management board members of another entity are simultaneously management board members, proxies or executive officers of a given

entity or another entity dependent thereon.A dependent entity shall mean an entity toward which another entity is a dominant entity, on the understanding that all entities dependent on such dependent entity are also considered entities dependent on such dominant entity;

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In relation to exceptions, please see the reply to the previous question.

If the activity of a centralizing entity is treated as brokerage activity requiring a brokeragelicense, a lack of such license creates a risk of criminal liability for the centralizing entity. TheTrading in Financial Instruments Act provides for a fine in an amount of up to PLN 5,000,000(approx. EUR 1,400,000) in such a case.



Polish law does not set any prohibition on notional pooling. Notional pooling is employed inpractice by Polish entrepreneurs. Some Polish banks have notional pooling in their offers.

Please also note that the Banking Law Act in its Article 93a provides for notional pooling withregard to a tax capital group. Although this Article refers only to a tax capital group, it showsthat notional pooling is generally accepted by law. The fact that this Article concerns only atax capital group does not mean that cash pooling is prohibited within capital groups notqualified as tax capital groups. This regulation is applied very rarely since there are very fewtax capital groups in Poland within the meaning of this provision.

There is no statutory obligation in respect to cross guarantees, but, in practice, banks oftenrequire such cross guarantees. Such guarantees may be subject to limitations resulting frombankruptcy regulations. They are usually limited to the value of assets.

Some banks secure their interest in the form of an irrevocable authorization to set-offoutstanding debts of some participating companies with the receivables of others.



No consent is required for such an arrangement. However, according to the Foreign ExchangeLaw, activity consisting of the sale and purchase of foreign currency or agency in selling andbuying foreign currency is treated as foreign exchange activity and as such is subject toregistration in a register maintained by the National Bank of Poland. Therefore, it cannot beexcluded that activity of a centralized or centralizing entity may also under somecircumstances be subject to registration in the register.


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Depending on the scope of activities of the centralizing entity within ‘management ofpayments/collective programs’ some activities may theoretically fall within the scope ofbanking activities in a strict sense and as such may require a banking license. The Banking Law Act provides that banking monetary settlements may be made exclusivelyby banks or other entities specifically entitled by statutory regulations to carry out suchactivities. If ‘management of payments’ qualifies as a banking monetary settlement within themeaning of the Banking Law Act, then an entity organizing such activity would be required toobtain a banking license.




Can/must a bank disclose account statements to the tax authorities?

The Banking Law Act stipulates a bank secrecy regime. All information regarding activities ofbanks, including information on clients, constitutes bank secrecy. Banks may disclose suchinformation only if specifically permitted by the Banking Law Act. Therefore, disclosure ofinformation on a bank account to the centralizing entity would be permitted only if allowedby the Banking Law Act. According to the Banking Law Act, disclosure of such information toa centralizing entity would be possible if the bank obtains written consent of the centralizedentity for disclosure of such information to the centralizing entity. In case of no such consentdisclosure of such information, depending on circumstances, may still be possible on the basisof some provisions of the Banking Law Act. However, a detailed analysis of the Banking LawAct would be required in this scope. Banks are obliged on the basis of anti-money laundering regulations to notify the anti-moneylaundering agency of all transactions exceeding EUR 15,000 as well as all suspicioustransactions. Anti-money laundering information may also demand disclosure of transactionsmade by banks, including account statements.Also, tax authorities may demand disclosure of information by banks, including accountstatements. Banks are obliged to disclose such information. Furthermore, banks are obliged tonotify the Ministry of Finance on an opening or closing of bank accounts of their clients.



We presume that the question concerns specific requirements regarding cash pooling, whichare stipulated in laws concerning other regulated financial activities. We have not identified

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any provisions that specifically refer to cash pooling. However, some provisions concerninggeneral principles of asset management of financial institutions may have some influence oncash pooling. For example, Article 153 of the Insurance Activity Act states that an insurancecompany shall be obligated to invest financial means in such a manner as to achieve, giventhe type and structure of insurance carried out, the highest degree of security and profitabilityand at the same time to maintain liquidity. Cash pooling may, in some circumstances, betreated as not guaranteeing a proper degree of profitability for an insurance company incomparison to profit that may be gained in an individual bank account system.

The opening of bank accounts is regulated by the Banking Law Act and Civil Code. The BankingLaw Act requires that a bank account agreement be executed in writing. It also stipulatesobligatory elements of such agreements. Regulations on bank accounts currently in force donot allow for a bank account to be owned by more than one legal person. However, anamendment of the Banking Law Act and the Civil Code is pending that will abolish thislimitation. The amendment is currently being discussed at the level of the Ministry of Financeand we are unable to indicate when it will enter into force.

If parties to a bank account agreement provide for an accrual of interest on financial meansheld on an account, such an agreement must indicate the interest rate and conditions forchanging such rate by the bank. Furthermore, Article 93a of the Banking Law Act regulatingnotional pooling with regard to a tax capital group states that a bank may set a globaleffective rate in a centralization agreement.

In the case of a bank account agreement concluded between a bank and entrepreneur thereis no need to conclude such agreement in Polish. However in practice many agreements areconcluded in bilingual versions.

1.4 Outsourcing


Polish regulations provide for special rules concerning outsourcing, but only if a bankoutsources its functions. These rules would apply if a bank entrusts performance of itsobligations under cash pooling agreements. Such outsourcing may require prior consent ofthe Financial Supervisory Commission. Also, if a bank entrusts its obligations under a cash-pooling agreement to an entity seated outside of Poland such consent is required.

Entrusting cash pooling functions of a centralizing entity not being a bank may betheoretically possible. However, one should analyze specific bank account agreementsconcluded by a centralizing entity in order to determine whether such outsourcing isacceptable by the bank holding a bank account.

The issue of admissibility of such transfer should be analyzed to the extent that outsourcingrequires a transfer of data constituting bank secrecy to an agent not being a party to a bankaccount agreement.


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2. CORPORATE LAW

2.1 Form of participating entitiesAre there restrictions as regards the form of entities that can participate in cash poolingarrangements, either as a centralized or centralizing entities (certain forms of entities,groupings, partnerships…) and/or the form or the nationality of shareholders (state ownedentities, foreign shareholders…)?There are no specific restrictions on the legal form of entities participating in cash poolingarrangements. In terms of practice, the two most commonly employed forms of conducting business activityin Poland are:- a limited liability company (spólka z organiczoną odpowiedzialnością - abbreviation:

“sp. z o.o.”);- a joint stock company (spółka akcyjna - abbreviation: “S.A.”).If the creation of a separate entity is considered for the purposes of intra-group cash pooling(e.g. SPV to act as a centralized entity) a sp. z o.o. cannot be incorporated solely by a wholly-owned limited liability company (it is irrelevant whether the establishing company has its seatin Poland or elsewhere).Since only a sp. z o.o. and S.A. are enabled with legal personality and Corporate Income Taxliability, foreign investors tend to hardly use other entities for business purposes in Poland. Forthis reason our further comments will be limited to cash pooling aspects related to sp. z o.o.and S.A. companies.

2.2 Corporate purposeDo the activities carried out in cash pooling arrangement need to be expressly contemplated inthe bylaws?The Polish Commercial Companies Code (“Companies Code”) does not require a cash poolingagreement to be specified by the articles of association or bylaws in order for a company tohave capacity to enter into such an agreement.2

2.3 Corporate benefit How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? The Companies Code does not define a corporate benefit directly. Nevertheless, it ismandatory for company directors3 to comply with principles of corporate benefit asdeveloped through jurisprudence and court judgments based on the Commercial CompaniesCode wording.

2 However, it cannot be excluded that a cash pooling contract in certain circumstances (if treated as equivalent to a profit transfer agreement) should be first allowed by specific bylaws. Please see point 2.6 below for details.

3 Pursuant to the Commercial Companies Code, all Polish companies must have two separate boards of directors: a management board and a supervisory board. Members of each body cannot be appointed to the other (two tier system). When we refer to “company directors” it should be understood that this means members of both the management and supervisory boards.

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The term corporate benefit must be interpreted narrowly. It cannot be understood as actingfor the benefit of a parent company or capital group (holding), or for the benefit of anyshareholders. Company directors are obliged to act in the best interest of the company wherethey are appointed.

The principle of corporate benefit is reflected in some provisions of the CommercialCompanies Code, e.g. in the regulation forbidding directors to manage or act as companyrepresentatives when conflict of interest exists between them and the company. Anotherrelevant example is the competition ban imposed on directors. It should also be mentionedthat a shareholder resolution contrary to the corporate benefit may be challenged in court. Ashareholder resolution may be deemed contrary to the corporate benefit if it protectsshareholders or third parties with detriment to company interests. .

Are there restrictions on the participation of certain entities due to their financial structure(ratios, etc.)?

Corporate law does not stipulate any restriction on the financial structure of a holding withinwhich cash pooling activity can be established, but such structure in a given case shouldalways be developed with consideration of tax regulations. Our comments in this respect areprovided further in the memorandum.

In some circumstances, if the centralizing entity is a parent company that recently purchaseda group of companies to be centralized within cash pooling structure, the risk exists that cashpooling may be considered to be illegal indirect financial assistance for the centralizing entityin connection with the purchase of group companies. In Poland, such risk may arise only inrelation to joint stock companies.


Polish civil law does not impose an obligation to propose equal contractual terms to allpossible contracting parties. However, cash pooling agreements should be drafted withconsideration of the corporate benefit principle and tax statutes.


Generally, the law does not contain any restriction on financial operations specificallyinvolving proceeds from centralized entities within cash pooling schemes. Nonetheless,operations to be performed within a cash pooling structure cannot violate principles of Polishcivil and commercial law, e.g. directors must act for the benefit of their company; the termsof a contract cannot infringe social customs or evade statutory regulations. In practice,directors of Polish companies entering into a cash pooling agreement should, for instance,ensure that all surpluses are invested on market conditions.

In addition to the above, the law may impose certain restrictions upon some heavily regulatedtypes of entities (e.g. insurers, investment funds, and banks) in relation to their investmentsand, as a consequence, upon different cash management tools, including cash pooling.


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Is there an obligation to offer the participating entities market financial conditions (i.e. the“arm’s length principle")?

Due to tax regulations (e.g. transfer pricing provisions of the Corporate Income Tax Law of1992, as amended) and the obligation to act in the corporate benefit it is generally advisablethat an agreement be concluded on the basis of market conditions.


The consequences of a violation of the corporate benefit principle may vary depending onwho acted against a company’s interest and the negative results of a particular violation (e.g.damages incurred by a company), etc.

Usually, director liability is limited to the obligation to compensate the company. However, incase of serious acts of corporate benefit violation, a director may be found guilty ofcommitting a crime against the economy and penalties provided by law even includeimprisonment.

Equally, shareholders are not allowed to act against a company’s interest. The CommercialCompanies Code provides that if a shareholders’ meeting concludes a resolution that:- infringes a corporate benefit; and - is in breach of a company’s by-laws or does not comply with good commercial customs,

then a court may cancel such a resolution.

Generally, the law does not allow finding a contract invalid only because directors orshareholders acted against the corporate benefit. In some circumstances, if such a shareholderresolution was a precondition for conclusion of a cash pooling agreement, such a finding mayalso affect the validity of the agreement except in relation to third parties acting in good faith.

In reference to the question of whether are there any consequences of a corporate benefitviolation in the area of bankruptcy law, a company under Polish law may be declared bankruptwhen it is insolvent, i.e. when, inter alia, its debts and liabilities (even conditional) exceed itsassets even though it still pays its obligations. For details see our reply to question 3 below.



Generally, there are no guidelines in civil and corporate law on remuneration for entitiesinvolved in cash pooling process. Remuneration usually depends on the type of cash-poolingarrangement, financial standing of companies involved and their turnover. However, it shouldbe calculated according to principles of corporate benefit and tax implications of cash poolingstructure functioning. If remuneration is in a form of interest on loans provided within suchscheme, the amount of such interest is capped by law.

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There is no direct civil law regulation on investment rules connected to cash pooling activities.Again, funds should be invested in a manner following the aforementioned legal principles.



The law does not specifically require any corporate consent in connection with conclusion ofa cash pooling agreement. Of course, company articles of association may be drafted tocontain contrary provisions.

As far as limited liability companies (sp. z o.o.) are concerned, certain restrictions usuallyapplicable to more important contracts may exist. If managers conclude that a cash poolingagreement is beyond the normal course of company business (which will usually be the case),management board consent will be required in this respect.4

Moreover, if liabilities under a cash pooling contract exceed twice the value of company sharecapital, then a shareholders’ resolution will be required in connection with such agreement,unless provided otherwise in the articles of association.

In both types of companies (Sp. z o.o. and S.A.), there is a risk that a cash pooling contract(depending on the exact type and wording) may be recognized as, in fact, a so-called profittransfer agreement . In such case, in order to legally enter into a cash pooling structure ashareholders’ meeting must grant prior consent to the conclusion of such contract. Profittransfer agreements also cause certain reporting obligations of a company. Moreover, itcannot be excluded that a cash pooling contract (if treated as equal to a profit transferagreement) should be first allowed by a specific provision of bylaws.


Are there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan?

As noted in point 2.3, there is a risk that cash pooling may be considered illegal indirectfinancial assistance for the centralizing entity in connection with a purchase of groupcompanies. In Poland, such a risk may occur only in relation to joint stock companies (S.A.).Article 345 § 1 of the Companies Code states that “a company may not grant loans, providesecurity, pay advances, or offer any other direct or indirect financing of the acquisition orsubscription for the shares that it issues.” Violation of this provision will be deemed invalidunder Article 58 of the Polish Civil Code. There are two exceptions to such limitation set forthin §2. This restriction is not applicable toward payments made within the ordinary business offinancial institutions, as well as toward payments to company employees or those of anaffiliated company made in order to facilitate the acquisition of or subscription for sharesissued by the company, but only if special purpose supplementary capital has been formed.

4 Article 208 § 4 of the Commercial Companies Code.


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Does the existence of a cash pooling arrangement involving the target modify the rules?

A cash pooling arrangement involving the target company does not modify theabovementioned rule.

2.8 Termination


There are no such restrictions in company law prohibiting the centralizing entity fromexercising its contractual right to terminate the agreement.


As a general comment, a company can be declared bankrupt under Polish law when it isinsolvent, i.e. when, inter alia, its debts and liabilities (even conditional) exceed its assets, eventhough it still pays its obligations. If, as a result of cash pooling duties, company debts andliabilities exceed its assets, company managers should file an application for bankruptcy. Thisregulation may imply the need for certain limitation clauses in relation to Polish companiesparticipating in cash pooling schemes. On the other hand, our practice proves thatparticipation in a cash pooling arrangement may prove to be a successful defense againstinsolvency (and, as a consequence, declaration of bankruptcy) because in many cases a cashpooling participant may argue that it is entitled to receive necessary recovery funds under thecash pooling agreement.

As noted above, depending on circumstances certain cash flows within cash pooling schemesmay qualify as extended loans (this does not apply to notional cash pooling). Any suchdownstream loan granted by a shareholder to a Polish company in cash management systemswill be deemed as equity if a centralized entity is declared bankrupt within two years fromthe date of concluding such agreement. In order to limit this risk, cash flows within a cashmanagement system may not originate from a shareholder of the centralized entity, but froma different company within the group.

There may be a number of consequences of a participating entity being insolvent for cashmanagement operations involving the insolvent entity.

Upon declaration of bankruptcy any type of cash pooling agreement (so-called reciprocalagreement (umowa wzajemna) under Polish law) may be terminated by the receiver.Depending on circumstances, the receiver may also choose to meet liabilities of the bankruptparty and demand that other parties to a cash pooling agreement fulfill their obligations.

Although not specifically provided in law, it appears that the bankruptcy of a Polish centralisedentity would not affect a centralizing entity’s contractual right to terminate a cash poolingagreement.

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When it comes to notional cash pooling, a main issue is how bankruptcy affects set-offpossibilities. There are different regulations depending on the type of bankruptcy proceedings. As a general rule, set-off of reciprocal claims between the bankrupt party and creditor (othercash pooling entity) is not admissible in an arrangement bankruptcy, if the creditor:- has become a debtor to the bankrupt party after declaration of bankruptcy,- being a debtor to the bankrupt party, has become a creditor to the bankrupt party after a

declaration of bankruptcy by acquiring, through an assignment or endorsement, a claimthat arose prior to declaration of bankruptcy.

In the case of liquidation bankruptcy, a set-off of the bankrupt party’s claim against thecreditor's claim is admissible if both claims existed on the date when bankruptcy wasdeclared, even if one of them is not yet due. If a cash pooling agreement is re-qualified as a loan agreement (which cannot be excluded, inparticular, in the ZBA), such agreement shall expire by law. A declaration of bankruptcy does not affect bank account agreements of the bankrupt party.However, bankruptcy law is expected to be amended so that any multi-party bank accountagreements (which are also intended to be used in cash pooling arrangements) expire by law.It also cannot be excluded that cash pooling agreements upon declaration of bankruptcy(concluded shortly prior to declaration of bankruptcy) are questioned by the receiver on thebasis of specific “claw-back” provisions of Polish bankruptcy law.If a cash pooling agreement is concluded with a parent entity or subsidiary (which is usuallythe case) such agreement is by virtue of law ineffective toward the bankruptcy estate if it wasconcluded within six months prior to filing of application for bankruptcy on the part of oneof its Polish parties.If benefits of the bankrupt party received under a cash pooling agreement are significantlylower than the value provided by the bankrupt party to other parties to a cash poolingscheme, then such cash pooling agreement is by law ineffective towards the bankruptcyestate if it was concluded within one year prior to filing of application for bankruptcy of oneof its Polish parties.If a company participating in a cash pooling structure is declared bankrupt, there is no risk thatbankruptcy proceedings are extended to other participating group entities. The existence ofbankruptcy conditions is verified separately for each company.Unfortunately, there are no court precedents (to our best knowledge) that could assist inbetter understanding how general provisions of bankruptcy law mentioned above would bein practice apply toward cash pooling agreements.

4. TAX ISSUES

4.1 Value added tax (VAT)Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?According to current fiscal practice and based on the common understanding of commentators,the VAT status of a cash pooling scheme may depend on the identity of pool leader.


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If a pool leader qualifies as a bank or similar financial institution, it is argued that cash poolingactivities of participants (including the pool leader) in a given scheme fall within the scope offinancial services within the meaning of Community and national VAT rules5. This implies thatany such activities are exempt from VAT, either in Poland or in any other EU jurisdiction. Hence, the VAT structure of supplies of participants may be affected and the correspondingproportion of input VAT charged to participants would not qualify for deduction from theiroutput liabilities. Nonetheless, tax authorities have recently held that when cash poolingservices provided by a bank are subject as exempt activities to VAT in Poland, deductibility ofinput VAT will only be effective for the bank as pool leader, whereas participants benefitingfrom the scheme are not deemed to provide any taxable services whatsoever. Thus,involvement in cash pooling would not have an adverse VAT effect upon them6.We believe that the above tax aspects (VAT exemption) should also apply if participants,including the pool leader, do not have the formal status of financial institution7, even if thepool leader is based outside Poland8.However, it is also occasionally raised that when a pool leader is merely a corporation fromwithin a group and does not operate as a financial institution, this could potentially bedeemed a VAT-taxable supply of services subject to VAT under general rules in the MemberState where the service provider (pool leader) is established. In practice, this may imply that participants of a cash pooling scheme would need to recognizeinterest earned as VAT-taxable turnover. Since cash pooling services would fall under and betaxed subject to general VAT rules, the ability of participants to deduct their input VAT wouldnot be affected.It is further important to note that VAT qualification of given cash pooling arrangements isvital for other tax aspects of a scheme, since certain taxes may apply to a transaction only ifit is outside or exempt from VAT in Poland.Specifically, as certain tax authorities tend to argue9, cash pooling arrangements may,depending on the actual wording of underlying contracts, qualify as a loan, at least within themeaning of relevant Polish tax laws.It must therefore be noted that whenever a loan is extended to a Polish company, it will besubject to a separate Civil Law Transactions Tax (commonly abbreviated as the “PCC”, anequivalent of stamp duty) at the rate of 2% and payable within 14 days from the date of loan,unless a loan is made by a (foreign) enterprise involved in financial services10.As a matter of principle, loans will remain outside the scope of PCC whenever they are subjectto VAT, even if they appear to be VAT-exempt, as is the case for financial services.

5 Such was the position of the Lubelski Tax Office in a ruling dated 8 May 2006 (PD.423-9/06). Also, the Minister of Finance, in his letter dated 2 July 2004, explained that cash pooling facilities, in line with guidelines from the Central Statistical Office, qualify as financial services that are exempt from VAT.

6 Ruling of the Second Mazowiecki Tax Office dated 9 May 2006 (1472/RPP1/443-256/06/MK). Recently, also the First Warszawa-Śródmieście Tax Office in a ruling of 29 March 2007 (1435/PP1/443-177/06/KC).

7 See, for instance, a ruling of the Opolski Tax Office of 17 July 2007 (PP/443-35-1-GK/07) as well as rulings of the Director of the Warsaw Tax Chamber of 4 February 2008 (IP-PP2-443-545/07-2/AZ) and 29 March 2007 (1435/PP1/443-179/06/KC). This approach was also taken by the First Mazowiecki Tax Office in Warsaw in two rulings of 27 March 2007 (1471/VUR2/443-468/06/ST and 1471/VUR2/443-470/06/ST) and a ruling of the Rzeszów Tax Chamber dated 8 January 2007 (IS.II/2-443/209/06, IS.II/2-443/210/06). See also a ruling of the First Wielkopolski Tax Office in Poznań dated 29 December 2006 (ZP/443-236/06).

8 This aspect of VAT treatment of cash pooling was recently discussed by the Director of the Warsaw Tax Chamber in a ruling of 4 February 2008 (IP-PP2-443-545/07-4/AZ).

9 Letter from the Minister of Finance of 27 April 2004 (PB4/060-14739-445/03) and letter from the Minister of 2 July 2004.10 Certain other PCC exemptions may also apply to loans, but these have not been mentioned since we do not consider them directly relevant to cash pooling

transactions.

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Consequently, if the cash pooling activities under consideration are deemed to constitutefinancial services that are exempt from VAT, they would also be free of any PCC11. Otherwise,they will either enjoy a PCC-exemption (when issued by a foreign enterprise involved infinancial services) or, which appears rather unlikely, be taxed at 2%, per single transaction. Infact, a number of rulings, especially those most recent, support the conclusion that cashpooling does not give rise to any PCC exposure12.

In any event, we believe that, in light of the considerable scope of the scheme and occasionallyambiguous fiscal practice, it would be highly recommended to request Polish tax authoritiesto issue a binding tax ruling on VAT treatment of the envisaged cash pooling arrangements.Rulings are issued by a statutory deadline of 3 months of request, and should therefore beapplied for in advance.




Under general Polish taxation rules, Polish corporate taxpayers earning interest, whether fromforeign sources or domestic, are subject to a 19% corporate tax charged on the amount ofinterest actually obtained.

Interest is immediately integrated into the tax basis, also for purposes of calculating amonthly advance, which is generally due until the 20th of the following month. Consequently,tax will practically need to be settled by such deadline, unless the company incursconsiderable operating tax-deductible costs.

Whenever a Polish corporation distributes interest abroad, it would principally be required towithhold 19% tax at source.

