Cash pooling – taxation issues (CIT, VAT and Civil Law Transactions Tax)
Cash pooling is a type of unnamed civil law agreement also known as joint cash flow management agreement or bank account consolidation agreement. It is concluded by companies operating within the scope of the same capital group in order to concentrate funds of several entities and to compensate temporary surpluses of individual members with temporary shortages of others. Under this agreement joint account of capital group is managed by pool leader.
Due to the lack of precise legal frameworks for this contract, there are several doubts about the proper qualification with regard to taxation law, especially Corporate Income Tax (CIT), Value Added Tax (VAT) and Tax on Civil Law Transactions (pl. PCC).
Corporate Income Tax
The fact of concluding a cash pooling agreement causes some consequences for CIT taxation. According to current case law of Polish Supreme Administrative Court, the cash pooling agreement and payments made upon its provisions are subjected to provisions on thin capitalisation. As a result, if the company exceeds the statutory limits, it will not be entitled to report it as tax-deductible expenses.
If the interests are paid to foreign pool leader, the company shall pay attention to the issues related to withholding tax (base rate 20%). In this regard, it seems that the most optimistic will be considering taking advantage from the provisions of agreements on avoiding double taxation concluded by Poland and other countries.
It should be noted that according to current position of Polish tax authorities, the differences between exchange rates shall be taken into account on regular basis. It is also important to prepare transfer pricing documentation after exceeding the statutory thresholds.
Value Added Tax
Under the cash pooling agreement, the only entity, which manages the cash flow between participants is pool leader. The fact of transferring funds between the current account and consolidated account is not considered as separate service and is not subjected to VAT. The same applies to the interests received by the company for the transferred funds. Therefore, the most important is to correctly identify where the cash pooling service is located and appropriate determination of tax base.
Tax on Civil Law Transactions
Polish Tax on Civil Law Taxation Act includes an exhaustive list of activities, which are subjected to this kind of tax. The list does not include cash pooling agreement. This means that cash pooling agreement is not subjected to Polish PCC tax. This is confirmed by current interpretation of tax authorities.
To obtain more information on cash pooling issues, please contact with our lawyers specialised in providing legal services for capital groups at [email protected]