The primary function of cash pooling is the optimization of cash management within a corporate group by balancing the accounts and allowing the use of surplus funds by all companies. Although it is growing in popularity across the globe, until today, in many jurisdictions cash pooling has received very little or no attention from lawmakers and it remains subject to a complex and incoherent regulatory landscape of civil, tax, banking and insolvency law. This is the case of both Poland and the Russian Federation, where a lack of specific regulation has led to legal uncertainties, which, however, have occurred in different contexts.

In Poland, it is argued that cash pooling arrangements do not meet the obligatory elements of a loan contract[1]. Therefore, and in absence of other alternatives, under Polish civil law cash pooling is considered an unnamed contract structured on the principle of freedom of contracting. On the other hand, analysis of the practice of Polish administrative courts and tax authorities in the context of tax regulations, leads to the conclusion that there is a dichotomy in the approach.

Initially, both administrative courts and tax authorities shared the view that cash pooling is not a loan agreement under the Polish Civil Code, nor is it one within the meaning provided by the Corporate Income Tax Act[2]. Following this interpretation, taxpayers were not required to draw up transfer pricing tax documentation in relation to cash pooling contracts and did not have to comply with limitations related to thin capitalization. However, between 2015-16, a new practice of the Supreme Administrative Court was formed. In accordance with this novel approach, cash pooling contracts were eventually recognized as loan agreements under the CIT Act and thus subject to thin capitalization and, when meeting certain thresholds, there was an obligation to draw up transfer pricing documentation.[3] In the aftermath, cash pooling became less attractive. Despite the fact that there have been several amendments, currently there is no definition of a loan under the CIT Act; the act refers to the term “credit (loan)” and the Supreme Administrative Court maintains its position that that cash pooling contracts generally fall within this category.

On the other hand, tax authorities in Poland do not recognize cash pooling as a loan subject to taxation under the Tax on Civil Law Transactions Act[4]. In this case, when issuing individual tax interpretations, Directors of Tax Chambers are of the view that cash pooling agreements remain unnamed agreements under Polish law and thus do not meet the criteria of any of the contracts exhaustively listed in Art. 1 item 1 point 1) of the CLT Act, including loan agreements.

As a result, a cash pooling contract is qualified in Poland differently within the context of various laws, which do not provide for any significant definitional differences regarding term “loan”. This inconsistent approach lacks solid legal justification. However, in practice, it does not hinder making cash pooling arrangements as such.

In the Russian Federation, just like in Poland, there is no specific and comprehensive regulation on cash pooling. Contrary to Poland, where, no matter the tax assessment of the arrangements, cash pooling remains an unnamed contract based on the freedom of contract principle, cash pooling provided by Russian banks is typically considered a set of intra-group loans[5]. This is to make the cash pooling product be in compliance with Russian legislation and to minimize risks. Under cash pooling arrangements in Russia, as a rule, each company enters into an intra-group loan agreement or agreements with the parent company, which manages the master account. Bank accounts of the subsidiaries are maintained in the same bank. Under loan agreements, each of the parties may borrow funds and shall repay them along with market rate interest. A master loan agreement may be entered into between a bank and the parent company in order to secure the availability of financial resources in the master account.

From the above set-up, it is clear that the currently existing Russian qualification of cash pooling arrangements as loans does not raise serious doubts, as is the case in the Polish legal system, where the aforementioned dichotomy exists. Bilateral loans are not equal to a single, unnamed, multilateral contract, the main purpose of which is joint management of the financial liquidity of the group. Thus, cash pooling within the meaning of the bank product available and offered in Russia is not precisely a cash pooling agreement within the meaning used in other jurisdictions.

At the same time, recent amendments to the Russian Civil Code have made it possible for banks to execute a debiting instruction even if there are no funds in an account, provided that the account is included in a pool of accounts (including those held by different entities) and the total amount in those accounts is sufficient to execute the debiting instruction. This solution, established in the Russian Civil Code, may have a positive influence on the development of cash pooling in Russia and bring it closer to the concept used in other jurisdictions. However, currently, in the absence of clarifications from the Central Bank of the Russian Federation, it is still unclear how the above mechanism may be operated in practice.