This is, however, subject to an applicable double taxation treaty, if the beneficial owner ofinterest is resident, for tax purposes, in a tax jurisdiction having a binding tax treaty withPoland and if the beneficial owner provides the Polish interest payer, on the date of interestdistribution at the latest, a tax certificate confirming his tax residence in a treaty jurisdiction.

In such case, a Polish company would apply a reduced withholding tax rate or an exemptionfrom any withholding tax whatsoever, as available under the applicable treaty. For instance,interest distributed to certain jurisdictions, including Germany and Austria, are exemptedfrom any withholding tax in Poland if charged on loans extended to Polish companies byforeign banks13.

11 A ruling of the Second Mazowiecki Tax Office dated 28 February 2006 (1472/SPC/436-50/05/AW).12 See a ruling of the First Mazowiecki Tax Office (1471/DC/436/59/05/HB), ruling of the Opolski Tax Office dated 22 May 2006 (PD/436-2/MG/06) and a ruling of

the Podkarpacki Tax Office dated 12 April 2006 (1472/ROP1/423-84-122/06/AJ). See also a ruling of the Małopolski Tax Office of 22 August 2007 (PMO/436-17/07/69516/2007), ruling of the First Warszawa-Śródmieście Tax Office dated 1 August 2007 (1435/DM/436/31/07/BP), ruling of the Podkarpacki Tax Office of 6 July 2007 (PUS.V.436/4/07), ruling of the First Warszawa-Śródmieście Tax Office dated 13 March 2007 (1435/DM/436/35/06/BP), ruling of the Second Mazowiecki Tax Office in Warsaw dated 6 March 2007 (1472/SPC/436-2/07/SJ) and ruling of the Pomorski Tax Office dated 14 February 2007 (DM/436-13/07/JU).

13 Other tax treaties such as the current 1975 Polish-French Double Taxation Treaty may even offer an exemption from any withholding tax on interest paid abroad. For further examples, please refer to the chart.


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Tax authorities generally assume14 that this is a particular participant receiving interest, andnot the pool leader, who is the beneficial owner of interest paid. Hence, tax treatment ofinterest (and choice of applicable tax treaty, if any) depends upon the tax status (includingtax residence) of the recipient of interest, whereby the status of pool leader is principallyirrelevant in this regard.

14 As held by the Minister of Finance in a ruling of 13 August 2007 (DD7/033-42/KS/07/MB7-2040), as well as in two rulings of 12 July 2007 (DD7/033-16/KS/07/MB7-609 and DD7/033-14/KS/07/MB7-653) as well as a ruling of 11 July 2007 (DD7/033-17/KS/07/MB7-436).

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 5% 5% 19%

1

15% 10% 10% 19%1

5% 5% 19%2

10% 15% 10% 10% 10%

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 10% 15% 5% -

3

10% 10% 10% 10% 10% -3

10% 19%1

10% -3

1 No applicable tax treaty.2 No applicable tax treaty, as Hong Kong is not covered by the Chinese-Polish tax treaty.

To that effect, see, for instance, a most recent ruling of the Minister of Finance dated 14 February 2008.3 No withholding tax is applicable.

4.3 Stamp dutyDo cash pooling operations raise any stamp duty? Please refer to section 4.1 above for comments on PCC (the stamp duty).

4.4 Deductibility of interestAre there limitations to the deductibility of interest paid by the centralized or the centralizingentity (such as a thin capitalization rule - debt / equity capital ratio)?Is it possible to obtain a ruling from the tax authorities as to the deductibility of interest? If so,at what conditions may it be obtained?In case of loans between related entities, Polish thin capitalization rules, including the 3:1 debt-to-equity ratio, will apply. Any interest incurred by a Polish company in excess of theratio would not be tax-deductible.

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Principally, Polish tax authorities15 tend to claim that cash pooling arrangements, in particular,those where a pool leader is a non-related bank offering specialized services, do not qualify asloans within the meaning of Polish thin capitalization rules. However, an adverse approach hasalso been recently taken by the authorities16.Still, as facts of the case upon the basis of which tax rulings were issued thus far apparentlyinfluence the outcome (some rulings related mostly to zero-balancing cash pooling with anindependent bank as the pool leader), we presume that it would be necessary to first reviewcash pooling contracts before it is confirmed that a specific project is not covered by the thincapitalization regime. Moreover, account must be taken of most recent tax rulings which seemto suggest that cash-pooling schemes may actually fall under thin capitalization legislation,as indicated above.You may also wish to note that, except for thin capitalization rules (see above), there are nospecific limitations on the deductibility of interest in cash pooling transactions17. Therefore,although a binding ruling may indeed be obtained from tax authorities, it is not strictlynecessary in the present case18.

4.5 Tax havens


Whenever a Polish corporation pays interest to a tax haven in excess of EUR 20,000, per taxyear, it will be required to produce and maintain special transfer pricing documentation, so asto demonstrate and substantiate that the interest rate and other conditions of a transactionhave been established on an arm’s length basis. The transfer pricing documentation must beprovided to tax authorities if and when requested. Failure to present documentation within7 days of request may trigger considerable tax exposure if it is found that income has beenunderestimated as an effect of an interest rate being below proper market value.



As explained above, Polish tax legislation does not separately recognize cash pooling19 andhence does not provide any specific, not to mention favorable, rules to that effect. It is only to be noticed that interest charged to a Polish company is taxed only if and after ithas been actually paid out to or left at the disposal of such Polish company. Therefore,

15 Please refer to a ruling of the Second Mazowiecki Tax Office dated 18 April 2006 (1472/ROP1/423-84-122/06/AJ), ruling of the Opolski Tax Office dated 19 May 2006 (PD/436-2/MG/06), of the Świętokrzyski Tax Office dated 29 May 2006 (RO/436-2/06), of the First Mazowiecki Tax Office in Warsaw dated 15 April 2005 (1471/DPD1/423/II/05/AS), of the Podlaski Tax Office dated 17 May 2006 (P-I/423/26/EW/06), of the Podkarpacki Tax Office dated 16 May 2006 (PUS.I/423/14/06) and the Lubelski Tax Office dated 8 May 2006 (PD.423-10/06). This was recently confirmed by the First Wielkopolski Tax Office in Poznań in a ruling dated 28 September 2007 (ZD/4061-212/07) and, on specific grounds, by the Podkarpacki Tax Office in its ruling of 27 September 2007 (PUS.I/423/74/07), as well as a ruling from the First Mazowiecki Tax Office in Warsaw dated 26 March 2007 (1471/DPR2/423-210/06/JB).

16 See, especially, a ruling of the Pomorski Tax Office of 3 August 2007 (DP/423-0141/07/AK), ruling of the First Mazowiecki Tax Office in Warsaw dated 25 May 2007 (1471/DPR1/423-27/07/KK/2), ruling of First Wielkopolski Tax Office in Poznań dated 10 April 2007 (ZD/4061-8/07), rulings of the First Mazowiecki Tax Office in Warsaw dated 26 March 2007 (1471/DPR2/423-211/06/JB and 1471/DPR2/423-212/06/JB) and a ruling of the Second Mazowiecki Tax Office in Warsaw dated 1 March 2007 (1472/ROP1/423-9/07/AJ).

17 Most recent fiscal practice indicates that deductibility of interest may be limited in case of a cash-pooling scheme where participants are, inter alia, given access to their own funds managed by the leader, as held in a ruling of the Pomorski Tax Office of 17 August 2007 (DP/423-0086/07/AK).

18 In fact, additional costs of a cash pooling scheme may also be tax-deductible, as the Pomorski Tax Office held in a ruling dated 3 March 2007 (DP/423-0110/07/AK). 19 Ruling of the Third Tax Office in Radom of 12 June 2006, 1473/546/WD/423/36/06/TC.


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notional interest, accrued but not yet distributed, would not generate tax liabilities for thePolish beneficial owner of interest.

Moreover, tax authorities have clearly held that the mere transfer of financial surplus, as wellas return of a corresponding amount, net of interest20, is neutral for tax purposes and does not,respectively, generate tax-deductible costs and taxable revenues21.



According to a specific interpretation of the Polish Minister of Finance22, transfer pricing rulesfully apply toward cash pooling schemes. This approach has been principally followed by taxauthorities.

Therefore, if a Polish corporation pays interest to a related entity in excess of EUR 30,000 pertax year, it will be required to produce and maintain special transfer pricing documentation,so as to demonstrate and substantiate that the interest rate and other conditions of atransaction have been established on an arm’s length basis. The transfer pricingdocumentation must be provided to tax authorities, if and when requested. Failure to presentdocumentation within 7 days of request may trigger considerable tax exposure if it is foundthat income was underestimated as an effect of an interest rate being below proper marketvalue.

Moreover, as mentioned above, whenever a Polish corporation pays interest to a tax haven inexcess of EUR 20,000 per tax year, it will be required to produce and maintain transfer pricingdocumentation, according to the conditions mentioned, even if interest is paid to an unrelatedentity. Transfer pricing documentation must be provided to tax authorities upon request.Failure to present documentation within 7 days of request may trigger considerable taxexposure if it is found that income was underestimated as an effect of an interest rate beingbelow proper market value.

Notwithstanding the above, tax authorities have more recently admitted that if interest ratesare negotiated with a pool leader entirely unrelated to pool participants, transfer pricing ruleswould not apply even if the participants are themselves related entities within the meaningof transfer pricing laws23.

20 Interest itself will constitute revenues or tax-deductible costs when, respectively, received or paid (see, to this effect, for instance, a recent ruling of the First Wielkopolski Tax Office in Poznań dated 27 September 2007, ZD/4061-182/07, Rulings of the First Mazowiecki Tax Office in Warsaw, dated 25 May 2007, 1471/DPR1/423-27/07/KK/1, and 24 May 2007, 1471/DPR1/423-27/07/KK/2).

21 Ruling of the Third Tax Office in Radom of 12 June 2006, 1473/546/WD/423/36/06/TC and the Małopolski Tax Office, dated 24 February 2006 (DP1/423-87/05/16258/06). More recently, a ruling of the First Wielkopolski Tax Office in Poznań, dated 28 September 2007 (ZD/4061-210/07), a ruling of the Pomorski Tax Office of 3 August 2007 (DP/423-0109/07/AK), as well as a ruling of the First Wielkopolski Tax Office in Poznań, dated 25 January 2007 (ZD/4061-239/06).

22 Letter of the Minister of Finance of 2 July 2004.23 As confirmed by the Pomorski Tax Office in a ruling dated 3 August 2007 (DP/423-0111/07/AK) and from 14 February 2007 (DP/423-0183/06/AK).

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Depending on the structure of the cash pooling there may be some reporting obligationsimposed on a Polish entity participating in cash pooling system. In case of cross-border cash-pooling the Foreign Exchange Law imposes reporting obligations upon Polish entitiesparticipating in cash-pooling arrangements. In such case Polish entities must notify theNational Bank of Poland of conclusion of a cash-pooling agreement and report ontransactions being subject to such cash-pooling agreement. Banks have their own reportingobligations resulting from respective regulations concerning banking supervision and foreignexchange.


The Foreign Exchange Act provides for some restrictions and limitations on foreign exchange.Currently, most limitations concern foreign exchange undertaken with entities situatedoutside the EU, EEA or OECD. Depending on the structure of a specific cash-pooling arrangement (in particular, if someparticipants to the arrangements are based outside the EU, EEA or OECD) the participation ofPolish entities in an arrangement may require foreign exchange permission. For example, suchpermission may be required if a Polish entity acquires foreign currency within a specific cash-pooling arrangement from an entity situated outside the EU, EEA or OECD in exchange foranother foreign currency or Polish currency. Also, the acquisition from entities situatedoutside the EU, EEA or OECD of rights that are performed through money settlement mayrequire permission. Additionally, opening a bank account outside the EU, EEA or OECD mayrequire prior permission.Taking the above into consideration it is recommended to analyze a specific cash-poolingarrangement in light of foreign exchange regulations, in particular, if entities situated outsidethe EU, EEA or OECD participate in such an arrangement. The Foreign Exchange Law also provides for some reporting obligations (see point 5 above).


Poland implemented the European Parliament and Council Regulation EC No 1606/2002 of19 July 2002.Following those rules, IAS may be used in cases where the Accounting Act, the implementinglegislation or the national accounting standards are imprecise, do not deal directly with thegiven issue, do not show the way of proceeding in a specific situation or do not define theconcepts referred to in the Accounting Act or in implementing regulations. It must be stressed


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that entities can apply only IAS approved by the European Union and published in the formof European Commission regulations.

Entities which are part of a capital group where the dominant entity of a higher level preparesa consolidated financial report in accordance with IAS apply the provisions of the AccountingAct and the implementing legislation only in respect of issues not handled by IAS. In theseentities, accounting principles set forth in IAS should have precedence over accountingdirectives (such as Council Directive 78/660/EEC on the annual accounts of certain types ofcompanies or Council Directive 83/349/EEC on consolidated accounts of banks and otherfinancial institutions), and, consequently, over national regulations that implement thosedirectives.


Services rendered by a bank within cash-pooling agreements, if rendered with the use of ITsystems, may qualify as e-services and as such be subject to regulations stipulated in the E-Services Act. Furthermore, under some circumstances a cash-pooling agreement may qualifyas e-banking agreement regulated by the Electronic Payment Instruments Act. In both cases,regulations impose obligations to use safe technical measures that guarantee the security oftransactions, including encryption measures.


Poland implemented into its national system two directives referring to the uniform marketof securities: Directive no 2003/6/EC of 28 January 2003 on insider dealing and marketmanipulation and Directive no 2003/71/EC of 4 November 2003 on the prospectus to bepublished when securities are offered to the public or admitted to trading. The threesuccessive directives: no 2004/39/EC of 21 April 2004 on markets in financial instruments,known as MiFID, no 2004/109/EC of 15 December 2004 on the harmonisation oftransparency requirements in relation to information about issuers whose securities areadmitted to trading on a regulated market, and no 2006/73/EC of 10 August 2006implementing Directive 2004/39/EC of the European Parliament and of the Council as regardsorganisational requirements and operating conditions for investment firms and defined termsfor the purposes of that Directive, known as MiFID II, have not been implemented by Polandwithin the adopted time schedule. However, the draft laws intended to implement thosedirectives are currently in the pipeline.

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UNDER PORTUGUESE LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Portugal. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Albuquerque & Associados LL LAw FirmRua Victor Cordon, 21 – 1200-482 Lisboa, Portugal

www.albuquerque-associados.com

Rute Martins [email protected]

Ántónio de Mendonça [email protected]


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Portuguese law does not specifically regulate the cash pooling operations, and as a generalrule it falls under the exclusive scope of activity of credit institutions. Notwithstanding, cashpooling operations legally admitted carried out between dominated or group companies arenot considered exclusive of banking activity. So, holding companies may provide cashmanagement services to their group companies with some limitations.

In Portugal, the cash management systems are operated mainly through a bank institution.The Bank of Portugal (Banco de Portugal) is the authority that supervises banks and financialcompanies, and also the companies of management of group purchases.

Thus, being the cash management a system mainly developed through the banking system,we can say that the activities accomplished by the centralizing company are not submittedto Bank of Portugal’s control and supervision because this entity only supervises creditinstitutions and financial companies, but the Bank of Portugal may supervise the masteraccount that the centralizing company has in the bank and its activities, and there is anidentification obligation on credit institutions’ clients and on some occasional transactions,according to the implementation of the Directives no. 91/308/CEE and 2001/97/CEconcerning money laundry.

As per the investments in financial instruments including derivative products, please note thatthis kind of investment should be carried out through a bank or a financial intermediary ableto receive and execute orders. The relationship between centralizing and centralized entitiesis not specifically regulated.



Portuguese law does not specifically regulate the cash pooling operations, so there is no legaldistinction and consequent restrictions between the various ways of carrying out such activity.

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Portuguese banks normally request some guarantee of their risk position, which depends verymuch of the contractual conditions agreed in each case.



The activity of carrying out operations of exchange of foreign currencies on a regular basisaiming to obtain profit is deemed to be a commercial exchange activity, which can only becarried out by authorized companies. Companies carrying out this activity are under thecategory of financial companies and its incorporation requires the authorization of Bank ofPortugal.



Portuguese law does not specifically regulate the cash pooling operations. In any case theseactivities are usually provided by commercial banks under their regular activity.



The banks have to comply with a rule of professional secrecy that applies to client’s names,the banking accounts and their credits and debits and other banking operations. Theconfidential information may only be disclosed to the Bank of Portugal, to CMVM, to the TrustFund of Guarantee of Deposits and to the System of Indemnity under their scope of activity,to tax authorities under specific circumstances and on criminal proceedings when authorizedby the tribunal.



Please note that banking and financial activities including asset management, as well asfinancial intermediation are regulated activities under the supervision of Bank of Portugal andCommission of Securities (Comissão do Mercado dos Valores Mobiliários - CMVM)respectively. Insurance activity is also a regulated activity, being the Portuguese InsuranceInstitute (Instituto Português de Seguros - ISP) the competent supervising authority.Portuguese law does not specifically regulate the cash pooling operations, and so theagreements concerning that activity are executed under the freedom of parties to estipulatethe details of their relationship.Nevertheless the relation with banks is highly regulated and there are rules concerning theprocedures and information that has to be delivered to the bank when opening a bank account.


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1.4 Outsourcing


Portuguese law does not specifically regulate the cash pooling operations, and as a generalrule this kind of activity falls under the exclusive scope of activity of credit and financialinstitutions.

Notwithstanding, holding companies may provide cash management services to their groupcompanies with some limitations and also these services are legally admitted when carriedout between companies in group relationship or dominated companies.

As per the limits on cash management service by holding companies we highlight thatregarding participated companies (not dominated) the holding can only provide loans up tothe amount of its shareholding according to last approved balance sheet, unless the loan isprovided as a shareholder loan under the regime of suprimentos.

2. CORPORATE LAW



Portuguese law does not specifically regulate the cash pooling operations and does notexpressly prohibit certain types of companies of participating in cash pooling arrangements.

As per state owned companies we stress that these are bound by rules of financial controlaimed to ascertain the legality, economy, and efficiency of management, and further thesescompanies are subject to financial supervision of Tribunal de Contas and of Inspecção-Geralde Finanças, which makes it unlikely to implement any cash pooling techniques.



Considering cash management as a financial management instrument, it does not have to beinscribed in the company’s corporate object. However, this instrument shall always beconsidered as necessary and convenient to the accomplishment of the company’s purpose.Consequently, the use of this financial instrument has to be, in each moment, evaluatedconsidering its respective conditions and its harmony with the accomplishment of thecompany’s aims.

The participation in cash management agreements has always to be compatible with thesubsidiary’s individual interests and the decision of prejudicial measures related to centralizedcash management can be annulled if it is invoked by any director, fiscal council or anyshareholder with the right to vote.

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Portuguese law does not define expressly the concept of corporate benefit, but it requires thatcommercial companies have a commercial purpose and it refers to the concept of “company’sown social interest”, which has been developed by our doctrine as a common contractualinterest of the shareholders (there are also authors that advocate that the “company’s ownsocial interest” corresponds to an institutional concept that encompasses the commoninterests of shareholders and stakeholders). In any case that does not differ if a company ispart of a group or not, but in a situation of total control of a company the holding companycan issue mandatory instructions to the hold company even if they are disadvantageous tothe hold company.

According to the general practice in Portugal, cash remuneration is, usually, negotiatedbetween the client and the bank where the centralizing company has its master account,although it may be remunerated according to all market underlying, notably EURIBOR andLISBOR.

The centralizing company shall always respect the subsidiaries’ purposes, notably thereimbursement of the transferred capital. Nevertheless may by admit to exist somedistinctive characteristic that may justify not offering all participating entities equivalentterms and conditions.

The centralizing company shall act according to the prudence of a careful and organizedmanager, considering always the company’s interest but also and above all considering, ineach moment, the individual interests of all and each one of the participating companies,since it has a determinant influence among its management and its liquidity.

We should also remark a provision from the Portuguese Corporate Code concerning financialassistance, which foresees that a company can not deliver founds to third ones, includingother companies, so that they can subscribe or obtain shares representing that company’sshare capital. The disrespect of this prohibition is sanctioned with the nullity of the acts andagreements involved.



As mentioned on earlier paragraphs Portuguese law does not specifically regulate the cashpooling operations and so the agreements concerning that activity are executed under thefreedom of parties to estipulate the details of their relationship.


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2.5 Investment of excess cash by the centralizing entityAre there prudential investment rules? In general the centralizing company shall act according to the prudence of a careful andorganized manager, considering always the company’s interest but also and above allconsidering, in each moment, the individual interests of all and each one of the participatingcompanies, since it has a determinant influence among its management and its liquidity.Further the centralizing company shall always respect the subsidiaries’ purposes, and complywith the obligation of reimbursement of the transferred capital.

2.6 Approval of cash pooling arrangementDoes the cash pooling arrangement need to be approved by the management board /supervisory board or the shareholders? Portuguese law foresees several types of companies. Nevertheless, the most commoncompany types are the Limited Company by Quotas (Lda) and the Company by Shares (S.A.).The proceedings of approval of cash pooling arrangement are different in each type ofcompany.If we are dealing with a Limited Company by Quotas cash pooling arrangement should beapproved by shareholders resolution. Concerning the Company by Shares there is only a subordination of the board to shareholders’resolution on the cases specifies by law or in the respective articles of incorporation. So, as ageneral rule, a cash pooling arrangement should be subject board’s resolution. In this respectwe further highlight that the company’s directors have an obligation of diligence, i.e., theyshall always act prudently and according to corporate interest. This prudent action applies alsoto decisions pertaining to cash pooling agreements.According to Portuguese law, the members of the board are liable with the company in caseany of their acts or omissions, taken with lack of respect to their legal and conventionalobligations, cause damages to the company. On the other hand, the members of the board are liable before company’s creditors when,with culpable disrespect of legal or conventional provisions concerning their protection,corporate assets become insufficient to grant the respective credits. They also are liable beforeshareholders and third ones by any damage they might have caused them during theirmanagement.Besides this liability, all the decisions, measures and agreements taken by the directors mustbe in the interest of the companies and according to its object. The members of the boardhave to be sure that the cash management agreement will be advantageous for the companybecause in case of bad results they will have to explain it to the shareholders, in the AnnualGeneral Assembly, where their removal can be decided without prejudice to their liability.

2.7 Specific aspects relating to acquisition financing exitAre there restrictions on the use of cash of the target or the target’s subsidiaries to repay theacquisition loan? Does the existence of a cash pooling arrangement of the purchaser involvingthe target modify the rules? Portuguese law sets forth a prohibition of a company to offer loans or in any way deliversfunds or offers guarantees to third parties so they can subscribe or obtain shares of that

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company. The disrespect of this prohibition is sanctioned with the nullity of the acts andagreements involved.

2.8 Termination


Portuguese law does not specifically regulate the cash pooling operations and so thetermination of the agreement is governed by the stipulations of the parties and by theapplicable law.


According to Portuguese law, any bilateral agreement that has not been completelyimplemented and fulfilled at the time of the bankruptcy declaration is suspended until thebankruptcy trustee decides to uphold the agreement or to refuse to comply with it. Furtherthe general rule concerning the management agreements and power of attorney is that theireffect is terminated with the bankruptcy declaration.

