What is Cash pooling?

Cash-pooling is an instrument used to optimise corporate accounts. Companies typically use a number of current accounts and cash-pooling gives them the opportunity to consolidate these bank accounts into a ‘master account’ and accrue interest on a daily basis as a whole. The overriding benefit is that companies have the ability to avoid interest being charged on current accounts where the negative balance of an overdraft account is offset by a positive balance on another bank account. Obviously, cash-pooling does not necessarily serve only companies that have multiple bank accounts but also group companies to manage funding within the whole group.

Banks typically offer their corporate clients physical cash-pooling where the balances of all accounts physically transfer to one account that has been designated as the ‘master account’, or notional cash-pooling that makes it possible to achieve the same effect of interest optimisation as with physical cash-pooling, without the need to physically transfer account balances.

Accounting implications of using cash-pooling

Notional cash-pooling does not result in physical transfers of cash balances and, for this reason, this cash-pooling form has no accounting implications.

By contrast, physical cash-pooling poses a question as to whether the company does or does not have, at any point of time, the ability to “touch” its money that was transferred to the master account. In the vast majority of cases, the group conditions will be set such that physical cash-pooling will de facto represent an intercompany loan and hence the cash-pooling account balance will not be reported as part of “Cash at bank” or “Payables to credit institutions” but as a component of intercompany receivables or payables, ie in balance sheet lines C.II.2.2 “Receivables – controlled or controlling entity” or C.II.6 “Payables – controlled or controlling entity”.

Similarly, in the cash flow statement, if the company does not have the ability to handle the funding on the cash-pooling account, the cash-pooling account will not be included in cash and cash equivalents but rather as part of the “Cash flow from financial activities” section.

Legislative requirements for cash-pooling reporting

Cash-pooling transactions are not defined by law. However, they are subject to standard rules as any other transactions with the same substance. If foreign transactions are performed under physical cash pooling we recommend taking into consideration the obligations with respect to the Czech National Bank or the Tax Authorities.

Reporting to the Czech National Bank

Certain cash-pooling transactions can be subject to reporting to the Czech National Bank (the “CNB”) based on Regulation 235/2013 Coll., on Reporting to the CNB by Statistically Significant Reporting Entities for the Purpose of Preparing Cross-Border Payment Balance, Investment Position and Debt Service. This Regulation defines the number of reporting entities that are required to provide the CNB with the reports defined in the appendices to the Regulation. Under the Regulation, reporting entities include entities with the total annual amount of financial loans provided or received in respect of a foreign entity of at least CZK 100 million at the end of the calendar year.

According to the CNB’s statement, information on cross-border financial transactions is only reported by entities that have been notified by the CNB that they have been included in the group of statistically significant entities under the criteria specified in Regulation  235/2013 Coll. The obligation to prepare and submit a monthly statement on the balance of payments (ČNB) 41-12 “Financial Loans and Accounts Abroad” thus does not apply to any company exceeding the annual limit of financial loans provided or received in respect of a foreign entity in the amount of CZK 100 million.

Tax impacts of cash-pooling transactions

The Tax Authorities will naturally focus on tax impacts of cash-pooling transactions. When providing loans under cash-pooling, group entities are obliged to set up the arm’s length loan conditions or at least calculate the difference between the arm’s length and the set-up conditions and reflect the difference in preparing their tax returns. Any incorrect set-up of cash-pooling may result in additional tax assessment and the payment of resulting sanctions.

Please note that the rules of thin capitalisation should be followed, ie that the limit for the application of loan interest (or the related fees, etc) as the tax deductible item applies to cash-pooling as well. For non-financial companies, tax-deductible items only include financial expenses of the amount of up to the quadruple of the company’s equity.

The article is part of dReport – June 2018, Accounting news