Also important when considering cash pooling arrangements with Russian companies are the implications of Russian currency control laws applicable in the case of international transfer of funds. Under the aforementioned regulations, cash pooling conducted between a Russian entity and non-residents is subject to currency control. This means that the Russian company is required to register the contract with the bank, if the contract value is equal to or exceeds approximately USD 50,000 for import contracts or approximately USD 100,000 for export contracts. Moreover, transfer of funds to a Russian bank account includes a phase of initial transfer to a special transit account and only after supporting documents are provided to the servicing bank, may the servicing bank authorize the transfer to the current account. Apart from that, the execution of cross-border cash pooling agreements may be connected with the risk of breaching rules on repatriation of funds in accordance with which, if a Russian company issues a loan to a non-resident, the Russian company shall ensure repayment of borrowed funds to its bank accounts within the term provided in the loan agreement. In connection with this, currency control laws contain the obligation to indicate the expected loan maturity under an agreement. Agreements without a specified duration for the loan shall generally not be accepted. As it follows from the above, currency control laws create not just uncertainties, but rather obvious obstacles to international groups willing to include its affiliated Russian company in cross-border cash pooling arrangements.

Summarizing the above, both in Poland and Russia participants in cash pooling are operating within a scant legal framework which does not directly address such institution. In a similar situation, different approaches seem to apply. Under Polish law, cash pooling is generally considered an unnamed contract on financial transactions carried out between related entities, save for the assessment made in the context of the CIT Act. This dichotomy in legal status of cash pooling, however, does not stop it from being used as a cash management tool for groups of companies. On the other hand, in Russia, in order to minimize risks and secure compliance with the law, cash pooling is typically considered as a set-up of several bilateral loan agreements and such product provided by the banks is not exactly cash pooling within the meaning it has in other jurisdictions. Finally, whenever considering cross-border cash pooling arrangements with a Russian counterparty, the application of currency control rules may seriously affect or even prevent effective cash pooling from happening.  Marcin Kryszko, an associate at PETERKA & PARTNERS Moscow & Warsaw

____________

Marcin Kryszko, Associate of the Moscow office of PETERKA & PARTNERS and Leader of Polish Desk

Svetlana Seregina, Partner and Director of the Moscow office of PETERKA & PARTNERS.

[1] Typically, a zero-balancing cash pooling contract provides for the obligation to return the same amount of money, however, the obligation to transfer a specified amount of money to the entity specified in the contract is missing. A participant with a surplus is unable to determine in advance whether it will be used for financing of another participant, in what amount, when and by which of the other participants. On the day of the conclusion of the contract, it remains uncertain whether the participant will show financial surpluses or shortages. Moreover, a loan agreement within the meaning of the Civil Code presumes two parties to the contract (lender and borrower) while in cash pooling arrangements the number of participants is at least three and there shall be a pool leader, whose role is to manage liquidity within the group if necessary.

[2] The Corporate Income Tax Act of 15 February 1992 (hereinafter: “the CIT Act”)

[3] E.g., in its judgment dated August 4, 2016 (case No. II FSK 1097/16), the Supreme Administrative Court emphasized that the actual purpose of a cash pooling contract is to provide funds between companies of the group and to obtain benefits in the form of interest. In zero-balancing cash pooling, it is possible to track and determine funds transferred to the pool leader’s account and then distribute them to participants. Thus, the contract meets the necessary conditions (essentialia negotii) of a loan agreement within its autonomous definition provided by the CIT Act, which is wider than the civil law definition. According to this position, the very moment of determining the amount of funds is irrelevant for determining that cash pooling constitutes a loan and therefore is subject to thin capitalization rules.

[4] Article 1 item 1 point 1) letter b) of the Tax on Civil Law Transactions Act of 9 September 2000 (hereinafter: “the CLT Act”) stipulates that tax is charged on a money loan agreement or loan agreement involving tangible property defined only in terms of their class.

[5] It seems that the first reference to a “cash pooling” notion in governmental acts appeared in the order of the Federal Service of State Statistics of 07.24.2019 N 421 “On approval of federal statistical monitoring forms for organizing federal statistical monitoring of prices and finances” in which cash pooling is deemed as an intra-group loan agreement between companies.