The Portuguese Bankruptcy Code foresees “derived bankruptcies”, i.e. bankruptcies occasionedby other entities’ bankruptcy for instance in cases of unlimited liability companies, which areonly few of the Portuguese companies, and also if a member of a Complementary Group ofCompanies (ACE, in Portuguese), is bankrupted provide the ACE’s By Laws set forth thatconsequence.

The Portuguese Bankruptcy Code includes the situation of lack of liquidity as a sign of dangerof bankruptcy, so the liquidity transference from a subsidiary to the centralizing company, hasalways risks to the same. On the other side, the rights of set-off are not allowed since thebankruptcy declaration.

4. TAX ISSUES



Within the terms of the Article 9, paragraph 28 of the VAT Code, the bank and financialoperations exempted from VAT are: "The credits’ concession and the negotiation, under anyform, understanding discount and rediscount operations, as well as their administration ormanagement performed for those who conceded them".


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4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?The corporate income tax is subject to withholding in source concerning certain earnings suchas interests. (Articles no. 88, 89 and 90 of the Code of Corporate Income Tax – Código doImposto sobre o Rendimento das Pessoas Colectivas).Thus, regarding the security interests earned by the residents and not residents with stableestablishment is 20 %.

Note regarding the tax system of the Madeira's Free Trade Zone:The entities participating in the social capital of the companies established in the Madeira'sFree Trade Zones and of the Island of Santa Maria, within the terms of the Article 33 of TaxBenefits By Laws, benefit an individual income tax (IIT) and a corporate income tax exemptionuntil 31st December of 2011, concerning the profits released to it by those companies, as wellas the earnings resulting from interests or other forms of remuneration of supplies.Besides, the loans' interests contracted by entities established in the free trade zone areexempt, if the loans' product is designated to loans' performance and to the normal functionof the borrowers.Recent changes on Madeira's tax system legislation were submitted to the approval of theEuropean Commission and were rejected. In light of this, the assistance system to companies that have been incorporated in the freeindustrial trade zone and in the centre of the international services of the Madeira's Free TradeZone, in the period of 2003 and 2006, excludes of the reduced rates incidence all financialintermediation activities, securities, and auxiliary financial and securities activities, as well asall activities from the type "services intra-group" (coordination, treasury and distributioncenters).The same happens with the reduced rates system in Azores. Portugal is now negotiating anextension of tax benefits within the scope of Madeira Free Trade Zone.

Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?In what concerns not residents without stable establishment the rate of withholding in sourceunder the benefits is 20%.This rate may also be avoided depending on the application of double taxation agreementsgranted by Portugal and several countries.

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 10% 15% 15% 10% 10% 10% - 10% - 10% 10% 15% 15% -

10%1

15%2

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In any event, and in European context, the above mentioned rate can also be avoided throughthe application of EU Directive regarding interest. Portugal, as a full member of EU, applies EU Directive 2003/49/EU. However it has beengranted a derogation regarding the complete transposition of the EU Direction 2003/49/EU’srules for a period of time of 8 years. It means that the payment of interest between entitieswill give rise to withholding taxes in the following terms: - The first 4 years: a rate of 10%- The subsequent 4 years: a rate of 5%In what Portugal is concerned, and for the time being, in order to benefit from the applicationof the Directive, the parties will have to submit before the local tax authorities of residence aCertificate (a specific form issued by the Portuguese Authorities), to be signed and dulycertified by the State of the income beneficiary. This proceeding is also applicable for theDouble Taxation agreements.

4.3 Stamp duty


In Portugal, every act, contract, document, title, book, paper and other facts foreseen in theGeneral Table of Stamp Tax Code (STC) are subject to stamp tax (Article 1 of STC).However, the law establishes some exemptions:Thus, in what concerns to financial operations, including the respective interests, for a termnot superior to one year, if it is exclusively bound to the coverage of treasury need and madeby the Social Capital’s Holding Company to controlled companies or to companies holdingthe participations foreseen in the Decree-Law 495/88, of 30th December, as well as financialoperations performed in favour of companies that are in control or in group relationship withthem.There will be also an exemption in the above-mentioned operations when made by socialcapital owners to entities in which they hold a social participation not inferior to 10%, and ifthis one has remained in their ownership during a consecutive year or since the incorporationof the participating company.

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 10% 10% 10% - 10% 10% 10% - 15% 10% - 15% 10%

5

1 When paid by bank entities2 In every other cases3 Interests paid by a company of a state to a financial establishment resident of other state4 Every other case5 Interest arising from long-terms loans (more than 5 years included) granted by banks or financial Institutions, resident in one

of the Contracting State are exempt from withholding tax.

10%3

15%4


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The majority of bank institutions, during the analyses of the request for a cash managementsystem, demand the minimum percentage of 10% participation in the capital. Others are,however, more demanding and request a minimal participation of 51%, considering thatstamp tax exemption only occurs in a control relationship.If the legal conditions do not verify, the interests will be taxed in a rate of 4% in the stamptax.



Usually, the interests constitute charges deductible for the determination of the benefitstaxed in the terms of the established in the Article 23, paragraph 1, subparagraph c) of CITCode. In light of this, it is considered costs proved indispensable for the earnings or incomesperformance subject to tax, the financial charges, such as the interests of improper capitalapplied in exploration.It will not be deductible the interests of supplies or loans given by partners to the company,in the part exceeding the value correspondent to the rate of reference Euribor to 12 monthsof the day of debt incorporation, or other rate defined by administrative rule of the FinancialMinistry (Administrative rule number 184/2002, of March 4, that established a spread of1,5%) (Article 42 of the CIT Code).

In the area of international groups it is more advantageous for a company to assure itsfinancing through a loan, contracted next to other company of the group, than by the increaseof social capital, since the interests are considered charges.

The Corporate Income Tax Code (CITC) , article no.61, establishes that "when the indebtnessof a passive subject to a not resident entity in Portuguese territory or in another EuropeanState Member with which it has special relationships (…), is excessive, the interests suppliedrelated to the part considered in excess, are not deductible for tax determination effects oftaxable income".There will be special relationships in indebtedness situations of the passive subject to a thirdpart not resident in Portuguese territory or European State Member, whenever there is anauthorization or guaranty rendered by one of the entities referred in the Article 58, paragraph4 of CITC1, regarding transfer pricing.

In light of this, it will not be considered as costs, the interests paid to entities not residents inthe Portuguese territory or European State Member, with which there is special relationships,when the indebtedness to those entities is excessive. There will be excess of indebtednesswhen the value of the debts concerning the mentioned entity is superior to the double of thevalue of the correspondent participation in its own capital.

1 Article 58, paragraph 4 of CITC:”One entity and the holders of the respective capital, or spouses, ascendants or descendents of these, who detain, direct or indirectly, a participation not inferior to 10% of the capital or the rights of vote; entities in which the same holders of the capital, respective spouses, ascendants or descendents detain, direct or indirectly, one participation not inferior of 10% of the capital or of the rights of vote; one entity in which the majority of the members of the social organs, or the members of any management organs, director, agency or inspection, being the same persons or, being different persons, be related between them by marriage, union of fact legally recognised or parentage; entities related by contract of subordination, of group in the same level or other equivalent effect; companies in control relationship, within the terms of what is defined in the decrees that statue the obligation of elaborate financial consolidated accounts (….)”.

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However, please note that there will not be place to corrections if, in the term of 30 days afterthe term of the taxation period, it is made prove that, considering the kind of activity, thesector, the dimension and other relevant criteria, and also the operation's risk profile could beobtained the same level of indebtedness and in similar conditions of one independent entity.


The Article no. 68 of the General Taxation Law and the article no. 57 of the TaxationProceeding and Process Code establish the possibility of asking an obligatory consult to TaxAdministration about passive subjects' tax situation and the tax benefits requirements not yetperformed.This obligatory information can foresee any other question that taxpayers want to clear outconcerning their tax situation or the possibility to achieve tax benefits.The information given within the terms foreseen of this Article bind the Tax Administration,that can not act in a different way, unless in case of judicial decision execution.

4.5 Tax havens


For effects of taxable benefit calculation, Portuguese law foresees that the amounts paid toentities not resident in the Portuguese territory are not deductible and in there submitted toa tax system clearly more advantageous2. Although this provision also admits the eliminationof the presumption by proving that the charges correspond to operations effectivelyperformed within those privileged jurisdictions and they do not have an unusually characteror that the amounts at stake are not outstanding. (Article 59 of CITC).



Portuguese tax law does not specifically foresee a specific favourable tax regime for corporatetax of centralizing entities and taxation of cash pooling operation beside the particularitiesabove referred concerning Stamp duty and Company Income Tax.

2 For all effects foreseen in the law, notably in the Article 59, paragraph 2, in the Article 60, paragraph 3, subparagraph c) and paragraph 7 of the CIT Code, Article 26, paragraph 2, subparagraph b) of the tax benefits By Laws, in the Article 6 of the Stamp tax Code, in the Article 3 of the Decree-law 88/94 of April 2, in the Article 2, paragraph 4 and in the Article 4, paragraph 3 of the Decree- law 219/2001 of August 4, the list of countries, territories and regions with privileged taxation systems, clearly more advantageous, is the follow:1) Andorra; 2) Anguilla; 3) Antigua and Barbuda; 4) Dutch Antilles; 5) Aruba; 6) Ascension; 7) Bahamas; 8) Bahrain; 9) Barbados; 10) Belize; 11) Bermuda Island; 12) Bolivia; 13) Brunei; 14) Channel Island (Alderney, Guernsey, Jersey, Great Stark, Herm, Little Sark, Brechou, Jethou e Lihou); 15) Cayman Island; 16) Cocos e Kelling Islands; 17) Cyprus; 18) Cook Islands; 19) Costa Rica; 20) Djibouti; 21) Dominica; 22) United Arabian Emirates; 23) Falkland or Malvinas Islands; 24) Fiji Islands; 25) Gambia; 26) Grenada; 27) Gibraltar; 28) Guam Islands; 29) Guiana; 30) Honduras; 31) Hong Kong; 32) Jamaica; 33) Jordania; 34) Keslim Islands; 35) Kiribati Islands; 36) Kuwait; 37) Labuán; 38) Líban; 39) Liberia; 40) Liechtenstein; 41) Luxemburg, only in what concerns to holding companies in way of Luxemburg legislation that is ruled by the law of 31st July, 1929 and for the Great-Dukel Decisition of 17th December, 1938; 42) Maldives Islands; 43) Man Islands; 44) Marianas of North Islands; 45) Marshall Islands; 46) Maurice's; 47) Monaco; 48) Monserrate; 49) Nauru; 50) Natal Islands; 51) Niue Islands; 52) Norfolk Islands; 53) Sultanato of Oman; 54) Pacific Islands; 55) Palau Islands; 56) Panama; 57) Pitcairn Islands; 58) Polynesia French ; 59) Porto Rico; 60) Qatar; 61) Salomon Islands; 62) American Samoa; 63) Occidental Samoa; 64)Santa Helena Islands; 65) Santa Lucia; 66) Sao Christian e Nevis; 67) San Marino; 68) Sao Pedro e Miguelon Islands; 69) Sao Vicente e Grenadines; 70) Seychelles; 71) Swaziland; 72) Svalbard Islands; 73) Tokelau Islands; 74) Tonga; 75) Trinidad e Tobago; 76) Tristan of Cunha Islands; 77) Turks e Caicos Islands; 78)Tuvalu Islands; 79) Uruguay; 80) Republic of Vanuatu; 81) Virgins Britannica's Islands; 82) Virgins of Unit States of America; 83) Arabian Republic do Yemen.


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The operations resulting from the cash management system and its respective fluxes mayraise questions in transfer pricing area.

In fact, whenever special relationships exist, it can often happen that transactions do notrespect arm’s length principal.

Following OECD guidelines, Portuguese tax law (Article 58 of the CITC) establishes that in thecommercial and financial operations between entities with special relationships are to beagreed similar conditions, accepted and practiced terms or with conditions substantially tothose that would normally exist between independent entities in similar operations.

Company shall indicate in the annual accounting declaration and tax information (Article 113of CITC), the existence or the inexistence of operations with entities with which it is insituation of special relationships.

In case of non-compliance with such rules, the company is required to perform corrections tothe taxable income. The same will occur in the operations performed between a non residententity and its permanent establishment located in Portuguese territory.

If from the analysis of the operations and the nature of the special relationship, TaxAdministration understands that arm’s length principle conditions have not be observed, thecorrections to taxable income will have to performed within the terms of the Article 58 ofCITC.

The applicable methods are: the method of the market price comparable, the method ofresale minored or the method of majored cost; the method of fractionally of the benefit, themethod of the liquid spread of the operation.


Portuguese law does not specifically regulate the cash pooling operations and so theoperations carried out thought banks are subject to general reporting obligations towards theBank of Portugal.


For the most part the exchange operations are liberalized, but Portuguese law requires thatthese operations are carried out thought authorized intermediaries, which can be banks,exchange agents or other authorized entities.

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There are not specific accountancy obligations and standards for entities participating in acash pooling arrangement. Nevertheless, it is advisable that different structures of the samegroup keep separated accounts and financial records.


Portuguese law does not specifically regulate the cash pooling operations and does notspecifically provide for the security of data exchange between entities in this regard, andfurther the law concerning personal data legal protection only applies to personal dataregarding to individual persons as opposed to legal entities. Notwithstanding, the transfer ofdata protected by banking secrecy and confidentiality should comply with safety measuresable to prevent any unauthorized disclosure.


Portuguese Law does not foresee specific financial reporting, evaluation and controlobligations for entities participating in a cash arrangement. Although some principles have tobe followed:- Definition of the centralizing entities and other participating entities;- Definition of rules and proceedings of cash management to negotiated with banking

institutions where are booked excess cash amounts in each entity account though zerobalancing arrangements or notional cash pooling;

- Definition of level of financial needs of each entity.


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UNDER SOUTH AFRICAN LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in South Africa. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Robert DrimanDirectorParticulars of contributor(s):Tel: (011) 685-8861Fax: (011) 535-5238Email: [email protected]

Anthony ColegraveAssociateParticular of contributor(s):Tel: (011) 685-8828Fax: (011) 535-5241Email: [email protected]

82 Maude Street, Sandton, South Africa, 2196


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Loans or advances to other group entities by a group entity do not require banking authorities’approval for the centralized entity or the centralizing entity, irrespective of whether it is ashort, medium or long term loan or advance.

However, regard has to be had to section 38 of the Companies Act, 1973 (the “CompaniesAct”) dealing with financial assistance. Section 38 provides that no company shall give,whether directly or indirectly, and whether by means of a loan, guarantee, the provision ofsecurity or otherwise, financial assistance for the purpose of or in connection with a purchaseor subscription made or to be made by any person of or for shares of the company, or wherethe company is a subsidiary company, of its holding company.

Section 38 does not prohibit the following:(a) The lending of money in the ordinary course of its business by a company whose main

business is the lending of money;(b) The provision by a company, in accordance with any scheme for the time being in force,

of money for the subscription for or purchase of shares of the company or its holdingcompany by trustees to be held by or for the benefit of employees of the company,including any director holding a salaried employment or office in the company;

(c) The making by a company of loans to persons, other than directors, bona fide in theemployment of the company with a view to enabling those persons to purchase orsubscribe for shares of the company or of its holding company to be held by themselvesas owners; or

(d) The provision of financial assistance for the acquisition of shares in a company by thecompany or its subsidiary in accordance with the provisions of section 85 (relating toshare buy-backs) for the acquisition of such shares.

In addition the Corporate Laws Amendment Act, 2006 added subsection 2A to Section 38 ofthe Companies Act. This subsection now allows a company to give financial assistance for thepurchase of or subscription for shares of that company or its holding company provided:(a) the company’s board is satisfied that subsequent to the transaction, the consolidated

assets of the company fairly valued will be more than its consolidated liabilities;

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(b) subsequent to providing the assistance, and for the duration of the transaction, thecompany will be able to pay its debts as they become due in the ordinary course ofbusiness; and

(c) the terms upon which the assistance is to be given is sanctioned by a special resolutionof its members.

Since the pooling arrangements do not involve the purchase or subscription of shares, Section38 of the Companies Act will not apply to the pooling arrangements. Investments in financial instruments carried out by the centralizing entity on behalf of thecentralized entities do not need the approval of the banking authority.

1.1.2 Notional pooling Is there any prohibition/restriction on banks/participating entities implementing notionalpooling (i) by way of bank margins reductions, (ii) by way of merging current account balancesof the centralizing and centralized entities in order to create a single balance, or (iii) by way ofcalculating interest payable to each account based on merged scales of interest? Do banksrequire cross guarantees from participating entities? Can such guarantees be capped?Pooling arrangements are purely contractual in nature. This means that the parties to thepooling arrangement are free to choose the method employed to pool their accounts. Noregulatory authority or consent is required to effect these methods of notional pooling. Also,no cross guarantees from participating entities are necessary. The parties are, of course, freeto contractually agree to limit the methods of pooling employed or provide for crossguarantees between different entities to the pooling arrangement. However, South Africanexchange controls pose various difficulties in respect of cross-border cash poolingarrangements as more fully discussed under 1.1.3.

1.1.3 Centralized management of exchange rates and risksDoes the arrangement whereby a centralized entity agree to buy from and sell to thecentralizing entity all its foreign currencies require banking authorities’ approval or consent?In terms of the Exchange Control Regulations, the South African Reserve Bank (“SARB”)enforces a rigid exchange control regime on South African residents. It is important to notethat, for the purposes of exchange control, South African companies, banks, financialinstitutions and South African branches of foreign entities are regarded as “South Africanresidents”. Generally, the Exchange Control Regulations provide that no person may, except with theprior approval of the SARB, transfer any funds or securities out of South Africa or make anypayment to a non-South African resident as defined or place any sum to the credit of suchperson. Such approval may be granted specifically on application to the SARB.Exchange controls generally preclude South African residents from incurring obligations tonon-South African residents (whether in respect of purchases, loans, derivatives or anysecurity in respect thereof or otherwise) without the prior approval of the SARB. Exchangecontrols also preclude South African residents from holding assets outside of South Africaexcept with the prior approval of the SARB. In cases where a South African resident holdsassets outside South Africa the resident may only deal in those assets on the terms of theSARB approval under which the assets were transferred out of South Africa in the first


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instance. Where there is no SARB approval, the resident may be required by the SARB torepatriate its foreign assets to South Africa.

The main purpose of exchange control is to ensure the repatriation into the South Africanbanking system of all foreign currency acquired by residents of South Africa whether throughtransactions of a current or of a capital nature. In other words, funds which have their sourcein South Africa, but have nevertheless been utilised offshore must at a future point berepatriated to South Africa.

Exchange control is enforced through a number of officially authorised foreign exchangedealers (“Authorised Dealers”). Authorised Dealers include the major South African retailbanks. Only Authorised Dealers may exchange Rand for foreign currency. Authorised Dealersmay only approve the registration of a transfer of securities into the name of a non-residentif the transaction in respect of which the exchange or transfer is made is approved by theSARB. The SARB gives Authorised Dealers written directives as to the type of payments andtransactions in respect of which they may exchange Rand for foreign currency and in respectof which they may approve the registration of securities in the name of non-residents.

The SARB also from time to time grants general approvals to certain classes of business or forcertain business purposes. Examples of general approvals under which residents may performin favour of non-South African residents are:(a) trades in listed financial instruments and securities;(a) the issuers of securities may pay non-resident dividends and interest on securities

properly acquired by them;(c) certain types of over-the-counter derivatives entered into by Authorised Dealers under

certain conditions;(d) securities lending/borrowing transactions entered into by authorised dealers under

certain conditions;(e) individuals are given a once-off foreign investment allowance.

In terms of a person’s individual foreign investment allowance, under current ExchangeControl practice, a South African resident may (subject to obtaining certain tax clearances andexchange control approval) invest, as a once-off allowance, up to R2 million offshore. Subjectto Exchange Control approval, certain South African companies (and other legal entities) areable to invest a percentage of their assets (based on audited balance sheets) abroad forportfolio investments. The SARB considers applications for such offshore investments on acase by case basis.

In terms of the Exchange Control Regulations it is incumbent upon the South African resident,and not the non-resident, to obtain the requisite Exchange Control approvals. However, if theapproval does not exist in respect of a transaction, the South African resident may beprecluded from obtaining foreign exchange with which to perform its obligations under thetransaction. It is also possible that a transaction entered into in contravention of theExchange Control Regulations may be unenforceable in the South African courts. A SouthAfrican resident who contravenes the Exchange Control Regulations may be criminally liable.

Furthermore the Exchange Control Regulations preclude the set-off of foreign liabilitiesagainst foreign accruals, without first obtaining SARB approval. In the current circumstances,exchange control approvals would be required for the pooling arrangements. In our opinion,

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it is unlikely that Exchange Control would approve of such arrangements insofar as crossborder transactions were concerned. Exchange Control is not likely to approve the set-off ofbalances across borders or in different currencies, particularly where money is to be paidoffshore to settle accounts in respect of obligations or services performed outside of SouthAfrica.



As long as the centralizing entity’s activities as the operator of a cash management systemdo not amount to settlement or clearing activities, which are regulated activities for which alicense is required in terms of the National Payment Systems Act, 1998, the centralizingentity will not need consent for its pooling operations. As we understand it, the poolingarrangements will be effected through a bank, and the centralizing entity will not require alicense to give effect to the pooling arrangement. However approval of the SARB as discussedunder 1.1.3 above will be required in respect of cross border cash pooling arrangements.



Banks are generally under a common law duty of confidentiality to keep its customersinformation confidential. Bank confidentiality laws originate from contractual principlesgoverning the relationship between a bank and its client. A bank’s duty to keep its customer’sinformation confidential is seen as an implied term of the contract between a bank and itscustomer: there need not be an express agreement between the bank and the customer todo so.

South African case law provides many instances in which the courts have pronounced on therelationship between a bank and its customers. The earliest of these cases is that of Abrahamsv Burns 1914 CPP 452 wherein it was held that a bank will be held liable if without sufficientreasons, it discloses confidential information about its clients to a third party. A leading case,which has repeatedly been referred to with approval by the South African courts, and whichwent on to affirm the principles in the Abrahams case and the current South African legalposition is the English law case of Tournier v National Provisional and Union Bank of England1924 1 KB 461. In this case, the court referred to four distinct instances in which a bank coulddisclose confidential information and thereby breach the implied term of the contract. Theseinstances are: (a) Where the bank is compelled to disclose the information by law; (b) Where there is a duty to the public, to disclose the information; (c) Where the disclosure is made by the express or implied consent of the customer; and (d) Where the interests of the bank required the information to be disclosed.

In accordance with the principles of South African Common law relating to the banks duty ofconfidentiality, the centralizing entity will not be able to obtain from banks holding accountsof centralized entities any information on such accounts. However, the parties to the pooling


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arrangements i.e. the centralized entities and the centralizing entity, can contractually agreethat the centralizing entity may obtain information on the individual accounts of thecentralized entities from the banks that hold the accounts of the centralized entities.



A regulatory body called the Financial Services Board (“FSB”) has been established to governfinancial advisory and intermediary services provided within South Africa. The FinancialAdvisory and Intermediary Services Act, 2002 (“FAIS”) requires that financial servicesproviders register as such with the FSB and comply with FAIS.

The types of asset managers, and their governing legislation, which must be considered whenentering into cash-pooling or zero-balancing arrangement are as follows:(1) Pension Fund Managers - Pension Fund Act, 1956 and the Regulations thereto;(2) Collective Investment Scheme Managers - Collective Investment Schemes Control Act,

2002 and the Regulations thereto;(3) Long-term Insurers - Long-term Insurance Act, 1998;(4) Short-term Insurers - Short-term Insurance Act, 1998;(5) Discretionary Financial Services Providers who are authorised in terms of FAIS.

Essentially, cash-pooling arrangements can only be entered into if they are permissible interms of the above legislation, and the Rules or Deed of the fund or scheme, as applicable.Insurers and collective investment schemes in particular must maintain minimum capitalreserves to comply the capital adequacy requirements laid down in the governing legislation.As a general rule asset managers must separate investor’s assets from their own, and trustbanking accounts (holding investors funds) must be kept distinct from the company’s ownoperational bank accounts. Zero-balancing and cash-pooling across such client’s trustaccounts, would as a general rule, not be permissible. Zero-balancing and cash-pooling of theasset manager’s own banking account may be permissible subject to the maintenance of thecapital adequacy requirements required by the applicable legislation.

Money laundering is regulated in South Africa by the Financial Intelligence Centre Act (“FICA”).Numerous account opening procedures and KYC enquiries are prescribed by FICA and mustbe complied with whenever a person opens a bank account in South Africa.

1.4 Outsourcing


The cash pooling function can be entrusted in whole or in part to an agent or another entity,which is not a member of the group of companies.

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2. CORPORATE LAW



To the extent that the activities of entities wishing to participate in cash poolingarrangements are not regulated by other legislation or are subject to monitoring or approvalsby a regulatory body in terms of such legislation (see paragraph 1.3 above), there are norestrictions on the form of entities that can participate in cash pooling arrangements.However, the memorandum and articles of association of a company, which are theconstitutive documents of a company in South Africa, determine whether or not a particularcompany can undertake or enter into cash pooling arrangements. A company’smemorandum and articles of association must be examined in this regard as thesedocuments will set out the powers of the company and the direct powers of the directors andshareholders insofar as making decisions regarding the company or its assets are concerned.



Again, the memorandum and articles of association of a company determine whether or nota particular company can undertake or enter into cash pooling arrangements. Eachcompany’s memorandum and articles of association must be examined in this regard as thesedocuments will set out the powers of the company and the direct powers of the directors andshareholders insofar as making decisions regarding the company or its assets are concerned.It is most likely that the company will require a board or shareholders meeting in order todecide whether or not to approve the participation in cash pooling arrangements. This willhowever depend on the company’s constitutive documents.


How is corporate benefit defined? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities? Is there an obligation to offer theparticipating entities market financial conditions (i.e. the “arm’s length principle")? What arethe liabilities and sanctions in case of violation of the corporate benefit of a participating entity(cancellation of the agreement, management liability, extension of bankruptcy proceedingsetc.)? Do they apply to directors, officers and shareholders?

Corporate benefit laws or the concept of “consideration” under English law does not apply inSouth Africa and there are no such similar laws. However if funds were transferred by aninsolvent entity during insolvency proceedings to an account of another entity, any transfer


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could be set aside by the liquidator as a disposition (see paragraph 3 below). The effectthereof would be that the liquidator may elect whether or not to abide by the transaction orrepudiate it, leaving the contractual counterparty with a damages claim against the insolventestate.



In South Africa there are no prescriptions as to the remuneration of the centralizing entity. Theremuneration of the centralizing entity will be agreed upon contractually with the centralizedentities and determined by the agreement concluded between the parties. However, anyremuneration paid to the centralizing entity by a South African resident centralized entity willbe subject to and require exchange control approval as discussed in 1.1.3 above.



To the extent that the centralized entities’ activities are regulated by legislation (seeparagraph 1.3), regard must be had to such legislation to ensure that there is regulatorycompliance with respect to the types of investments that the regulated entities are permittedto partake in and that such entities comply with the requirements relating to the manner inwhich the assets of such entities may be dealt with by the regulated entity. In respect ofunregulated entities however, the investment of excess cash by the centralizing entity willdepend on whether the agreement entered into with the centralized entities empowers thecentralized entity to do so and provides for the investment of excess funds. If this is the case,excess cash may be invested by the centralizing entity.


Does the cash pooling arrangement need to be approved by the managementboard/supervisory board or the shareholders?

Whether or not the pooling arrangements need to be approved by the management of theboard, supervisory board or shareholders will depend on the particular company’s constitutivedocuments and whether or not the activities of the entities are regulated by legislation. To theextent that an entity is regulated by legislation one must take cognisance of such legislationand ensure that the requisite approvals are obtained prior to any cash pooling arrangementsbeing entered into. Where a company is not regulated by legislation however, the company’smemorandum and articles of association will need to be examined in this regard as thesedocuments will set out the powers of the company and the direct powers of the directors andshareholders insofar as making decisions regarding the company or its assets are concerned.It is most likely that the company will require a board or shareholders meeting in order todecide whether or not to approve the participation in cash pooling arrangements. This willhowever depend on the company’s constitutive documents.

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In South Africa regard must be had to Section 38 of the Companies Act, 1973 (the “CompaniesAct”) dealing with financial assistance. Section 38 provides that no company shall give,whether directly or indirectly, and whether by means of a loan, guarantee, the provision ofsecurity or otherwise, financial assistance for the purpose of or in connection with a purchaseor subscription made or to be made by any person of or for shares of the company, or wherethe company is a subsidiary company, of its holding company.

Section 38 does not prohibit the following:(a) the lending of money in the ordinary course of its business by a company whose main

business is the lending of money;(b) the provision by a company, in accordance with any scheme for the time being in force,

of money for the subscription for or purchase of shares of the company or its holdingcompany by trustees to be held by or for the benefit of employees of the company,including any director holding a salaried employment or office in the company;

(c) the making by a company of loans to persons, other than directors, bona fide in theemployment of the company with a view to enabling those persons to purchase orsubscribe for shares of the company or of its holding company to be held by themselvesas owners; or

(d) the provision of financial assistance for the acquisition of shares in a company by thecompany or its subsidiary in accordance with the provisions of section 85 (relating toshare buy-backs) for the acquisition of such shares.

In addition the Corporate Laws Amendment Act, 2006 added subsection 2A to Section 38 ofthe Companies Act. This subsection now allows a company to give financial assistance for thepurchase of or subscription for shares of that company or its holding company provided:(a) the company’s board is satisfied that subsequent to the transaction, the consolidated

assets of the company fairly valued will be more than its consolidated liabilities;(b) subsequent to providing the assistance and for the duration of the transaction, the

company will be able to pay its debts as they become due in the ordinary course ofbusiness; and

(c) the terms upon which the assistance is to be given is sanctioned by a special resolutionof its members.

If the cash pooling arrangements do not involve the purchase or subscription of shares, section38 of the companies act will not apply to the pooling arrangements.However, regard must also be had to legislation which regulates certain entities (seeparagraph 1.3) to ensure that these arrangements are permitted under the relevant legislationand that to the extent that they are permitted the requisite approvals in respect thereof areobtained. Insofar as the use of the cash of the target or the target’s subsidiaries in repayment of theacquisition loan offshore is concerned, any entity which is a South African resident will besubject to Exchange Control Regulations and require exchange control approvals as discussedin 1.1.3 above.


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2.8 Termination


There is no restriction preventing the centralizing entity from exercising its contractual rightto terminate the agreement and termination of the agreement may be exercised subject tothe terms of the agreement entered into between the centralized entities and the centralizingentity.


3.1 In terms of the Insolvency Act, 1936, (“Insolvency Act”) where the liabilities of a company,fairly valued, exceed the assets of the company, the court has the discretion, on applicationby a certain category of persons, to wind up the company and appoint a provisional liquidator.The liquidation of a company will give rise to a concourse of creditors. The Insolvency Actdivests the insolvent company of its assets and liabilities and vests them in the liquidator, andcivil proceedings are stayed. The liquidation crystallises the company’s position and at oncethe rights of the general body of creditors are paramount. No transaction can then be enteredinto with regard to company matters by a single creditor to the prejudice of the general body.The claim of each creditor must be dealt with as it existed at the issue of the liquidation order.Liquidation not only affects the insolvent’s property, but also the contracts to which theinsolvent is a party. The liquidator of the insolvent estate has an election to abide by thecontract and perform thereunder or not. The liquidator will obtain and abide by theinstructions of the general body of creditors in exercising his election.

No transaction may be entered into by a party after the insolvency of that party. Everytransaction entered into by a party to the contractual pooling arrangement, where it is beingwound up after the commencement of the winding-up, without the sanction of the liquidator,is void.

Furthermore, Section 29(1) of the Insolvency Act provides that:“Every disposition of his property made by a debtor not more than six months before thesequestration of his estate or, if he is deceased and his estate is insolvent, before his death,which has had the effect of preferring one of his creditors above another, may be set asideby the Court if immediately after the making of such disposition the liabilities of thedebtor exceeded the value of his assets, unless the person in whose favour the dispositionwas made proves that the disposition was made in the ordinary course of business andthat it was not intended thereby to prefer one creditor above another.”

A “disposition” includes the giving of security in respect of a previously unsecured debt.

Any transaction between the parties to the pooling arrangement entered into in the six

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months preceding the liquidation, may amount to a “disposition” in terms of the InsolvencyAct, and may therefore be subject to the avoidable disposition provision of the Insolvency Act,where insolvency proceedings have commenced against the South African transferor. Whatis important in relation to a voidable preference is the effect of the disposition, not the reasonfor which it was made.

Where a participating entity has been declared insolvent and is in the process of being woundup, the centralizing entity will not be in a position to terminate the agreement constitutingthe pooling arrangement. This is because on the insolvency of a participating entity, the estateof that entity is frozen. In terms of the Insolvency Act, the liquidator can then either enforceperformance under the agreement or cancel the agreement. However, as between the othermembers of the pooling arrangement, the agreement may provide that upon the insolvencyof one of the members of the arrangement, the arrangement will be terminated. Thisprovision will be enforceable as against the solvent members of the pooling arrangement.

In South African law, companies have separate legal personality and therefore, the insolvencyof one of the entities will generally not extend to the other entities in the poolingarrangement.

3.2 Banks Act

In addition, Regulation 13 of the Regulations Relating to Banks issued under the Banks Act,only permit a bank to set-off the accounts of clients who maintain both debit and creditbalances with the bank where a legal right of set-off exists and is enforceable post-insolvency.Generally pre-insolvency set-off is permissible under South African law provided that it isdone on a gross basis. However, a bank will not be entitled to capital relief. Capital reliefrequires that the set-off arrangements are enforceable post-insolvency. Post-insolvency set-off is subject to the provisions of the Insolvency Act and is only permitted if set off takes placebetween an exchange or a market participant or in terms of any “master agreement” asdefined in Section 35B of the Insolvency Act, for example ISDA or ISMA, then the set off willbe effective and binding on a trustee of an insolvent estate. If one has regard to the provisionsof section 35B of the Insolvency Act, it is evident that debit and credit balances and depositson bank accounts would not qualify as “master agreements” for purposes of section 35B, andwould consequently not be capable of set-off post insolvency. Consequently, it is our opinionthat a bank would not be able to provision against the debit and credit balances of accountson a net basis.

4. TAX ISSUES



The movement of funds, whether notional or physical, carries no VAT implications, as theseare deemed to be financial services and exempt from VAT. However, any fees charged forcarrying out such transfers will be subject to VAT if they are carried out in South Africa by a


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registered vendor. The rate is 14%, unless the recipient of the service is not physically presentin South Africa at the time of the service, in which case the rate is 0%.



The tax rate is the same for interest accrued in South Africa, whatever the nature of theinvestment. For a company the rate is 28%, for individuals it is 40% at the maximummarginal rate. Interest payable to a foreign entity is exempt from tax provided it did not atany time during the year carry on business through a permanent establishment in SouthAfrica. In the case of individuals, the person must have been physically present in South Africafor no longer than 183 days during the year of assessment.


There is no withholding tax on interest payable to a non-resident.

4.3 Stamp duty


The shifting of funds between accounts does not attract stamp duty.




The only limitation could arise in the thin capitalisation/transfer pricing context. If the foreignentity is the creditor of the local entity (subsidiary or associated company) then, to the extentthat the loan exceeds thrice the capital and reserves, interest will be disallowed and treatedas a dividend. These rules do not apply where the relationship is between branch and headoffice.

4.5 Tax havens


If the creditor is a non-resident, it matters not where it is situated. Provided the creditor isnot carrying on business in South Africa, interest paid by the South African debtor is deductible(unless the funds were borrowed for a non-trade or tax-exempt purpose such as earning orpaying dividends) and is exempt in the hands of the creditor.

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There is no favourable tax regime for such activities other than the exemption for interestaccruing to non-residents as discussed in 4.5 above. Also see 4.2 above with regard to interest.



To the extent that the interest rate between local subsidiary and foreign parent exceeds theInterbank rate of the currency of the loan plus 2%, it will be disallowed and treated as adividend. Here too, as with thin capitalisation, these rules do not apply where the relationshipis between branch and head office.


There are no central bank reporting obligations bearing upon either the centralized entity, thecentralizing entities or the banks with which such pooling accounts are held.


Please see our advice in regard to question 1.1.3 above. Exchange controls, under the SouthAfrican Exchange Control Regulations essentially render cross border cash poolingarrangements unenforceable in the absence of regulatory approval. In our view, such approvalis unlikely to be forthcoming.


Sources of disclosure for published financial statements of South African entities comprise ofthe following:(a) the Companies Act 67 of 1973 (the “Companies Act”);(b) Statements of Generally Accepted Accounting Practice (“GAAP”);


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(c) Statements and Interpretations issued by the International Accounting Standards Board;(d) the JSE Listings Requirements; and(e) the King Report on Corporate Governance.

The Section 288 of the Companies Act requires that where companies that are not whollyowned subsidiaries of another company incorporated in South Africa (including externalcompanies which are subsidiaries of a company incorporated in South Africa) havesubsidiaries, group annual financial statements should be made out including the annualfinancial statements of such companies. The group annual financial statements and thecompanies own annual financial statements must conform to generally accepted accountingpractices and fairly present the state of affairs of the business of the company and all itssubsidiaries for a particular financial year. One of the matters required to be dealt with insuch financial statements is the cash flow statement, which deals amongst other things withitems that include cash and cash equivalents. In terms of the Companies Act a failure by anydirector or officer of the company to take reasonable steps to comply with the aboveconstitutes an offence by such person.

Where the directors of the company find that there are reasons for departing from any of theaccounting concepts stated in GAAP they may do so upon providing reasons for departingfrom GAAP, the effects thereof and stating the particular departures.

Usually entities which are regulated by legislation (see paragraph 1.3) also have to meetrequirements in respect of accountancy obligations and standards. Regard must be had tothose provisions which deal with the accountancy obligations of such entities to ensure thatthese provisions are complied with.


The Electronic Communications and Transactions Act 25 of 2003 (the “ECT Act”) regulateselectronic communications and transactions and provides for matters relating to the abuse ofinformation systems. Most aspects relating to data securitization will therefore be regulatedthereby subject to any contrary agreements entered into which exclude the application of theECT Act.


The King Committee on corporate governance issued its report in March 2002 (King II). KingII advocates principles of openness, integrity and accountability. Apart from the accountancyobligations set out above, the King Report and the Code of Corporate Practices and Conduct

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guide corporate disclosures to be made by companies. Further to this Industry norms andnational and international best practice prove instructive in this regard. The King reportidentifies seven primary characteristics of good governance namely discipline, transparency,independence, accountability, responsibility, fairness and social responsibility. King II is not astatute but a set of guidelines. Private companies are encouraged but not obliged to complywith King II’s provisions. King II sets out a code of corporate practices and conduct which dealswith:(a) The board of directors;(b) Risk management;(c) Internal audit;(d) Integrated sustainability reporting;(e) Auditing and accounting;(f) Relationship with stakeholders;(g) Communication.

In addition to this, entities regulated by legislation (see paragraph 1.3), usually have to complywith provisions which regulate financial reporting, evaluation and control obligations andregard must be had to these relevant provisions to ensure that the requirements in respectthereof are met.


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UNDER SPANISH LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Spain. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Pere Kirchner Baliu1

Partner63, Velazquez St.28001 Madrid (Spain)Tel: (34) 915 247 156 Fax : (34) 915 247 154E-mail: [email protected]

1 The author thanks Florentino Carreño Vicente, Jesús Mardomingo Cozas, Jose María Garrido García, Fernando Mínguez Hernández and José Francisco Fernández Aparicio for their collaboration.


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Under Spanish law, and pursuant to article 28 of the Credit Institutions Discipline andIntervention Law 26/1988, dated July 29, and article 1 of the Royal Legislative Decree1298/1986, dated June 28, only credit institutions duly registered in Spain (under a Spanishbanking license or a license granted in another EU country and subsequently “passported”)may receive “funds repayable from the public” under the form of a deposit or any other alikenot subject to the provisions of the Stock Market Act. Granting loans or credits is not, in itself,a reserved activity and is thus not subject to any license (even though there are someregulated financial institutions whose purpose consists of granting credit under various forms,without receiving deposits).

In order to enter the scope of activities reserved to credit institutions, the reception of fundsmust: (i) constitute the purpose or, at least, an activity carried out by the receiver on acontinuous and non exceptional basis; and (ii) come from “the public”, i.e. funds maypotentially come from any person or institution or, at least, from a set of persons orinstitutions with sufficient generality. The term or duration of the loans, deposits, advances orwhichever contracts that may support the reception of funds is of no relevance to this end.

Therefore, and as a matter of principle, the establishment of a series of reciprocal credits anddebits among a given set of identified companies – particularly if those companies belong tothe same group– would not imply the need for a banking license.

A similar rationale applies to the investment in financial instruments, including derivatives, bya company on behalf of other companies. The management of investments or the receptionand handling of orders on behalf of third parties must be, in accordance with the Stock MarketLaw 24/1988, dated July 28, carried out under an administrative license (which may be abanking license or an investment company license) if such activities are (i) developed on aprofessional basis and (ii) offered, at least potentially, to the public in general or to a group ofpersons or institutions defined with broad generality.

As a result, the same activities, carried out by a company on behalf of a given and defined setof other companies, would not fall into such requirements.

Carrying out financial intermediation activities without a license, when such license ismandatory, constitutes an administrative infringement, sanctioned with fines up to € 300,000.

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Pursuant to article 1 of the Ministerial Order dated December 12, 1989, interest rates and feescharged by banks are fully liberalised, save some restrictions applicable in the field oftransactions with consumers. In this respect, banks and companies taking part in a notionalpooling scheme are, pursuant to article 1,255 of the Spanish Civil Code, free to establish anyprocedure for the calculation of interest payable. Due to general, civil and commercial lawprovisions, however, two conditions must be met: (i) since the individual accounts of each andevery company would not lose its legal status, the express consent of every participatingcompany is required; and (ii) the interest calculation system must be objective and it shouldnot be under the control of any party under the contract.

Since the pooling is virtual and every company maintains individual rights and obligationswith the bank, it is logical that banks may require either cross guarantees from everyparticipating company or, otherwise, the right to compensate credits and debits fromdifferent companies, if needed. Different schemes of guarantee may apply and, in principle, itis possible that they may be limited to certain amounts.



Since 1992, companies –other that banks– may freely trade with foreign currencies andmaintain foreign currency balances of any size. It is therefore possible that a company agreesto transfer any foreign exchange risk to another company within the same group through avariety of contracts without a need for a regulatory approval. As an exception, should one ofsuch companies be itself a regulated company, particular limitations may apply.



The operation of payments as a professional activity is reserved to banking institutions.However, “handling a payment” on behalf of a third party does not collide with regulation, thecentralizing entity might use its own bank accounts to handle payments for other entitiesand, therefore, debits and credits would be settled by means of internal accounts.

As explained in section 1.1.1, the key for the provision of this kind of services without a licenselies with its limitation. A company may handle payments on behalf of third parties as far assuch service is (i) not offered to the public –and therefore, as far as it does not constitute aprofessional activity–; and (ii) strictly limited to a given set of companies somehow linked tothe provider of the service.


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As a matter of principle, banking information is confidential. However, such confidentialitymay be waived by the interested parties. Thus, centralized entities can, under thecentralization agreement, instruct the bank to report statements to the centralizing entity.A potential problem lies not with the entities being part of a centralization agreementthemselves, but with third parties potentially concerned. The information made availablethrough other entities may be sensitive and protected under the Personal Data ProtectionOrganic Law 15/1999 (particularly if it concerns natural persons). Article 12 of such Lawcontains special requirements to make data-sharing possible when such sharing is needed dueto the characteristics of the services being rendered (e.g. if, in order to manage treasury of acentralized basis, the centralizer needs to know to whom payments are addressed).Companies concerned may need to sign a contractual provision on this matter.



Financial intermediaries –banks, insurance companies, investment managers and otherintermediaries– are subject to a wide set of specific and sectorial regulations. In principle, noneof such regulations prevent these companies, as a matter of principle, from taking part intocash pooling arrangements. However, such arrangements may be subject to limitations to beanalyzed case by case. Regarding the effective global rate, its regulation and description in contracts is mainly aconsumer protection issue. However, the provisions regulating it (Article 7 of the MinisterialOrder of December 12, 1989 and Banco de España’s Regulation 8/1990) do not use theprecise word “consumer” but “client”. In this respect, the obligation may be construed asaffecting all deposit accounts (it is also compulsory for credits, but only below € 60,000 savemortgages), even those with corporates.In Spain, Anti-Money Laundering provisions are institution-driven. This means that KYC –asother AML procedures– apply to a company in case that company is an “obliged institution”in accordance with article 2 of the Money Laundering Prevention Law 19/1993. This conceptincludes most financial intermediaries and other industries (real-estate intermediaries, cash-intensive industries such as casinos, etc.) which are, potentially, more exposed to risk. Asgeneral rule, all KYC requirements in the opening of an account lie with the bank, which mustapply KYC procedures to all clients. This supposes the performance of an identification test,which includes the obtaining of proofs of identity; in the case of corporates, the bank shouldget reasonable assurance of the corporate being duly incorporated, as well as of the validityof its representatives’ powers of attorney.Regarding language, the parties to a contract are free to choose the language they use fortheir documents. However, it should be noted that: (i) the latter is not true when one of theparties is a consumer, in which case, the contract should be drafted in a language the

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consumer is meant to understand –ultimately, pursuant to articles 2.1d) and 10.1 a) of theGeneral Consumer and Users Defense Law 26/1984, dated July 19–; and (ii) it should berecalled that, in order to be brought before the Courts, every document which is not in Spanish(or in any other language which is also official in an Autonomous Community of Spain, if thecase is brought to the attention of a Court within the relevant area) must be officiallytranslated into Spanish in accordance with article 144.1 of the Civil Procedure Law 1/2000.

1.4 Outsourcing


In certain industries, such as the financial industry, this may be construed as the outsourcingof a core function, and hence be challenged by the supervisor, but as a general rule, there areno reasons to consider that it would be unlawful.

2. CORPORATE LAW



There are no restrictions as to the form of entities that can participate in cash poolingarrangements, either as centralized or centralizing entities. It is possible that centralized orcentralizing entities take the form of commercial companies, such as sociedad anónima(“S.A”.), sociedad limitada (“S.L.”), sociedad en comandita por acciones (“S.Com.p.A.”),sociedad colectiva (“S.R.C.”), or a cooperative (sociedad cooperativa, “S.Coop.”). There is noobstacle to civil companies participating in a cash pool arrangement (sociedad civil, “S.C.”),but if the centralizing entity is a civil company, it will be subject to the rules of commercialcompanies (“S.R.C.”). It is also possible that the centralizing entity takes the form of anEconomic Interest Grouping (Agrupación de Interés Económico, “AIE”).

There are no restrictions as to the nationality of shareholders. Similarly, no restrictions applyas to the participation of state owned entities.



For the centralizing entity, it is advisable to include cash management in the corporate objectclause, especially if that is the only activity carried out by the company. For the centralizedentities, it is not necessary to include in the bylaws the possibility of participating in a cashpool agreement. Arguably, the participation in that sort of arrangements is implied for anycompany carrying any type of economic activity.


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2.3 Corporate benefit How is defined corporate benefit? Is it different when it relates to entities belonging to a samegroup? Are there restrictions on the participation of certain entities due to their financialstructure (ratios, etc.)? Is there an obligation to offer all participating entities equivalent termsand conditions? Are there restrictions on the type of operations that the centralizing entity mayundertake with the cash of the centralized entities? Is there an obligation to offer theparticipating entities market financial conditions (i.e. the “arm’s length principle")? What arethe liabilities and sanctions in case of violation of the corporate benefit of a participating entity(cancellation of the agreement, management liability, extension of bankruptcy proceedingsetc.)? Do they apply to directors, officers and shareholders?Directors of a company must always act in the best interests of the company (see article 127bis of the Spanish Public Companies Law, “LSA”). However, it is necessary to explain theseemingly obvious concept of “interests of the company”. There are two possible answers tothis query: the “institutionalist” theory holds that the company has an interest of its own,whereas the “contractualist” theory holds that “interests of the company” means the sum ofthe interests of all shareholders of the company. The Spanish Courts have expressly supportedthe view that the interest of the company is nothing but the sum of the interests of itsshareholders2. In a group situation, this means that directors of companies where the parentcompany has one hundred per cent of the capital must act in the best interests of the parentcompany. Where there are minority shareholders, the situation may be different. Spanish lawdoes not recognize the “interest of the group” as such, but there is a trend towards recognitionof the possibility that in some transactions the respect of the whole interest of thecompanies’ group excludes the existence of an action in damages by the minorityshareholder3. It is advisable, in any case, to regulate the group relationship by contract, and toestablish adequate compensation to avoid that minority shareholders and creditors can arguethat group relationships cause damage to a specific company within the group. If corporate interest is found to have been damaged, and there are no circumstances thatjustify the action of the directors, such as explained before, directors would be held liable forthat damage by minority shareholders and creditors (article 133 LSA). If the actions of acompany are the result of instructions of another company (such as in a parent-subsidiaryrelationship), the possibility exists that the directors in the parent company are considered asde facto directors of the subsidiary, and so those directors could be subject to the sameliability (article 133.2 LSA).

2.4 Remuneration of the centralizing entityAre there any prescriptions as to the remuneration of the centralizing entity difference oflending/borrowing rates, lump sum fee…?There are neither rules nor limitations for the remuneration of the centralizing entity. Theparties to the agreement are free to set the amount and remuneration method. Naturally,excessive remuneration might be seen as indicative of an unjustified prejudice to the interestsof the centralized companies, and therefore exposes the directors in centralized companies toliability towards minority shareholders and creditors.

2 See Judgment of the Spanish Supreme Court (“STS”) dated February 19, 1991. The Unified Good Governance Code (2006) also supports the contractualist theory. 3 See Judgment of the Spanish Supreme Court (“STS”) dated October 10, 2003, where the granting of intragroup security is not considered.

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Directors of the centralizing entity must manage the funds in a diligent manner (see, forinstance, article 127 LSA). However, there is no “prudent investor rule” as to the use of thefunds. Diligent behavior would require, normally, diversification, but it is more difficult to infera requirement to invest in certain securities or financial instruments. Diligent behavior wouldalso imply that the centralizing entity has the necessary liquid assets to fulfill its obligationsvis-à-vis the centralized entities.



The approval of the cash pooling arrangement falls within the competences of the directorsof the participating entities. There is no need of a shareholder resolution. There are no specialrules for the approval of contracts with companies belonging to the same corporate group.

2.7 Specific aspects relating to acquisition financing


The use of cash of the target to repay the acquisition loan could constitute financial assistancefor the acquisition of the shares in the target, which is prohibited under Spanish law (article81 LSA; article 40.5 of the Limited Companies Law, “LSRL”). It is irrelevant that the assistanceis given after the acquisition of shares has been made. The consequence of infringement ofthe financial assistance prohibition is not only that the assistance transaction (in this case, therepayment of the acquisition loan) is null and void, but the acquisition itself is void too. Theinfringement of the prohibition can also be sanctioned with an administrative fine (article 89LSA; article 42 LSRL).

However, it is possible that after the acquisition, the target makes a distribution by way ofdividend to its shareholders. If the shareholders use the proceeds of the dividend to repay aloan, or for other purposes, and there is no express link between the acquisition loan and thedividend payment (such as, for instance, if the dividend payment is foreseen in the loanagreement), then the existence of financial assistance is considerably more difficult to beestablished.

The existence of a cash pooling agreement does not per se modify the rules dealing withfinancial assistance. Entering into a cash pooling arrangement after an acquisition will notnormally constitute financial assistance, as the purpose of the agreement, which is linked tobelonging to a corporate group, will not normally be the repayment of the acquisition loan.However, there might be specific cases in which the cash pooling agreement is used as ascreen for a real loan from the target to the acquiring company. If the transaction, in its realterms, amounts to a loan, and is linked to the acquisition of the shares, it would fall under theprohibition.


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Spain has not implemented the reform of the Second Company Law Directive so far. TheReform allows financial assistance within the limits of the company’s distributable reserves,so that many of the transactions described above would be lawful (article 23 of the SecondCompany Law Directive, as reformed by Directive 2006/68/EC), if the conditions of fairmarket value, shareholders’ approval, are also met. It is expected that the Directive will beimplemented shortly by Spain.

2.8 Termination


There is no company law restriction that prevents the centralizing entity from terminating theagreement, if the centralizing entity provides for compensation for damages to the party withwhich the contract is terminated (article 1101 of the Spanish Civil Code).


If a company is insolvent and is declared bankrupt, it could be that the transactions performedunder the cash pooling agreement may be void, if there is prejudice to the bankruptcompany’s estate. This can cover the time lapse of up to two years before bankruptcy wasdeclared (article 71 of the Bankruptcy Law 22/2003, dated July 9, “LC”). Once a participating entity has been declared bankrupt, it will be unable to pay the debtsincurred before the declaration of bankruptcy. Those debts will have to participate in thebankruptcy, and will be subordinated to the ordinary unsecured claims against the bankrupt’sestate (article 92.5º LC: see below). Set-off is expressly prohibited under Spanish insolvencylaw (article 58 LC), but set-off is possible where the law that governs the credit belonging tothe bankrupt company allows set-off in insolvency (article 205 LC). Regarding the right to terminate the agreement, it is important to underline that underSpanish law it is not possible to include in the contract a clause whereby the contract isterminated by the fact that one of the parties is declared bankrupt. Such clauses are void(article 61.3 LC). If the centralizing party decides to terminate the agreement, it will have topay damages for breach of contract to the bankrupt company. Under Spanish law, there is no extension of bankruptcy. The insolvency of a companybelonging to a group does not cause other companies in the same group to become bankrupt.It is necessary to examine solvency company by company. A major risk associated with the insolvency of one of the participating entities under Spanishlaw is the subordination of the claims of the other companies belonging to the same group.Spanish insolvency law considers companies belonging to the same group as “connected

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persons” (article 93.2.3º LC). The consequence of being a connected person is the legalsubordination of all claims against the bankrupt company (article 92.5º LC), and the loss ofsecurity, if the claim was secured (article 97.2 LC).

4. TAX ISSUES



General principle

Cash management operations are subject to VAT but exempt under Spanish VAT law, as manyother financial operations. The main consequence is that these operations do not allowdeducting any VAT accrued by taxpayers on their purchases.

Exceptions relating to the right to deduction of V.A.T.

A certain right to deduct is possible when the company or business performs bothtransactions that give and transactions that do not give right to deduction, applying the so-called “pro-rata rule”.

Spanish VAT provisions do not take into account while calculating the pro-rata percentage allthose financial operations deemed to be accessory activities which are not comprehended inthe usual and normal activities developed by the company.

Accordingly, the main issue would be to define accessory activities as opposite to usual ones.European case law, in cases C-306/94, Régie Dauphinoise, and C-142/99,Floridienne/Berginvest, has somehow clarified the concept. According to these cases, financialoperations are accessory when they constitute a direct, permanent and necessarycontinuation of the main activity. Thus, they will not be included in the numerator ordenominator of the fraction to calculate the pro-rata percentage.

The aim is to preserve economical neutrality in VAT. Spanish tax Authorities have ruled in asimilar way, by considering that financial operations are accessory when they are not relevantin relation to the object of the company and they are not a continuing, frequent and normallyperformed activity. However, when the company performs both main and financial activitiesas part of its main business, financial operations will be considered to calculate the pro-rata4.Furthermore, the character of the financial activities depends on its economical weight for thecompany rather than its quantitative importance.

4 Rulings 1581/2001 and 87/2004.


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4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?The interest would be included as part of the profit or loss of the year in the taxable base ofthe Spanish company following the general principles of the Spanish Corporate Tax Law, RoyalLegislative Decree 4/2004, dated March 5 (“CTL”)5. Currently, the ordinary Corporate Tax rateis 32.5 %, to be decreased for tax periods as of January 1, 2008, to 30 %.

Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?Interests paid by a resident company to a foreign entity are considered to be income from aSpanish source. Thus, they will be subject to withholding tax at a general rate of 18 %.However, interest paid to residents in the European Union operating in Spain without apermanent establishment or to permanent establishments of those companies in othermember States of the European Union will be exempted provided the interests are notobtained through countries or territories qualified as tax havens by Spanish legislation and, inconcrete, by Article 25 of the Non Resident Income Tax Law, Royal Legislative Decree 5/2004,of March 5.Additionally, the withholding tax rate depends on the application of provisions stated bydouble taxation conventions signed by Spain, which can cap the general rate established inSpanish internal law.Therefore, in relation to the countries in the chart below, which do not include EuropeanUnion member States covered by above exemption, the rates are as follows:

5 Particularly, as stated in article 10 of the CTL.

Braz

il

Can

ada

Chi

na

Dub

ai

Indi

a

Japa

n

Mex

ico

Russ

ia

Switz

erla

nd

Uni

ted

Stat

es

AffiliatedCompanies

in

Withholdingtax rate 15% 15% 10% 0% 15% 10% 15% 5% 10% 10%

4.3 Stamp dutyDo cash pooling operations raise any stamp duty? Under Spanish law, first copies of legal instruments or notarial deeds, when their object isappraisable and contain contracts or acts that can be registered, are subject to taxation at ageneral rate of 0,50 % of their object’s value. This tax rate can be modified by AutonomousCommunities.According to articles 30 and 31.2 of the Spanish Stamp Duty Law, Royal Legislative Decree1/1993, dated September 24, guaranteed loans are taxed on the value of the guaranteed

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capital or obligation, comprehending assured amounts for interests, indemnities and similarconcepts, at the same tax rate.



As a general rule, interests paid by Spanish companies to companies abroad will be taxdeductible provided interests are not paid to or through a country or territory qualified as atax haven by Spanish legislation, unless the effectiveness of the service is proven.In addition, thin capitalization rules established in the article 20 of the CTL should be takinginto account, although these rules may not apply when dealing with companies resident inanother EU Member State, unless classified as a tax haven as defined bv the Royal Decree1080/1991, dated July 5.According to this provision, when the average net remunerated debt, both direct or indirect,of a non-financial entity with non resident related persons, exceeds the triple of the averagetax capital, accrued interests corresponding to the excess will be deemed to be dividends.Therefore, interests will be included in the accounting result of the receiving company andtaxed accordingly.If the standard financing within the market differs from the above 3:1 ratio, authorization canbe obtained for the recognition by the Spanish tax authorities of this different ratio.


Binding rulings can be obtained by the Spanish tax authorities over different subjects, such astax regimes, qualifications and classifications, as regulated by articles 88 and 89 of theGeneral Tax Law 58/2003, dated December 17. It could be possible to request a ruling on thedeductibility of interest in a certain situation, before rights are exercised or forms for that taxperiod are filed, as a kind of preemptive information. The ruling will bind the tax authorities,and its judgment will always apply to the person who requested it, as long as law remainsunchanged.The tax authorities must answer in six months. However, if this term is not met, it shall notmean that the Administration accepts the arguments from the request writing.

4.5 Tax havens


Interest paid to countries or territories qualified as tax haven by Spanish legislation are subjectto several anti-abuse provisions, such as the followings.Payment of interests will not be considered as tax deductible unless the Spanish tax payerproves that the expense corresponds to a transaction effectively carried out.The exemption to the applicability of thin capitalization rules, under certain conditions, toentities that are resident in the European Union will not apply if the transaction is carried outthrough a country or territory qualified as tax haven.


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The exemption to the applicability CFC legislation to entities that are resident in the EuropeanUnion will not apply if the transaction is carried out through a country or territory qualifiedas tax haven. In addition, in application of CFC rules, it will be deemed, unless it is proven tothe contrary, that the participation and the income qualifies for the application of the CFCrules and that income obtain is at least 15% of the value of the participation.

4.6 Favorable tax regimeIs there a favorable tax regime for (i) corporate tax of centralizing entities, (ii) taxation of cashpooling operations (VAT, interest)?No special tax regimes have been implemented targeting specifically cash pooling operations.Tax groups can benefit of a special regime that allows taxation of the group as a whole,instead of its individual members one by one. According to articles 64 to 82 of the CTL, a taxgroup is comprised by a parent company that holds at least 75% of the stock capital of itssubsidiaries, and these subsidiary companies.The tax base of the group will be the total amount of its member’s bases, with certain legalreductions and increments. The group’s negative tax bases from previous tax periods can bededucted.

4.7 Transfer price issuesDo cash pooling operations raise transfer-pricing issues? All transactions carried between related parties shall be performed at arm’s length. In thissense, article 16 of the CTL provides that the tax authorities can challenge and correct it ifnecessary, to comply with this principle.The companies must be in a situation to prove that the price fixed follow arm’s lengthprinciples and, if they do not, Spanish authorities modify the declared price with all taxconsequence it might have.

5. CENTRAL BANK REPORTINGAre there central bank reporting obligations (balance of payments), bearing upon thecentralizing entity / each centralized entity / the banks?Royal Decree 1816/1991, dated December 20, while liberalizing full cross-border transactions,even those implying payments, imposed a series of reporting obligations, mainly for statisticalpurposes. In accordance with article 5 of that Royal Decree, payments to or from abroad mustbe channeled through an “entidad registrada” (registered entity), a definition which is broadlyequivalent to that of “banking institution” (i.e. banks operating on a Spanish license orBranches of “passported” EU institutions). Although reporting obligations lie with persons,either legal or natural, carrying out determined transactions, in practice, declarations are filledin by banks. In accordance with Banco de España’s Regulation 3/2006, dated July 28, residentsin Spain must report: (i) opening and cancellation of accounts and deposits held with non-resident banking institutions (including foreign branches of Spanish entities), (ii) opening andcancellation of accounts –meaning credits and debits- with non-resident, other than banksand (iii) payments to or from the abovementioned accounts (payments may be grouped forreporting purposes).

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As stated above, from 1992 (entry into force of Royal Decree 1816/1991), and saveexceptional temporary restrictions that might be applied by Authorities under safeguardprovisions, cross border payments in Spain are fully liberalized. Exchange rate controls wereabolished on the same date, and thus banking institutions are free to trade in any currency,at exchange rates also freely determined.Nevertheless, certain types of foreign transactions, such as loans, credits, commercial facilitiesor set-offs, need to obtain a financial transaction number (“NOF”) from the Banco de Españain the terms provided by Circular 6/2000, dated October 31, which amends Circular 23/1992,dated December 18. Particularly, any loan, financial credit facility or refundable advancegranted by (i) non-residents to individuals or corporate entities residing in Spain, or (ii)residents to individuals or corporate entities not residing in Spain, for an amount equal to orabove €3,000,000, or the equivalent in other currencies, must be notified to the Banco deEspaña for the purpose of assigning them a NOF to identify the transaction in question.Circular 23/1992 provides for different types of forms depending on (i) the amount of thetransaction, (ii) whether the non-resident is from a tax-haven country, or (iii) whether theresident part is the lender or the borrower. In any case, the resident (lender or borrower) isalways responsible for filing the form before each drawdown of funds. Although a NOF is only required for statistical and tax-monitoring purposes, failure to file therequired form (or any misrepresentation, omission or inaccuracy of information provided)may be penalized with a fine of up to one-half of the transaction’s financial value (if theamount exceeds €6,000,000), or up to one-quarter of the transaction’s financial value (if theamount is below €6,000,000).


A cash pooling arrangement does not, by itself, create any particular accounting obligation forthe participating entities.Pursuant to Regulation EC 1606/2002 of the European Parliament and Council, dated 19 July2002, the International Financing Reporting Standards (“IFRS”) –as adopted by the EU underthe form of EU Commission regulations– apply to the consolidated accounts of companieswhich have issued securities listed on EU regulated markets.The Spanish Code of Commerce (as amended by Law 62/2003) offers to those companiesthat have no securities listed the possibility of preparing consolidated accounts under IFRS ona voluntary basis, or keep Spanish GAAP.For individual accounts, all companies incorporated in Spain –other than banks or otherspecial companies for which sectorial standards may be applicable– must apply the GeneralAccounting Plan. From January 1, 2008, a new General Accounting Plan, quite in line with theIFRS, shall enter into force in Spain.


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As stated, the Plan does not refer to cash pooling arrangements specifically. However, if theexistence of the arrangement is an issue of relevance, some details may need to be disclosedin the notes (“memoria”) to the annual accounts.

8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?Safety of the transactions and protection against fraud is a critical issue with regard to thismatter, since efficient pooling techniques require the use of the internet. The issues putforward are not different from those raised, in general, by non-physical presence transactions.Banks have developed a series of safety measures and protocols which are now state-of-the-art. The use of electronic transactional facilities (on-line banking) is normally based on specialcontractual provisions, which define the protocol to be followed.A series of legislative measures have been implemented from 2002 on in order to solve someof the problems posed by electronic transactions, namely: (i) proof of the existence andvalidity of a given transaction and (ii) proof of consent of the persons involved. Regarding (i),electronic files may enjoy, at least, the same status of private documents before the Courts,pursuant to article 384 of the Civil Procedure Law and 24.2 of Law 34/2002, dated July 11.Regarding (ii), however, the only exact equivalent to a hand-signature as proof of consent isan e-signature as defined and regulated in the E-signature Law 59/2003, dated December 19.The wide extension of lawful e-signatures is yet to be generalized in Spain

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?There are no specific internal control, reporting or evaluation standards addressing cashpooling arrangements as such.Nevertheless, since these arrangements may have a significant impact on liquidity and riskmanagement, they should be probably taken into account when applying provisions oninternal control. Financial industry intermediaries, such as banks and investment servicescompanies have formal requirements in the matter.More broadly, listed companies must file with the National Stock Markets Commission(CNMV) an annual internal governance report, pursuant to CNMV Regulation 1/2004, ofMarch 17. Such report contains references to risk management structures.

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Switzerland


UNDER SWISS LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in Switzerland. The principles set out below should beconsidered in relation to individual circumstances, with legal and tax counsel.

Wenger & VieliDufourstrasse 56 - 8034 Zürich - Switzerland

Phone: +41 44 563 33 33 - Fax: +41 44 563 33 66

RA Dr. Martin HessE-Mail:

[email protected]

RAin Simone HofbauerE-Mail:

[email protected]

RAin Regula GrunderE-Mail:

[email protected]

RA Remy BärlocherE-Mail:

[email protected]


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In Switzerland, the supervision of the banking authorities includes – inter alia – the supervisionof banks, stock exchanges, securities dealers and collective investment schemes.

Banks are defined as companies which accept deposits from the public on a professional basisor which solicit such deposits publicly in order to finance in any manner whatsoever, for theirown account, an unlimited number of persons or companies with which they do not form aneconomic unit. Companies which conduct a significant volume of funding with several bankswhich do not own significant participations, for the purpose of financing in one way oranother, for their own account, an unlimited number of persons or companies with whichthey do not form an economic unit, are also considered as banks.

Therefore, centralizing companies which grant loans/advances to other group companies donot fall within this definition as the cash pooling arrangements are limited to groupcompanies and are, therefore, not subject to supervision from the banking authorities.

As long as the cash management is limited to group companies, the centralizing company is,according to legal teaching, also not a financial intermediary according to the Swiss MoneyLaundering Act. Therefore, it is not obliged to obtain an authorisation from the MoneyLaundering Control Authority to carry on business or to adhere to a recognised Self RegulatoryOrganisation within the meaning of the Swiss Money Laundering Act.

No distinction is made between short term, mid term and long-term loans/advances.


Investments in financial instruments including derivative products carried out by thecentralizing entity on behalf of the centralized group entities do not require the bankingauthorities’ approval for the centralized entities or the centralizing entity.


As mentioned above, cash management must be limited to group companies.


Is there any prohibition/restriction on banks/participating entities implementing notionalpooling (i) by way of bank margins reductions, (ii) by way of merging current account balances

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of the centralizing and centralized entities in order to create a single balance, or (iii) by way ofcalculating interest payable to each account based on merged scales of interest?

There are no prohibition/restriction on banks/participating entities implementing notionalpooling (i) by way of bank margins reductions, (ii) by way of merging current account balancesof the centralizing and centralized entities in order to create a single balance, or (iii) by wayof calculating interest payable to each account based on merged scales of interest.

Provided that the bank together with the participating entities conclude a netting agreementwhich satisfies the requirements of the Ordinance regarding capital requirements , the banksmay take this netting into consideration for calculating the equity capital.

Do banks require cross guarantees from participating entities? Can such guarantees becapped?

This depends on the Bank in question but banks usually require a guarantee from the parentcompany.



The arrangement whereby a centralized entity agrees to buy from and sell to the centralizingentity all its foreign currencies does not require banking authorities’ approval or consent.



The centralizing entity’s activities - within the group - as the operator of a management ofpayments/collective program are not subject to approval requirements under applicablebanking regulatory laws.



If the centralizing entity has been given power of attorney of the centralized entities in thepooling agreement it can obtain information from banks holding the accounts of centralizedentities.



There are no specific requirements.


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1.4 Outsourcing


As long as the cash pooling function includes granting loans/advances to group companiesthis function can only be outsourced to an agent (not being a group member) which qualifiesas a bank. However, if the cash pooling is only notional the agent does not need anauthorisation as a bank.

2. CORPORATE LAW



In Switzerland, there are no legal requirements or restrictions with regard to the use of aparticular legal form of entities that can participate in cash pool arrangements as part of agroup of companies (Konzern) nor are there any restrictions with regard to the nationality ofshareholders.

In practice, however, the predominant legal form of entities used within the context of a groupof companies participating in cash pooling arrangements in Switzerland is the corporationwith a liability limited by shares (Aktiengesellschaft).



Pursuant to the constant case law of the Swiss Federal Supreme Court a corporation mayconduct any business that is not excluded by its purpose as stated in the bylaws. Any businessbeyond the scope of the company's purpose could be deemed null and void.

The participation in cash pooling arrangements of a group company in order to facilitate thecash management within the entire group is usually well within such corporate purpose of aparticipating company. For the finance company or for the holding company of a group ofcompanies it is also within the scope of the corporate purpose to act as centralizing company.

It is controversial, whether the provision of financial assistance, i.e. upstream and/or cross-stream guarantees for the benefit of a parent or sister companies, that often goes along withcash pooling arrangements, also falls within the company's purpose. Therefore, it is customaryand highly recommendable in practice to enlarge the purpose clause in the bylaws of eachgroup company that participates in cash pooling arrangements by stating that the companyhas the explicit power to provide financial assistance to its direct or indirect parent companyand sister companies.

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Swiss corporate law does not recognize the overall legal concept of integrated companygroups. Therefore, the same rules apply to companies which are part of a group as opposed tostand-alone companies. Hence, the board of directors of each participating company isresponsible and reliable to act for the benefit and in the sole interest of the specificcorporation and not in the interest or the benefit of its parent company or its sistercompanies.

Any form of payment to a parent or a sister company is subject to special rules. In particular,any such payment or provision of a collateral without an adequate consideration may bequalified as a (hidden) dividend distribution or as prohibited repayment of any share capitalto the shareholders with the consequence of the entire transaction being null and void. Inorder to avoid such consequences a corporation may only distribute dividends out of itscapital surplus and based on a shareholder's resolution and an auditor's report. This becomesin particular relevant in case of upstream or cross-stream guarantees. The granting of anintercompany loan or collateral at arm's length conditions is, however, not qualified as adividend distribution.

The management and the board of directors of an individual participating corporation mustfurther and protect the interest of their corporation even where such corporation forms partof a group of companies. They have to constantly survey the financial situation of theindividual corporation and have to avoid any cluster risk such as the accumulation of aconsiderable lending position vis-à-vis a particular other participating company. They have totake immediate appropriate measures, if the creditworthiness of another participatingcompany ceases to exist. Accordingly, the participating company must be allowed toterminate the cash pooling agreements and to end or limit its cash contributions.

In case of any damage caused by an intentional or negligent violation of their duties, themanagement or board members may become personally liable to the corporation as well asto its shareholders and creditors. In general, the shareholders are not liable for the obligationsof the corporation in a corporation with limited liability by shares. If a shareholder participatesin the management of the corporation, be it formally as a director or officer or informally byassuming such functions (faktische Organstellung), he may become liable as such.



The remuneration of the centralizing entity is subject to the parties' contractual freedom. If


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the remuneration of the centralizing entity does, however, not constitute an adequateconsideration for the services and the risks of the centralizing entity under the cash poolingarrangement, this may be an indication for a non-arm's length transaction with related partiesand trigger withholding taxes.



Swiss law does not provide for any special investment rules with regard to cash poolarrangements.



The competent body within a corporation to enter into a cash pooling arrangement is theboard of directors. The board may delegate its executive duties to the management based onRules of Organization (management bylaws). Such Rules of Organization may foresee theapproval of the board for key contracts, but there is no mandatory approval by the board ofdirectors. In practice cash pooling agreements are sometimes approved by the shareholders'meeting although the shareholders' meeting is not the competent body to approve cashpooling arrangements.



Swiss corporate law does not expressly prohibit a Swiss company or its subsidiaries to repaythe acquisition loan for the purchase of its shares. However, the same rules and restrictionsapply as stated above with regard to the provision of any up-stream or cross-streamguarantee for the benefit of parent or sister companies, irrespective of whether a cash poolingarrangement exists or not.

3. BANKRUPTCY3.1 What are the legal consequences of a participating entity being insolvent or nearly insolvent on

the operations involving the entity (zero balance account and notional)?

In a zero balancing structure, the management of each participating group company mustmake sure, that only those amounts are made available for the cash pooling which areavailable in excess of the share capital and statutory reserves of the company.In a notional balancing structure, these limits have to be contractually agreed with the bankholding the account.If a group company is in financial distress, these duties must be complied with utmost care. Aconstant verification of the financial situation of the participating group companies is necessary.

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3.2 Would an insolvency of a participating entity limit the centralising entity's ability to exercise itscontractual rights to terminate the Agreements?

The overall set up of the cash pooling structure will provide arrangements for termination ofthe master agreement with the bank and for termination of the loan agreements among thegroup companies in case of insolvency of a group company. Furthermore, the agreements willcontain close-out provisions and require security in the form of collateral or bank guaranteefor the liabilities of the group and of each group company. If properly drafted, suchtermination and close-out provisions as well as the security are enforceable against a Swissgroup company affected by bankruptcy events.

3.3 Are there any risks of bankruptcy proceedings opened against the centralising company thatare extended to the other participating group companies and vice-versa?

Switzerland has no special bankruptcy law applying to groups of companies. In terms ofsubstantive law, liability within a group of companies is limited to reciprocal participation inequity capital. By its participation in the subsidiary, the parent company is thus liable only upto the amount of its participation. However, in the context of so-called "group confidence",the Swiss Federal Supreme Court has departed from this limited liability and extended liabilityfor a subsidiary's debts to the parent company in cases where third parties concluded frominformation transmitted by the former that the parent company was responsible for thedebts of the subsidiary. As legally independent companies, subsidiaries are subject to Swiss law. Local jurisdiction lieswith the Swiss authorities. Subsidiaries are therefore subject to insolvency proceduresindependently of parent companies or affiliated companies. The bankruptcy of any suchcompany has no direct implications in terms of procedural law for the other group companies. Branches are business establishments that are economically independent from, but at thesame time legally dependent on, the head office. Swiss branches of firms which have theirhead office in another country must be entered in the Register of Commerce at their Swissdomicile and are to that extent subject to Swiss law. Foreign debtors with a businessestablishment in Switzerland are subject to debt enforcement procedures at such domicilewith respect to debts incurred by the Swiss business establishment. The Swiss branch of aforeign group company is thus subject to debt enforcement and also to bankruptcyproceedings in respect of assets held in Switzerland. The head office and the branch office areseparate entities in terms of bankruptcy law.

4. TAX ISSUES



In principle, turnover in the field of money and capital transactions, such as the granting andbrokerage of credit and the management of credit by the grantor, are exempt from valueadded tax (VAT). However, some operations such as the receipt of services from enterprises


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with their domicile outside Swiss territory or inter-company management services are notexempted from VAT and are taxed at a rate of 7,6%.

4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?The accrued interest is considered as taxable income subject to the ordinary corporate taxrate or as tax deductible expense. No differentiation is made between fixed term loans andcurrent account advances. In case the centralising company qualifies for a privileged tax status(e.g. mixed company), tax relief may be claimed.

Is there a withholding tax on interest paid to a foreign entity? What is the applicable rate inrelation to the following countries?In principle, the interest paid by a Swiss company to a foreign group entity (inter-companyinterest) is not subject to Swiss withholding tax. However, if the Swiss company raises creditsfrom more than 20 lenders and the total sum borrowed exceeds CHF 500'000 the interestpaid is subject to 35% withholding tax. This may happen, if a group pays inter-companyinterest in a cash pool environment of more than 20 accounts. For foreign recipients, refundmay be granted based on a double taxation treaty between Switzerland and the country ofresidence of the recipient. The following table shows the remaining tax for the recipient.

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 0% 10% 35% 10% 10% 0% 35% 0% 0% 30% 10% 10% 0% 12,5% 10%

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 10% 15% 5% 10% 10% 10% 10% 10% 10% 0% - 35% 35% 0%

4.3 Stamp dutyDo cash pooling operations raise any stamp duty? Generally, cash pooling operations in the form of pure inter-company loans and currentaccount advances do not raise any stamp duty.

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Generally, interest payments on inter-company loans must meet arm's length conditions, asthey would be requested by an unrelated third party. The federal tax administration issuesyearly guidelines defining the maximum respectively minimum interest rates. The interestrates differ from currency to currency. Interest payments exceeding these rates may be addedback to the taxable profit of the company and considered as hidden profit distributions,subject to withholding tax of 35%. However, the guidelines clearly state that insofar as thespecific financing in a case can be proven to be an arm's length rate, no re-characterization ofinterest will occur.The general ratio of interest-bearing debt to equity should not exceed 6:1. Some Cantons mayhave other ratios or a general anti-abuse provision without determining a fixed ratio. Thefederal tax authorities issued more detailed guidelines with regard to safe harbour debt toequity ratios for different types of assets. If these guidelines are not fulfilled, the excessiveportion of a loan granted by a related party may be considered as hidden equity and,therefore, be subjected to capital tax. Furthermore, any interest paid on excessive debts isbasically not deductible for tax purposes and may be added back to income by the taxauthorities.


It is general practice to obtain a tax ruling from both the federal and cantonal tax authorities.Inter-company transactions have to be at arm's length, whereby special circumstances can bereflected in the ruling request. Tax authorities will issue such rulings in principle provided aninterest meriting protection exists. There is no specific form for the application.

4.5 Tax havens


Interests transferred from a Swiss company and accrued in a tax haven company may be re-qualified as taxable income by the Swiss tax authorities if certain substance and businessoperations requirements of the tax haven company are not fulfilled.



(i) Corporate TaxCash pooling functions may be performed under the privileged tax status of a mixedcompany, if certain conditions are met, resulting in an effective tax rate of approximately10%.

(ii) Taxation of cash pooling operationsA Swiss Finance Branch of a foreign head office may be in charge of the group finance andtreasury activities in a tax efficient manner. Such structures are for instance in use with


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companies in Luxembourg or Austria. Swiss tax authorities accept notional interest deductionas expenses of the Swiss branch, resulting in a substantially reduced taxable profit of thebranch. In order to benefit from tax relief, the activities of a Swiss Finance Branch must qualifyas financial activities, i.e. Loan allocation and administration, Treasury and cash management,Debt management, Factoring, Leasing, etc. In addition some other important conditions mustbe met to obtain the Swiss Finance Branch tax frame:- At least CHF 100 million of loans must be managed by the Swiss Finance Branch.- At least 75% of the assets and 75% of the income must be allocated to financial activities.

Swiss-derived business must not account for more than 10% of gross income.- 1/11 of the Swiss Finance Branch’s balance sheet total is subject to cantonal capital tax. The

remaining capital is taken as basis for calculation of the deductible interests.- Income allocation is done according to separate branch bookkeeping. The effective tax rate of a Swiss finance branch generally amounts to approx. 2%.


Do cash pooling operations raise transfer-pricing issues? Transfer price issues may arise if the cash management agreement is not based on arm'slength conditions.

5. CENTRAL BANK REPORTINGAre there central bank reporting obligations (balance of payments), bearing upon thecentralizing entity / each centralized entity / the banks?There are no reporting requirements of the centralizing company vis-à-vis the Swiss NationalBank or any other supervisory authority, except for capital export above a certain threshold.

6. EXCHANGE CONTROL REGULATIONSAre there any restrictions to the transfer of cash to foreign entities of the same group or theconversion of the local currency in other currencies?There are no exchange control mechanisms applicable to a centralizing company inSwitzerland.

7. ACCOUNTANCY OBLIGATIONS AND STANDARDSWhat if any are the specific accountancy obligations and standards for entities participating ina cash pooling arrangement?The general accountancy rules and standards developed for the consolidated accounting of agroup of companies do also apply to such entities participating in a cash pool arrangement.There are no specific accounting rules or standards due to the participation in a cash pool.

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8. E-CASH POOLINGAre there data security aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?When a payment transaction is effected this will involve the processing of informationrelating to an identified or identifiable person. Such information is defined as personal dataunder the Data Protection Act (DPA). Thus, the group companies are subject to all the dutiesof private individuals, which follow from the DPA.The DPA also applies to the transfer of personal data by Swiss group companies to foreigngroup companies. The statutory requirement that data processing shall be made transparentis respected only if the data subject is informed about subsequent data processing steps.Subsequent onward transfer of the data transmitted by the payment transfer by foreign groupcompanies to their regulatory authorities is not subject to Swiss, but to foreign law. A Swissgroup company is only authorized to transfer personal data to a foreign group company ifthere is a legal justification for doing so. A legal justification could take the form of the consentof the group company concerned. In practice, such a waiver of the DPA by the individual groupcompanies is often included in the cash pool agreement. Furthermore, the waiver of the DPAencompasses the waiver of the banking confidentiality with regard to all cash poolparticipants.

9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?In case the cash pool agreement stipulates a joint liability of the individual cash poolparticipants this must disclose such liability in the notes to the financial statements. Anauditor applies the same control measures with regard to cash pool arrangements as withregard to cash and cash equivalent.


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UNDER ENGLISH LAW

This contribution does not constitute legal advice. Its purpose is to give an overview of the laws andregulations that are applicable to cash management in England. The principles set out below should beconsidered in relation to individual circumstances with legal and tax lawyers. Any legal developmentsfollowing 9 August 2007 have not been taken into account.

DMH Stallard LLP 40 High Street - Crawley - West Sussex RH10 1BW

www.dmhstallard.com

Gwendoline GodfreyTel : +44 1293 605551Fax : +44 1293 415716

Email : [email protected]

Ernst & Young 1 More London Place - London - SE1 2AF

www.ey.com

George HardyTel : +44 20 7951 0124 Fax : +44 20 7951 1345

Email : [email protected]


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Background

The use of cash management or cash pooling structures by companies within the same groupis common in the UK. Banks offer these facilities both to domestic and to multi-nationalgroups of companies. In such circumstances it is usually the bank (and not the companies)which has to comply with any relevant requirements of its own supervising authority.Generally the group companies (the centralized companies) appoint another group company(the centralizing company) as their agent to administer the arrangements and to deal withthe bank on their behalf. They agree that the bank may rely on communications from thecentralizing company. These cash management structures can be set up in various ways. The individual companieswill enter into transactions on their own current bank accounts, the operating accounts. If thestructure is set up as a “zero balancing arrangement”, a consolidated cash pooling account isopened to which the debits or credits on the individual operating accounts are “swept” on adaily basis. Generally the consolidated account is in the name of the centralizing company.As a result intra-company loans arise between the centralized companies and the centralizingcompany. Interest can then be credited to, or debited from, the consolidated account and notthe operating accounts.However, an alternative structure, a “notional cash pooling arrangement”, is also possible. Inthat case, there is generally no sweeping of debits and credits to a consolidated cash poolingaccount. Instead, the bank will rely on its rights to set-off debits and credits across theoperating accounts, should the need arise. The bank will calculate interest on a net basis onall the operating accounts and credit it to or debit it from an interest account maintained bythe centralizing company.Banks will usually require all the companies to sign bank mandate forms for their respectiveaccounts and to fulfil all other relevant requirements for opening accounts. For example, theanti-money laundering “know your customer” procedures will have to be complied with.There will also be some form of cash management facility letter or agreement signed by thebank and all the companies (including the centralizing company) to set out the facilities to beprovided by the bank and the administrative details relating to the arrangement. Finally in anotional cash pooling arrangement, the bank will usually ask all the companies in the groupto grant it cross guarantees to enable it to set-off across the individual operating accountsunless the companies are jointly and severally liable to the bank on all the accounts on someother basis.




If the companies are not carrying out a deposit-taking business in the UK, but are only makingintra-group payments, they will not have to obtain any approvals, authorizations, consents or

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exemptions from the UK banking authorities. The Financial Services Authority (the “FSA”)regulates deposit-taking under the Financial Services and Markets Act 2000 (“FSMA 2000”).There is an exception where a sum is paid by one company to another at a time when bothare members of the same group or when the same individual is a majority shareholdercontroller of both of them. However, the bank providing the cash pooling facilities will haveto comply with its requirements where relevant. The centralizing company can operate theconsolidated pooling account with the bank, seek reimbursement from the other groupcompanies for interest paid to the bank and generally operate the arrangement without anyregulatory approvals or authorisation. The centralizing company can also make payments tothe other companies and receive money from them in relation to the consolidated cashpooling account.


Dealing in such investments as a principal or as an agent could fall within the activities forwhich an authorisation is required by FSMA 2000. However, subject to the satisfaction ofcertain conditions, there is an exclusion for risk management transactions involving groupcompanies.

The wording here is correct but it would be helpful to define Group Company. Since 1 Nov2007 the rules in MiFID will also apply so I suggest the wording:

Group companies are defined using the accounting definition of group found in theCompanies Act (50% holding or dominant influence). However this will mean that ifperforming investment services or activities for joint ventures or external parties you mayneed to become regulated under MiFID (Markets in Financial Instruments Directive).


The above assumes that all the companies are group companies. If they are not, then theremay be breaches of prohibitions set out in FSMA 2000, which contains specific penalties (finesor periods of imprisonment).



There are no general prohibitions or restrictions.

At one time, UK banks authorized by the FSA had to comply with its requirements for groupfacilities which were set out in Section 7.4 of the chapter on Collateral and Netting in Volume2 of the FSA’s Interim Prudential Sourcebook: Banks (IPRU (Bank)). This meant that eacharrangement had to be advised and controlled on a net basis and supported by a full


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cross-guarantee structure. However, the amount of the guarantee could be restricted tocredit balances held by the bank so as to avoid the situation where each company in a groupmade itself responsible for all the debts of the other group companies to that bank. If theaccounts were joint and several liabilities of all the group companies, cross-guarantees werenot required.

However, the revised capital adequacy framework under Basel II has been reflected in therecast EU Capital Adequacy Directive and the Consolidated Banking Directive. These havebeen implemented in the UK from January 2007. Amongst other things, this has meant thatIPRU (BANK) has been substantially replaced by various other sourcebooks. As far asauthorised banks are concerned, these include the Prudential Sourcebook for Banks, BuildingSocieties and Investment Firms (BIPRU).

Whilst Basel II recognises the technique of on-balance-sheet netting (which is reflected inBIPRU), the old rules relating to group accounts, as mentioned above, are not included inBIPRU. Even so, banks will need to have cross-guarantees in place, or alternatively groupcompanies will need to be jointly and severally liable to banks setting up these structures insome other way (for example, by signing mandates for joint accounts) to fulfil the generalprinciple of legal enforceability. The FSA requires banks to demonstrate that the economicreality of their transactions is reflected in their capital calculations.

Banks incorporated elsewhere in the EEA with UK branches will have to comply with therequirements of their home supervisors (which should be similar since they derive from thesame European Directives). Overseas banks will also have to comply with the requirementsof their home supervisors (which again may well be similar).


Does the arrangement whereby a centralized entity agrees to buy from and sell to thecentralizing entity all its foreign currencies require banking authorities’ approval or consent?

Depending on the nature of the arrangement, it could fall within the activities regulated byFSMA 2000. However, there is an exclusion for any transaction which a person enters intowith another person if that other person is also acting as a principal and they are members ofthe same group.


Are the centralizing entity’s activities as the operator of a management of payments/collectionprogram subject to approval requirements under any applicable banking regulatory laws?

There would be no approval or other regulatory requirements as long as it is acting on behalfof other group companies.



Banks owe a duty of secrecy to their customers subject to certain exceptions which includethe consent of a customer to disclosure of information to third parties. The documentationfor these arrangements will usually include consents from the centralised companies so that

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the bank can deal with the centralizing company and discuss the affairs of the centralizedcompanies with it.



Assuming once again that an authorised bank is dealing with a group of companies there areno additional specific requirements with regard to regulated financial activities or thecentralisation agreement. The normal procedures for opening bank accounts will have to befollowed, including compliance into the relevant anti-money laundering verificationrequirements.

1.4 Outsourcing


Outsourcing has developed for a number of reasons including improved technology andinfrastructure, cost reduction issues, a desire to focus on the core business, insufficientresources, and economies of scale. A number of banks have now taken this opportunity andprovide cash pooling outsourcing services.

The cash pooling function could be entrusted to an authorised bank as part of a cashmanagement structure, in which case the bank would have to comply with the relevantregulatory requirements. However if an agent were appointed which was not a bank (oranother entity authorised by the FSA) or a member of the group, then there may be breachesof prohibitions in FSMA.

There are no specific outsourcing tax issues. For further information on the tax issues involvedwith cash pooling please see paragraph 4 of this chapter.

2. CORPORATE LAW

Background

The Companies Act 2006 has been passed to modernise and simplify English corporate law.It is being implemented in stages during 2007 and 2008. The following takes account of theprovisions affecting directors which are due to come into force on 1 October 2007, Howeverit does not take account of other relevant changes which are due to come into force in 2008,unless otherwise mentioned.


Are there restrictions as regards the form of entities that can participate in cash poolingarrangements, either as a centralized or centralizing entities (certain forms of entities,


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groupings, partnerships…) and/or the form or the nationality of shareholders (state ownedentities, foreign shareholders…)?

There are no restrictions as such, although commercial and tax considerations may wellinfluence the final choice of entity. It would be usual for the centralizing company to be alimited liability company. As a result, it must have the relevant powers to fulfil its role in itsMemorandum of Association (although as from 1 October 2008 there will be no requirementfor a company to state its objects within its memorandum nor for the directors to ensure thatthey act within those objects). As long as there is commercial justification for it to enter intothe arrangement, it does not matter whether it is a holding company or a subsidiary.


Do the activities carried out in cash pooling arrangements need to be expressly contemplatedin the bylaws?

An English company should have the relevant powers to enter into these arrangements in itsMemorandum of Association until 1 October 2008 when the position will change whencertain provisions of the Companies Act 2006 are brought into force – see paragraph 2.1above. As a result of those changes, a company’s objects will be unrestricted unless they arespecifically restricted in its Articles of Association.



These arrangements should be in the commercial interests of each of the companiesparticipating in them. As long as commercial justifications exist, the tax consequences aredealt with appropriately and the bank’s requirements are met, companies can agree towhatever terms they consider appropriate between each other and the centralizing companyin relation to such an agreement. Under English law, however, the commercial interests ofeach company must be considered when agreeing to terms and each board of directors mustconclude that the arrangements benefit its company.

The Companies Act 2006 has codified directors’ duties. A director of a company has a generalduty to the company (not to its shareholders) to act in accordance with its constitution andto exercise powers for a proper purpose. A director must act in the way he considers, in goodfaith, would be most likely to promote the success of the company for the benefit of itsmembers (i.e. shareholders) as a whole. He must have regard (amongst other matters), to thelikely longer term consequences, the interests of the company’s employees, the need to fosterbusiness relationships with suppliers, customers and others, the impact on the community

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and the environment, the desirability of maintaining a reputation for high standards ofbusiness conduct and the need to act fairly as between members of the company. Directorsalso need to declare any conflicts of interest in the proposed arrangements at any boardmeeting.

As long as the directors fulfil these duties in making decisions relating to the arrangement andthe company is solvent, there should be no liabilities for the directors in entering into such anarrangement.

The company will have civil remedies against any director who is negligent or who breacheshis duties (i.e. damages, compensation, restoration of the company’s property or arequirement to account for any profits made as a result). Shareholders can seek leave of thecourt to bring such claims against directors. However, as long as the companies involved inthese arrangements are limited liability companies, their shareholders will not be exposed toany liability themselves, unless they act in such a way as to be “shadow directors” of thecompany when they will have similar duties to those of the directors. The same will be thecase with officers who are not directors.



Assuming that the companies are members of the same group, there are no specialrequirements as to the remuneration of the centralizing entity, although paragraph 2.3 will berelevant when its directors are considering the arrangements.

As already noted, one of the reasons for undertaking a cash pooling arrangement could be toreduce external financing and thereby potentially lowering the interest costs across the group.In the vast majority of cases the centralizing entity would have a better credit rating than theindividual subsidiaries. This would enable the centralising entity to borrow at preferentialrates and offer higher interest rates on credit balances. In addition, interest savings will beobtained by the "mixing" or blending of overdraft and credit balances of different entities. Thiswould improve the position of the group as a whole.

This business structure then raises the key transfer pricing question of how much of thisbenefit should be passed on to the individual entities and how much could be retained by thecentralising entity.

The OECD guidance on transfer pricing states that transactions between connected partiesshould be carried out on an arm's length basis. One method of calculating a reasonable arm'slength return would be to credit rate the subsidiaries and then using this credit rating, todetermine arm's length rates for comparable lending transactions based on market data. Thismarket interest rate can then be applied to the cash position of the subsidiary to determineits portion of the benefit. Similarly, arm's length deposit rates can also be determined.

Essentially, the benefits from cash pooling for the individual entities and the centralisingentity, can be split across a broad spectrum. The portion of benefits attributable to each ofthe entities along this spectrum will reflect the risk, value and bargaining power of that entitywithin the wider group.


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Once again, assuming that the companies are all members of the same group, there are noregulatory requirements.



Companies incorporated in the United Kingdom must comply with the relevant requirementsof company law when entering into these arrangements. The law includes a requirement thatsuch companies authorise these arrangements and their documentation in the normal way –usually by board resolutions. Each company’s board of directors has to pass the necessaryresolutions for that company, even where there are common directors for all the companies.

2.7 Specific aspects relating to the repayment of acquisition financing


At present there is a general prohibition on a company giving financial assistance for thepurchase of its shares (s.151 of the Companies Act 1985). Any steps taken to repay anacquisition finance loan from the cash of a target or its subsidiaries would probably fall withinthis prohibition. If the relevant companies are private companies, there is a whitewashprocedure which can be followed to enable the financial assistance to take place (s. 155 to158 of the Companies Act 1985). However, this cannot be used for a public company. Thereare provisions in the Companies Act 2006 which abolish the prohibition on financial assistancefor private companies. These are due to come into force in October 2008. However, theprohibition will still apply to public companies, subject to certain exceptions.


It will be important for the arrangement to be clearly documented and properly administeredby the centralizing company. If the individual group companies still run their own operatingaccounts with the bank and if the arrangements for payment of interest reflect theirrespective interests and liabilities, adverse consequences would be unlikely for either thecentralized companies or the centralizing company in the event of insolvency proceedings inEngland against one company in the group (except that claims against the insolvent companyfor moneys due but unpaid may not be satisfied). In any event, the documentation will

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usually provide for the arrangement to be terminated in various circumstances, includinginsolvency.

4. TAX ISSUES

4.1 Value added tax (VAT)Are the operations between the centralizing entity and the centralized entities subject to VAT?If so, at what rate?The operations between the group companies, the centralising companies, and thecentralizing company will be exempt from value added tax in the UK.

4.2 Taxation of interestAt what rate is the accrued interest, whether owed to or by the centralized entity and to thecentralizing entity, taxed? Is there a different rate for fixed term loans and current accountadvances?Generally, interest in respect of bank accounts subject to these types of arrangements will betaxable and relievable on an accrual basis as between UK companies. However, the detailedmechanism of each arrangement will determine its tax treatment in the UK. Factors to betaken into account include whether the centralizing company is operating the interestaccount as a principal or as an agent for the group companies and whether only net amountsof interest are payable or full amounts of interest are payable but are set-off.

Is there a withholding tax (“WHT”) on interest paid to a foreign entity? What is the applicablerate in relation to the following countries?The rate of WHT in the UK on payments of interest, in the absence of any treaty or other reliefis 20 per cent. The effective treaty rates for payments from the UK are as follows. These ratesdo not always apply automatically, and application may need to be made to the relevantauthorities for clearance in accordance with the terms of the specific treaty.

Aus

tria

Belg

ium

Braz

il

Can

ada

Chi

na

Cze

ch R

epub

lic

Dub

ai

Engl

and

Ger

man

y

Hon

g Ko

ng

Hun

gary

Indi

a

Irela

nd

Ital

y

Japa

n

AffiliatedCompanies

in

Withholdingtax rate 10% 0-15%

1

20% 20% 10% 0% 20% - 0% 20% 0% 0-15%2

0% 0-10%1

10%

1 Under a European Union directive, no WHT may be imposed on dividends paid to a parent company resident in an EUmember state by a subsidiary resident in another EU member state that is owned 25% or more by the parent company. Underanother EU directive, payments on interest and royalties made between, broadly, associated companies resident in EUmember states are exempt from withholding tax. Numerous conditions and transitional rules apply, including some that delaythe application of the rules for several years.

2 The lower rate applies to interest paid to banks and other financial institutions.


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4.3 Stamp duty


Standard cash pooling arrangements and those that do not involve the transfer of any sharesor securities give rise to no stamp duty implications.



Interest paid by a group company in the UK should be fully deductible. If the arrangementsare entered into for tax-driven purposes, certain provisions under UK law would limit thedeductibility of interest. However, these are unlikely to apply if it is a genuine cash poolingarrangement entered for commercial reasons.

With regard to a ratio of debt/equity capital (thin capitalisation) very broadly speaking,interest paid by a group company to the centralizing company may not be deductible if thetwo companies are connected and if the UK Inland Revenue (“HMRC”) deems the groupcompany in the UK to be thinly capitalised. Although there are no general rules, a rule ofthumb that is often applied is that the debt-to-equity ratio should be no greater than 1:1, andthat the projected profits of the company would provide interest cover of 3:1.


It is possible to obtain advance rulings from HMRC regarding the deductibility of such interestpayments. Such an advance ruling is likely to specify conditions regarding the debt-to-equityratio, and the level of interest cover of the company concerned.

4.5 Tax havens


Under certain circumstances, the profits of a non-resident company may be imputed to a UKcompany with interests in the non-resident company, and thus become taxable in the UK.

Luxe

mbu

rg

Mex

ico

Net

herla

nds

Pola

nd

Port

ugal

Russ

ia

Sing

apor

e

Slov

akia

Sout

h Af

rica

Spai

n

Switz

erla

nd

Taiw

an

Turk

ey

USA

AffiliatedCompanies

in

Withholdingtax rate 0% 15% 0% 0% 0-10%

1

0% 10% 0-10%3

0% 0-12%1

0% 10% 15% 0%

1 Under a European Union directive, no WHT may be imposed on dividends paid to a parent company resident in an EUmember state by a subsidiary resident in another EU member state that is owned 25% or more by the parent company. Underanother EU directive, payments on interest and royalties made between, broadly, associated companies resident in EUmember states are exempt from withholding tax. Numerous conditions and transitional rules apply, including some that delaythe application of the rules for several years.

3 The higher rate applies to industrial royalties.

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This can occur under the UK controlled foreign company (“CFC”) rules if individuals orcompanies who are resident in the UK control a non-resident company that is subject to alower level of taxation – i.e., less than three-quarters of what it would pay had it been residentin the UK. The type of profits that may be so imputed includes profits that relate to interestincome.

HMRC has published a ‘discussion document on the taxation of the foreign profits ofcompanies’. Under this, discussion document, changes to the CFC rules are proposed. Changesinclude a participation exemption for large and medium taxpayers with shareholdings greaterthan 10% and passive/mobile income based “control company” rules. It is thought that aftera consultation period, the new rules should take effect from the Finance Act 2009, but as yetthe proposals exist only in outline, and many significant details regarding their applicationremain to be settled.



Transfer pricing rules will become relevant if there are any cross-border payments of interestor any cross-border debt obligations. Therefore transfer pricing is applicable where a zero-balancing cash pooling arrangement is in place. If this is the case then HMRC will review theterms applicable to the interest to determine whether the arrangement is one that partieswould enter “at arm’s length”. If HMRC find this is not the case, HMRC can then substitutethe terms applicable with those they deem to be at an arm’s length rate.

Under the notional cash pooling arrangement as there is no physical cash flow and no debtobligations are created then transfer pricing issues do not arise.



The major concern when considering a favourable tax regime, for the consolidated cashpooling master account, must be WHT. Ideally, you would seek a jurisdiction which has low orzero WHT tax rates. The actual jurisdiction will not only depend on your group structure –where the consideration will be whether you have entities based in Europe, North America ora world wide multinational – but also as where your bank is based and has offices.

The diagram below will help one better understand the considerations when deciding onwhere best to locate your consolidated cash pooling master account, particularly regarding apossible charge to WHT in relation to payments of interest. As you will see from the diagram,the decision where to base the master account is primarily driven by two questions: • out of which country is payment made; and• what are that country’s WHT rates?

In this diagram you will note that we have UK and Dutch companies with positive balancesand US companies with negative balances. As the positive balances will be ‘swept’ from theUK and Dutch companies, these positive balances will be transferred to the jurisdiction of theconsolidated cash pooling master account. As such the WHT applicable, in relation to theinterest, will depend on the tax treaty in place between the UK, the Netherlands and the


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consolidated cash pooling master account jurisdiction and.However, as the US companies have negative balances, no money will leave these companies.What we will have instead is a payment from the consolidated cash pooling master accountto the US companies to order to increase that negative balance to zero. As such the WHTapplicable, in relation to the interest, will depend on the tax treaty in place between theconsolidated cash pooling master account jurisdiction and the USA.

Further issues to consider are VAT and transfer pricing. As already, mentioned, VAT is not anissue for UK based master accounts.


The UK does not impose any requirements on a company to report its cash inflows andoutflows to and from the UK.


There are no current exchange controls in the UK, although there are freezing orders andsanctions in existence which prohibit dealings with certain individuals, organizations andcountries (for example at present, Al Qaeda or the Taliban).

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7. ACCOUNTANCY OBLIGATIONS AND STANDARDSWhat if any are the specific accountancy obligations and standards for entities participating ina cash pooling arrangement?The relevant standard for a cash pooling structure would be IAS 32; however there may beother relevant standards dependent on how the deal is structured.

Requirements of IFRS/IAS 32 Under IFRS bank accounts are defined as cash ie financial instruments. According to IAS 32financial instruments need to be disclosed and presented individually, unless:1.The corporation has a legal right to settle on a net basis. 2.The corporation has the intention to settle on a net basis. The first requirement, having the legal right to settle on a net basis, tests the company's abilityto freely transfer cash between the accounts in the cash pool. This legal right needs to beincluded in either the cash pool agreement or in other enforceable documents, such as thebank's general terms and conditions or current account documentation. It is key that the legaldocumentation is enforceable under all circumstances.Meeting the second requirement does require the company to demonstrate its intention tosettle on a net basis. If it settles the cash balances on all bank accounts within the notionalcash pool periodically, it is likely that the net settlement requirement will be met; howeverthis largely remains subject to the agreement of the auditors. Settling all accounts once everyquarter would meet this requirement. A periodic sweep, at least once every reporting period,would bring all the balances on the accounts to zero. Resulting inter-company loans anddeposits would require the company to set up a separate administration.Under a substance-over-form approach the practice of sweeping out the balances andimmediately transferring them back may be seen as 'window-dressing' by the auditors, thuspreventing the acceptance of presenting the bank balances in the pool on a net basis.

Impact of not meeting the off set criteriaNot meeting the two requirements for netting cash balances means that companies will haveto present debit and credit balances separately on the balance sheet, as well as interest paidand earned separately on their profit and loss account. As a result of this volatility, balancesheet ratios as well as interest cover ratios can be affected. Ratio development, especiallythose ratios and covenants agreed with banks and financiers, needs to be monitored carefullyby corporate treasury. Not all corporates will have lending covenants that are impacted by thechange in accounting policy. In all cases, however, they will be faced by a balance sheet andprofit and loss account volatility.

8. E-CASH POOLINGAre there data securitization aspects to be addressed regarding the relations between thecentralizing entity, the centralized entities and the banks?On electronic commerce issues, the UK follows the relevant EU directives. For exampleSection 7 of the Electronic Communications Act 2000 provides for the admissibility inevidence of electronic signatures in legal proceedings.


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9. FINANCIAL REPORTING, EVALUATION AND CONTROLAre there financial reporting, evaluation and control obligations associated with cash poolingarrangements?The necessary reporting, evaluation and control obligations have been dealt with in paragraph7 of this chapter.

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UNDER UNITED STATES LAW

This contribution does not constitute legal advice. Its purpose is to give only an overview of the principlesapplicable in United states corporate law, banking law and tax law in the USA. The answers set out belowmust be considered in relation to individual circumstances, taking into account the nature of the activities,the structure chosen and the location of the centralizing company.

Elizabeth Leckie

Allen & Overy

30 Rockefeller PlazaNew York, New York 10112

[email protected]: 212-326-2057Fax: 212-408-2420

Bill Satchell

O’Melveny & Myers LLP

555 13th Street, N.W.Washington, D.C. 20004

[email protected]: 202-383-5342Fax: 202-383-5414


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There are several defining features of the United States financial system that fundamentallyaffect the form of U.S. cash management systems and distinguish them from those in othercountries.First, largely as a product of years of restrictive branching and interstate banking laws whichhave now largely been repealed, there is no depository institution (used here to include stateand national banks, depository trust companies and thrifts (or savings and loans)) that has anational footprint in the U.S.. There are a number of “super-regional” depository institutionorganizations which – either through a single depository institution or several sisterdepository institutions – have a commanding presence in two or more major geographicregions of the U.S. Many significant providers of cash management services maintain servicecenters in regions in which they do not have significant depository institution presence andare thereby able to offer some of the benefits of a regional presence. At the present time,there is no institution that offers comprehensive proprietary local and national services to abusiness organization group. As a result, companies operating in more than one state mayhave accounts with more than one depository institution, and many cash managementsystems involve more than one depository institution organization.Second, the U.S. is a federal system, in which the 50 individual states have retained significantsovereign power to legislate with respect to and regulate and supervise financial services.While the extent of U.S. federal law preeminence in governing the activities of depositoryinstitutions is growing, there is still variation in the rules applicable to the provision of financialservices like cash management by depository institutions among the 50 states and variousterritories of the U.S. State law also governs in substantial part the law of personal property,including the grant and effect of liens on deposits and rights of setoff, and the giving andeffect of guaranties. These legal structures are fundamental to most cash managementarrangements, with the result that ascertaining the law likely to govern particular transactionsmay be a critical part of setting up a cash management program. The determination of whichstate law will govern a particular relationship (typically referred to as the “choice of law”) canbe problematic, particularly because the law applied to a particular transaction will typicallybe ascertained under the choice of law rules of the state in which any forum court sits. Thismeans that the answers to many of the questions discussed below may vary – at least subtly– depending on the States in which the affected parties are located or in which a dispute islitigated.Third, depository institutions are not permitted to pay interest of any kind on commercialtransaction account deposits held in their U.S. branches. Interest can be paid on time deposits(generally accounts on which the depository institution has reserved the right to require upto seven days notice of withdrawal), although these are generally not suitable vehicles forcash management services. For this reason it is common for United States cash managementprograms to be linked with investment sweep features in which excess cash in swept intoshort-term investments.Fourth, checks are far more common as a medium for payment in the U.S. than in manyEuropean countries. Electronic transfers, particularly ACH transfers, and debit cards aregaining acceptance. A recent study by the Federal Reserve System concluded that electronic

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payments now comprise over two-thirds of all noncash payments by number, but less thanhalf by value. The number of electronic payments grew 12.4 percent per year from 2003 to2006. Payments made by debit, credit, or EBT cards were over half (51.6 percent) of allnoncash payments in 2006 but only 4.1 percent of the value. In contrast, ACH payments wereonly 15.6 percent of noncash payments but 40.8 percent of value. The ACH Network is ahighly reliable and efficient nationwide batch-oriented electronic funds transfer systemgoverned by the rules promulgated by the National Automated Clearing House Association, anot-for-profit operated by its members. The rules provide for the interbank clearing ofelectronic payments for participating depository financial institutions. The Federal ReserveSystem and Electronic Payments Network act as ACH Operators, central clearing facilitiesthrough which financial institutions transmit or receive ACH entries.

Finally, because an overdraft is treated as an extension of credit and overdraft policies aresubject to regulatory scrutiny, cash management arrangements rarely entail the maintenanceof overdrafts unless the account holder has a line of credit with the cash managementprovider. Notional pooling arrangements in which centralized companies have negativebalances that are offset by positive balances in account of affiliates are virtually unknown inthe United States.

Zero Balance Accounts (ZBAs)

As a consequence of these features of the U.S. system, the most common form of cashmanagement system in the U.S. involves the establishment of a series of zero balanceaccounts (“ZBA”) set up by the members of the business organization group, sometimes withmore than one depository institution. There is no general prohibition limiting the ability of acentralizing company to merge the balances of the current accounts of its participatingaffiliates to create a single balance in another account. As described above, there are twogeneral models for such activities: (i) the agency model, in which the centralizing companyeffectively holds the balances or property attributable to separate participants as nominee oragent for such participants, and (ii) the financing model, in which the centralizing companyborrows from participants that have funding surpluses and lend to participants that havefunding deficits. There are also intermediate models, in which some group membersparticipate on an agency basis and others as borrowers or lenders. In each case, thecentralization of cash management improves the administration of group liquidity andminimizes the need to utilize third-party financing. Whichever approach is used, however, itis important that transactions be clearly documented and that financial records bemaintained on a basis consistent with the transactions as effected. The commingling of thefunds of members of a business organization group, without the observance of appropriateorganization formalities or complete and adequate documentation and recordkeeping, cansignificantly increase the risk that, if a member of the group becomes insolvent, otherparticipants in the cash management program could be characterized as alter egos of theinsolvent member and substantively consolidated in the bankruptcy of the insolvent member.

Members of a group who are particularly anxious to ensure the avoidance of substantiveconsolidation in bankruptcy are usually advised to maintain separate deposit accounts and toavoid commingling funds or other property with affiliates. Reasons that members of businessorganization groups might affirmatively seek to avoid substantive consolidation includedifferences in their respective credit profiles and the desire of creditors to ensure the isolation


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of the operations and property of one group member, for instance, an entity to which theother group members have transferred their accounts receivable for financing purposes.Quite commonly, a cash pooling arrangement will include one or more lockbox accounts forthe collection of receivables paid by check, although increasingly physical checks will beconverted into ACH transactions at the lockbox location. The funds in zero balance accountsare swept into a concentration account held by one of the members of the group (the“centralizing company”). The funds from the concentration account are typically directed toone or more controlled disbursement accounts, from which the group is able to fund payrolland other disbursements. To the extent that funds can be disbursed from a ZBA, funds aredrawn from the concentration account. Arrangements are often made for excess cashbalances in the concentration account to be invested in money market instruments or similarshort-term investments through a securities account held with the depository institutionmaintaining the concentration account or one of its affiliates or in offshore deposits of thedepository institution maintaining the concentration account.ZBA arrangements are optimal in groups that do not face significant multi-currencyexposures. ZBA arrangements impose burdens on the participating business organizationgroup, requiring administration, documentation and recordkeeping with respect to resultingintra-organizational loans and borrowings and associated interest earnings/expense.

Notional Pooling ArrangementsThe principal alternatives to ZBAs are notional pooling arrangements. In a notional poolingarrangement, each participating member of the business organization group maintains, inaddition to any regular operating accounts (which need not be maintained with the poolingbank), an account with a single pooling bank (typically in a single location). Excess balancesare swept to each participating member’s account with the pooling bank; the participatingmember retains the right to manage the cash balance maintained in its account with thepooling bank. Typically, participating members enter into cross-guaranties for the benefit ofthe pooling bank with respect to negative balances of fellow members of the businessorganization group. The pooling bank notionally offsets positive against negative balancesmaintained by participating group members (including balances denominated in differentcurrencies), determines the net balance with respect to all of the participating members and,if positive, gives interest credit to the lead participant for with respect to any net creditbalance. Because any offset is only notional, each of the participating entities is able to retainmanagement of its own account and exposures may be maintained in different currencies.Such arrangements present significant complications from under U.S. tax law and are morecomplex from a regulatory perspective.From a tax perspective, if one participating company is viewed as lending into the notionalpooling group, it may be necessary to allocate an appropriate amount of interest to thatparticipant based on the rates applicable to an arm’s-length transaction. Such deemedinterest may also be subject to withholding tax. Another complication arises because theinterest income earned by a foreign participant could be treated as a taxable dividend to theparent, even if no cash is transferred (deemed dividend). The same deemed dividend exposuremay also exist when the parent is viewed as drawing on a bank pool with the guarantee of aforeign corporate affiliate.The confusing cross guarantee aspect in such transactions is particularly problematic if there

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are cross-border exposures. If a U.S. corporate participant is in a surplus position and non-U.S.affiliates draw against the pool to cover deficit positions, cross-guarantees may cause U.S. taxauthorities to take the position that the U.S. participant has performed a service for itsaffiliates, i.e., guaranteed their repayment of the draws to the bank. Accordingly, a service feewould be deemed earned by the U.S. corporate participant.

1.1 Banking authorities’ approval or exemption Banking Monopoly

Cash management using lockbox arrangements, concentration accounts, investment services,payment or receivables processing services, and related information services by businessorganization groups is common in the U.S., although it sometimes entails the coordination bythe business organization of the activities of several different depository institutionorganizations. Depository institutions offer these facilities both to domestic and to multi-national organizations. Typically the treasury function for a business organization administerssuch arrangements for the benefit of the business organization group. The exact strategiesemployed by different business organization groups can vary significantly, reflecting differentneeds and philosophies.

As a rule, only licensed depository institutions are permitted to accept deposits of funds.Ordinarily, however, the deposit of funds into a common depository institution account bymembers of a business organization group is not viewed as the conduct of a regulateddeposit-taking activity by the centralizing company, which is the holder of the account.Accordingly, no approval, consent or exemption is required from federal or state depositoryinstitution regulatory or similar authorities in connection with the offer or utilization of cashmanagement, lockbox, ACH, concentration account, or similar payments services by theparticipating depository institution or any member of a participating business organizationgroup. Nor do federal or state depository institution regulatory authorities have anysupervisory authority with respect to a business organization group in connection with itslawful cash management arrangements with licensed depository institutions.



In a ZBA arrangement, it is common for the centralizing entity to use balances in theconcentration accounts to fund members of the business organization group. Federal lawdoes not require licensing or regulatory approval for an entity (other than a foreign bank) toengage in U.S. lending activities. While some states regulate commercial lending activities(generally the term of the loan is not a factor in whether or not licensing may be required), itis uncommon for a centralizing entity to seek licensing or prior approval under state law tomake loans to members of the same business organization group, whether on the basis thatmaking loans to members of a business organizations group does not constitute beingengaged in the business of lending or on other grounds.


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1.1.2 Remuneration of cash deposited

Is the centralizing company prohibited from remunerating cash deposited with it by thecentralized companies?

Because no interest is payable on transaction deposit accounts, compensation by thecentralizing company for the benefit of holding commingled deposits is only rarely an issue.To the extent that cash balances are invested in short-term investments, the nominal holdermay allocate the proceeds to group participants as if the nominal holder were holding theinvestment as agent for the participants. Alternatively, in many organizations, net balancesfor the account of a participant company are treated as a loan to, and negative balances forthe account of a participant company are treated as a loan from, the centralizing company ofthe group. Typically interest would be paid by the notional borrower to the notional lenderat an appropriate short-term rate. Such arrangements may raise tax issues, if the applicableinterest rate is not appropriate or the centralizing company utilizes any funds or short-terminvestments acquired with such funds on an agency basis in a manner inconsistent with theposition that the centralizing company is acting as an agent for the participating members ofthe business organization group.



Notional pooling of current account balances is not a common feature of U.S. cashmanagement arrangements, because overdrafts are treated as loans to the participants withnegative balances and the offset of such accounts against the positive balances of affiliatesare problematical.When notional pooling arrangements touch on the United States, they typically entailguaranties from participating entities of the overdraft obligations of other members of thegroup and an express setoff agreement with respect to, or a pledge of, their deposit account(including any balances therein) as support for their guaranty obligation. While depositoryinstitutions are required to treat the overdraft as a loan, they may view the guaranty andcredit support as collateral therefore. Typically, when the collateral consists of cash on depositwith the depository institution, the related credit exposure would qualify for significantlymore favorable capital treatment than an unsecured exposure. Ordinarily, however, adepository institution would require clear legal guidance, possibly including opinions fromcounsel, that such arrangements are enforceable. The chief uncertainty associated with suchguidance is the difficulty in most cases of identifying with certainty the states whose laws arelikely to govern such arrangements. While parties frequently will chose the law of a particularjurisdiction and specify the courts of that jurisdiction as an agreed forum (and possibly theexclusive forum) for the litigation of any dispute related to the arrangements, such provisionswill not necessarily be respected in all of the states.Counsel will typically recommend that guaranties by participating members be capped at anamount which does not render the guarantor insolvent for the purpose of defending against

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avoidance of the guaranty as a fraudulent transfer or obligation.

A fraudulent transfer is one made by a debtor with intent to defraud, hinder, or delay his orher creditors or when a debtor transfers property without receiving "reasonably equivalentvalue" in exchange for the transfer if the debtor is insolvent at the time of the transfer orbecomes insolvent or is left with unreasonably small capital to continue in business as a resultof the transfer.


It is common in the U.S. for business organizations to centralize the management of currencyrisk as part of an organization’s overall management of treasury issues. Such centralizedmanagement affords the organization an enhanced ability to manage currency exposures andto take advantage of greater scale. Examples of the benefits of such management include theability to balance currency exposures among affiliates that respectively face long and shortpositions, thereby avoiding the necessity of paying currency exchange premiums, and usingscale to obtain more competitive exchange rates.



No regulatory approvals are required with respect to the activities of a centralizing entity inoperating or managing a cash management system for its affiliates.



Statutory privacy rules, both at the U.S. federal level and at the state level tend to focus onprivacy of information with respect to consumers, not commercial customers. Whiledepository institutions are obligated to protect the nonpublic information of commercialcustomers, the contours of the protection is much less well established than is true forconsumers. Depository institutions will customarily share statements and other similaraccounts of centralized entities with the centralizing entity. Best practices requires consentin writing from each centralized entity, although frequently such arrangements are less formaland the centralizing entity is simply given access to electronic reporting systems by itsaffiliated centralized entities.



In some cases, business organizations may be restricted from extending credit to affiliates or


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commingling funds with affiliates by regulatory law or contractual covenants. In most casesthe imposition of specific regulatory restrictions on pooling will be a question of state law andtherefore beyond the scope of this guidance. It is worth noting that there are strictrestrictions on extensions of credit by most depository institutions to their affiliates, with theresult that any pooling arrangement involving a depository institution as a participant wouldbe subject to strict scrutiny. Moreover, in many industries, participants are required tosegregate trust funds or customer funds from their own or their affiliates’ assets. Care shouldbe taken that customer or trust funds are excluded from cash management arrangements.

There are no requirements specific to cash management to be observed in connection withthe establishment of deposit accounts, although ordinarily anti-money laundering rulesrequire disclosure of the persons having day-to-day control of deposit accounts and requirethat the depository institution engage in appropriate diligence as to the identity of suchpersons.

1.4 Outsourcing


Cash pooling arrangements can be outsourced to an agent that is not a member of the group.Depending on the functions of the agent, it may be prudent to consider whether the agentthereby becomes subject to licensure as a money transmitting business or an investmentadviser.

2. CORPORATE LAW



The form of an entity does not itself result in any restriction on participation in a cashmanagement arrangement.



Ordinarily a cash pooling arrangement would not need to be contemplated in the bylaws ofa participating entity. In the case of participating entities that are less than wholly undercommon ownership, best practice would be to treat the cash management arrangement as atransaction with an “interested” person and to seek approval from any independent directorsafter full disclosure of the arrangement.

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With the exception of national banks and certain U.S. federal government sponsored entities(such as Fannie Mae and Freddie Mac), business entities are organized and chartered underthe law of the states. Ordinarily, it is the law of the state of organization of an entity thatgoverns the fiduciary obligations of the officers and directors of the entity to the entity andto its shareholders or members. Insofar as creditors are concerned, the determination ofapplicable state law may prove difficult. Moreover, in the event of bankruptcy, U.S. federallaws may also be pertinent.As a rule, a cash management arrangement that is fairly structured to ensure reciprocalbenefit to all of the participants is unlikely to constitute a breach of duty to any personinterested in any of the participants in a cash management arrangement. For these reasons,it may be useful to ensure that arrangements are, insofar as may be practical, on arms’-lengthterms.So long as all of the participating entities under common ownership, there may be no breachof duty to the group if the benefit or burden is concentrated in less than all of the participatingentities. Creditors, however, may be disadvantaged by an unfair allocation of burden, and sucharrangements may result in a greater susceptibility to allegations of fraudulent transfer oreven in substantive consolidation.



No. There are no prescriptions as to compensation of the centralizing entity. Best practicewould be to make an appropriate allocation of the expenses of administration among theparticipating entities.



Most states have adopted the prudent investor rule, which embodies a portfolio theory ofprudent investment that, as a practical matter, makes success in such claims relativelydifficult. It is unlikely that participating entities that are wholly under common ownershipwould make a claim of breach of prudential investment standards against a centralizing entity.In other cases, it is possible (but still unlikely) that a participating entity would make a claimfor breach of prudential investment standards


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Is the cash management agreement subject to any approval by the managementboard/supervisory board or the shareholders of the participating company?

Each State has its own business organization laws which are applicable to organizationschartered there (frequently different than the jurisdiction in which the business organization’smain office is located). U.S. law generally requires business organizations to observeappropriate organizational formalities, although how those are observed may vary fromcompany to company based on its general approach to such issues. U.S. corporations do nothave separate management and supervisory boards, although corporations and some limitedliability companies are supervised by “boards of directors”. As a rule, neither shareholder norboard of director approval is required for participation in a particular cash managementprogram. Typically, boards of directors broadly authorize company management toimplement appropriate deposit and related cash management arrangements; the details aregenerally left to the discretion of management. Even if broadly authorized, a board ofdirectors of a well-managed organization – either directly or through an audit or similarcommittee – would ordinarily exercise supervisory oversight with respect to key cashmanagement policies and the conduct of important cash management activities.



There is no specific rule prohibiting the use of cash of a target or its subsidiaries to repay anacquisition loan so long as it does not render the target insolvent or leave it with anunreasonably small capital.No rule restricts the ability of a centralizing entity to exercise a contractual right to terminatea cash pooling arrangement.

2.8 Respect of the corporate interest of the participating companies

To what extent is the cash management structure affected by the principle of protection ofprotecting corporate interest of the centralizing company, the centralized companies, and thegroup?

Although some business organizations – securitization vehicles, for example, including asubsidiary that has been formed to hold the accounts receivable for the group to facilitateaccounts receivable financing -- may have restrictive provisions in their charters or bylawsthat limit their ability to commingle funds or to invest in common money marketinstruments. Such provisions are rarely found the charters or bylaws of ordinary businessorganizations. In most case, however, business organizations have broad authority under theircharters and bylaws to engage in any activity permissible for business organization under theapplicable law of their chartering state (most typically anything other than banking, trust andinsurance activities). This authority commonly includes the power to deposit funds, lendmoney to and borrow money from affiliates, discount obligations, and purchase, hold, sell andredeem investments.

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Is there an obligation to offer the participating companies market financial conditions?

There is no such obligation, although terms that vary significantly from market may bedisputed by tax authorities seeking to reallocate income among affiliates, reinforce theargument that a group member is an alter ego of an insolvent affiliate and lead to chargesthat directors, officers or other managers have breached their duty of loyalty to thedisadvantaged group member.

Are there restrictions on the type of operations the centralizing company may undertake withthe cash of the participating companies?

No, subject to any intercompany agreements.

2.9 Management liabilities

Do the managers/directors of the participating company incur any potential liability byagreeing to the execution of a cash management agreement?

Although the directors, officers or managers of each participating company owe it a duty ofloyalty, that duty will seldom be viewed as having been violated by a cash managementarrangement unless the arrangement materially and disproportionately adversely affects thatcompany while benefiting other companies with respect to which the managers have aconflicting interest. Shareholders having relatively greater interest in the disadvantagedcompany or creditors or other stakeholders in the disadvantaged company may have standingto assert such claims if their interests are harmed.

2.10 Shareholders’ liabilities

Can the shareholders of the participating companies be exposed to any liabilities as a result ofthe cash management agreement?

As long as the business organizations are limited liability companies and the cashmanagement arrangements neither result in inappropriate benefits to the equity holders norare so structured as to result in the equity holder being substantively consolidated with aninsolvent subsidiary as an alter ego of the insolvent subsidiary, equity holders should not beexposed to liability as a result of such cash management arrangements.


As described above, the commingling of the funds of members of a business organizationgroup, without the observance of appropriate organizational formalities or complete andadequate transaction documentation and recordkeeping, can significantly increase the risk


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that, if a member of the group becomes insolvent, other participants in the cash managementprogram could be characterized as alter egos of the insolvent member and substantivelyconsolidated with the insolvent member in the bankruptcy of the insolvent member.

Substantive consolidation is a construct of Federal bankruptcy law. If successfully invoked inthe bankruptcy of an entity with respect to affiliated companies, the separate legal entitieswould be treated as if they were merged into a single survivor left with all the cumulativeassets and liabilities (save for inter-entity liabilities, which are erased). The result is that claimsof creditors against separate debtors morph to claims against the consolidated survivor. Whilethere is some difference in the application in the doctrine in the various Federal circuit courts,for the most part, substantive consolidation is only appropriate if the entities for whomsubstantive consolidation is sought (i) disregarded separateness so significantly before thebankruptcy petition that their creditors relied on the breakdown of entity borders and treatedthem as one legal entity, or (ii) after the bankruptcy petition their assets and liabilities wereso scrambled that separating them is prohibitive and hurts all creditors.

Although the successful invocation of the doctrine of substantive consolidation is very rare,this risk induces many organizations strictly to avoid commingling of assets – including funds– or to ensure that transactions involving commingling are carefully and fully documentedand that recordkeeping requirements are scrupulously observed. By this means it should bepossible to show that creditors did not rely on the whole and that the assets and liabilities ofthe respective participants should be treated as separate.

3.1 Centralizing company structure

Assuming the centralizing company is not required to be a group bank, are there corporatearguments in favour or against the centralizing company having any particular corporate form,such as a holding company, a subsidiary or a European grouping?

No.

4. TAX ISSUESUnder a properly documented and managed agency model of a centralized cash managementsystem, movements of cash between the participating companies and the centralizingcompany would be disregarded. Of course, to the extent amounts are owing, they would betreated as loans. Poor documentation and management of an agency model, however, couldresult in treatment of the centralized cash management system as a financing model for taxpurposes. The discussion below addresses the issues of a financing model, although anytreatment of intercompany loans would apply to the agency model to the extent theparticipating companies are not immediately clearing payables and receivables.

If funds are moved between U.S. centralizing and participating companies as loans, and thecash movements are properly documented as loans, there would generally be no U.S. federalincome tax consequence other than the accrual of interest income and deduction. If thefunds are moved between companies as a contributions and distributions, or if the cashmovements are not well documented (so they are treated as contributions and distributions),the analysis will be different. Assuming that the group of participating companies constitutes

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a “consolidated group” for U.S. federal income tax purposes (which requires 80% equityownership by vote and value), contributions and distributions of cash are not subject to tax.However, distributions of cash by a subsidiary reduce the basis of the subsidiary stock in thehands of the parent. Accordingly, consistent one-way movements of cash can create adepressed, or even a “negative basis” (referred to as an “excess loss account”), which caneventually lead to a gain (e.g., if that company leaves the consolidated group). While properplanning can often reduce or eliminate any real problems associated with excess lossaccounts, it can become a problem if not managed properly.

There can be a number of state and local tax issues that arise in centralized cash managementsystems. First, centralized cash management among a group of companies has been held bythe courts to be a significant factor in subjecting the various members of the group totaxation by a state under the unitary system of tax (pursuant to which various groupmembers can be subject to tax in a state, even if they otherwise have no presence in the state,if one member of the group is active in the state and the group is found to be engaged in a“unitary business”). Thus, the centralized cash management system can subject an entiregroup to taxation in a state by virtue of the activity of any one member of the group. Suchan inclusion in a unitary group principally requires the group to allocate a portion of thegroup’s income to that state for taxation purposes (based on the proportion of the group’spayroll, property and income attributable to that state).

In addition, the centralized cash management system can sometimes subject the centralizingmember of the group to specific state or local taxation imposed on companies engaged infinancing activities. Accordingly, care should be taken to examine the state and local taxregimes of the company that would serve as the centralizing member of the group.



There is no VAT in the U.S.



This is frequently not an acute issue in the U.S., because depository institutions are notpermitted to pay interest on transaction accounts. When interest is paid, the tax treatmentof any accrued interest depends on the characterization of the interest of a participatingcompany in the pooling account or any related investments. If the centralizing companyholds the interest in the account or investment as agent for the participating members,accrued interest should be attributed to the principals pro rata to their interest in the account.If the centralizing company holds the interest in the account or investment as principal,accrued interest should be attributed to the centralizing company. The amount of interestdeemed paid or received by the centralizing company in respect of deemed loans to or froma participating member, to the extent reasonable, would ordinarily be treated as income (to


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the extent receivable) and expense (to the extent payable) by the centralizing company andany participating members deemed to borrow or lend such funds to the others.

4.3 Withholding tax on interest paid to a foreign companyWhile the movement of cash between U.S. companies in a centralized cash managementsystem can typically be done without material federal income tax consequences, the samecannot be said for cross-border movements of cash between related companies. Although aU.S. company can contribute or lend money to a foreign subsidiary without muchconsequence, if the foreign subsidiary loans or distributes cash to its U.S. parent (or other U.S.members of the group), the movement of cash will be treated as a dividend to the foreignsubsidiary’s U.S. parent. This same distribution treatment occurs if (i) the foreign subsidiaryguarantees or pledges its assets to support a U.S. parent’s borrowings (or a U.S. affiliate’sborrowings) or (ii) more than 66% of the foreign subsidiary’s stock in pledged to support theU.S. parent’s borrowings (or a U.S. affiliate’s borrowings). While the U.S. parent may receive aforeign tax credit for such deemed distributions, a company’s ability to avail itself of suchcredits may often be limited. Accordingly, if a foreign subsidiary participates in the centralizedcash management system, there may be adverse tax consequences.Because dividends to a foreign parent (or an affiliate of a foreign parent) would generally besubject to withholding tax (30 percent, subject to treaty reduction), transfers to a foreignparent are typically structured as loans (unless the foreign parent can claim foreign tax creditsfor the withheld amounts). For that reason, it is important to make clear under a centralizedcash management system that the movements of cash from the U.S. company to the foreignaffiliate are loans and not distributions.To the extent amounts are advanced from foreign parents to the U.S. companies, repaymentof principal by the U.S. company will not be subject to withholding. However, interestpayments would potentially be subject to withholding unless a treaty reduces thewithholding. Also, careful attention must be paid to the conduit finance regulations and thetreaty-shopping provisions of U.S. treaties to determine whether or the extent to whichinterest payments would actually be eligible for treaty benefits. Both the conduit financeregulations and the treaty shopping provisions are designed to prevent the use of anintermediate foreign lender located in a country with favorable treaty withholding rates whenthe principal intent of using the intermediary is to obtain those lower treaty rates.The rate of withholding tax in the U.S. on payments of interest, in the absence of any treatyor other relief is 30 percent. The effective treaty rates for payments from the U.S. are asfollows:

Aus

tria

Belg

ium

Can

ada

Fran

ce

Ger

man

y

Ital

y

Liec

hten

stei

n

Luxe

mbo

urg

Net

herla

nds

Spai

n

Uni

ted

King

dom

AffiliatedCompanies

in

Withholdingtax rate 0% 15% 10% 0% 0% 15% 30% 0% 0% 10% 0%

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4.4 Stamp duty


There are no stamp duties in the United States.



Interest paid by a group participant to the centralizing company in the U.S. should be fullydeductible. However, interest paid by a U.S. company to a foreign parent, or paid to a bankwhere a foreign parent (or affiliate) guarantees the bank loan, can result in a denial of theinterest deduction for the U.S. company if (i) the U.S. company’s interest expense isconsidered excessive (roughly, more than 50% of its income) and (ii) the U.S. company’s debt-to-equity ratio exceeds 1.5:1 (these rules are referred to as the “earnings stripping rules”).

Is there a debt/equity capital ratio (thin capitalization)?

Yes, as described in the preceding paragraph, it is one of the factors taken into account indetermining limitations on the deductibility of interest.

Is it possible to obtain a tax ruling from the tax authorities as to the deductibility of interest? Ifso, under what conditions?

This is not U.S. practice. Tax rulings are issued only in respect of legal issues for which there isnot clear guidance, and do not address issues of fact.

4.6 Tax havens


No.



Transfer pricing rules will become relevant if there are cross-border payments of interest. TheU.S. Internal Revenue Service will review the terms applicable to the interest to determinewhether the arrangement is one that parties would enter “at arm’s length”, and can substitutea deemed arm’s length rate if they find this is not the case.

4.9 Risks of reclassification of the interest paid by the participating company

Is there a risk that the interest paid by the participating company could be regarded as (i) ahidden dividend distribution (subsidiary-borrower) or (ii) as an informal contribution to itsregistered capital parent company-borrower?

Assuming the arrangements are clearly documented and relate to external banking facilities,it is unlikely that interest paid by a group company to a centralizing company would beregarded as a dividend distribution. It also is unlikely that interest payable by a centralizingcompany to a centralized company would be regarded as a contribution to a centralizedcompany’s capital, assuming proper documentation.


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No special central bank reporting obligations are imposed on the centralizing company or thecentralized company with respect to domestic deposits or domestic investments. In somecircumstance, cross-border holdings (either by foreign persons of U.S. deposits or securities, orby U.S. persons of foreign securities) may trigger informational reporting requirements to theU.S. Treasury (administered by the Federal Reserve Banks). No special reporting obligationsare imposed on banks with respect to centralizing arrangements, although such liabilities arereportable on the same basis as all other deposit liabilities.


There are no controls or restrictions under U.S. law on the exchange of U.S. Dollars into non-U.S. currencies. There are, however, laws which prohibit dealings with certain countries andmoney-laundering and similar activities.

8. E-CASH MANAGEMENTAre there any data security matters to be addressed regarding the relations between thecompany, the centralized centralizing companies, and the banks?

It would be customary for any account opening documentation to which the centralizedcompanies are party to authorize the applicable bank to deal with authorized persons at thecentralizing company. That authority would ordinarily permit the bank to share accountinformation with such persons.

Customarily, depository institutions entering into cash management arrangements withagree to a security procedure with a customer for the purpose of (1) verifying that a paymentorder or communication amending or canceling a payment order is that of the customer, or(2) detecting error in the transmission or the content of the payment order orcommunication. A security procedure may require the use of algorithms or other codes,identifying words or numbers, encryption, callback procedures, or similar security devices.Comparison of a signature on a payment order or communication with an authorizedspecimen signature of the customer is not by itself a security procedure.

If a depository institution and its customer have agreed that the authenticity of paymentorders issued to the depository institution in the name of the customer as sender will beverified pursuant to a security procedure, a payment order received by the receivingdepository institution is effective as the order of the customer, whether or not authorized, if(a) the security procedure is a commercially reasonable method of providing security againstunauthorized payment orders, and (b) the depository institution proves that it accepted the

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payment order in good faith and in compliance with the security procedure and any writtenagreement or instruction of the customer restricting acceptance of payment orders issued inthe name of the customer. Commercial reasonableness of a security procedure is a questionof law to be determined by considering the wishes of the customer expressed to thedepository institution, the circumstances of the customer known to the depositoryinstitution, including the size, type, and frequency of payment orders normally issued by thecustomer to the depository institution, alternative security procedures offered to thecustomer, and security procedures in general use by customers and receiving depositoryinstitutions similarly situated. A security procedure is deemed to be commercially reasonableif (a) the security procedure was chosen by the customer after the depository institutionoffered, and the customer refused, a security procedure that was commercially reasonable forthat customer, and (b) the customer expressly agreed in writing to be bound by any paymentorder, whether or not authorized, issued in its name and accepted by the depositoryinstitution in compliance with the security procedure chosen by the customer.

9. FINANCIAL REPORTING, EVALUATION AND CONTROL

9.1 Are there financial reporting, evaluation and control obligations associated with cash pooling arrangements?Because it is desirable to ensure the separateness of the participating entities, as well as tohave clarity as to the status of the arrangement, cash pooling arrangements should bereviewed by internal or external auditors to confirm that arrangements are both properlydocumented and operated in conformity with any documentation. Arrangements should alsobe assessed to ensure that arrangements are report for tax purposes in accordance with theoperation of the program.

9.2 Legal qualificationsWhat are the legal qualifications to be retained between the centralizing company andcentralized companies: agency, loan, partnership, other? The legal characterization of the relationship between the centralizing company and anyaffiliated centralized companies depends, in part, on how their relationship is evidenced. Thebetter practice is to have current and clear written agreements reflecting such relationships.Typically, such arrangements are documented as either agency or lender-borrower (credit)relationships. In the absence of written agreement, it may be necessary to rely oncircumstantial evidence to characterize such arrangements. Factors considered might includewhether loans or borrowings are reflected on the books of the parties, the payment ofinterest, the titling of accounts and the characterization of the relationship in agreementswith the depository institution. In most circumstances, the relationships are likely to becharacterized as agency or borrower-lender arrangements.If the shared funds are limited to the proceeds of a particular enterprise, and reflect a sharingof profits and losses, it is also possible that the arrangement could lead to the characterizationof the relationship between the parties as a partnership in respect of the shared enterprise.Sometimes – although only rarely -- when there is substantial evidence of disregard of


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corporate separateness between the centralizing company and the centralized companies, itis possible the centralizing arrangements will themselves be viewed as evidence that theparticipants are alter egos and that the separate corporate existence of the respectiveparticipants should be disregarded.

EACT Regulatory framework, legal and tax constraints for centralized cash management Guides ECHNICAL

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