Tax Amsterdam. Cash Pooling. Efficient working capital funding

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1 Tax Amsterdam Cash Pooling Efficient working capital funding

2 Cash Pooling in the Netherlands: tax, transfer pricing and legal aspects More and more multinational enterprises (MNEs) set up cash pools to effectively manage regional or national liquidity, simplify bank account structures and reduce overall bank transaction costs. Cash pooling contributes to an MNEs efficient working capital funding. Mainly due to its extensive tax treaty network, the access to EU tax directives, the possibility to obtain advance pricing agreements (APAs) and the absence of interest withholding tax, The Netherlands is for many years a popular location to establish a global or regional cash pool centre. These centres are often combined with group financing, factoring, netting and collection and payment activities and are often referred to as in-house bank (IHB). Also banks often choose The Netherlands as basis to offer their cash pooling services. As a global law firm we have built-up extensive experience and knowhow with respect to the important tax, transfer pricing and legal aspects of the various (sub) types of (inter)national cash pooling systems. Our Amsterdam team is well positioned to advise on cash pooling and assist with the implementation of a cash pooling system fluently around the world. This brochure provides for a general background of cash pooling, as well as important tax, transfer pricing, corporate law and regulatory aspects of cash pooling in The Netherlands. Background Generally speaking the treasury department of a MNE seeks to maximize the return on surplus cash and minimize the cost of financing cash deficits, and furthermore to mitigate the interest rate, currency and other financial risks. This means that the liquidity of the group must be managed efficiently, i.e. that the right levels of cash resources are available in the right place, in the right currency and at the right time. A tool to support the efficient cash flow management is the cash pooling technique which basically eliminates the interest spread of the bank and hence reduces the overall financing costs for MNEs. In a cash pooling system, the participating group companies (members) conclude a contract with a bank that renders cash pooling services. Generally, each member opens a bank account with that bank. The cash pooling system can include a bank overdraft facility to allow an overall debit position of the pool. There are generally two types of cash pooling.

3 Physical cash pooling In a physical cash pool the credit balances of the members are physically moved to the concentration or master account up to a predetermined target balance (for example, a zero balance) on a periodic basis. The concentration account is usually held by the cash pool leader ( CPL ), e.g. a Dutch group company. Subsequently, the monies in the concentration account are used to cover the debit balances of the members. As a result of the cash sweeps, current account receivables and payables arise between the members and the CPL. A physical cash pool is usually a single currency pool. Notional cash pooling In a notional cash pool the credit and debit balances of the members are not physically moved to and from a concentration account. Instead, each member in the cash pool maintains its own position with the bank and receives or pays interest on its credit or debit position. The CPL will generally have a credit balance, to cover possible pool deficits. In a notional cash pool, each member needs to provide a cross guarantee or pledge to the bank. The bank will do as if the credit and debit balances of the members are concentrated and compute the aggregate amount of interest on basis of the aggregate of the credit and debit balances. The interest spread charged by the bank to the pool members with a debit balance will be paid to the CPL or to the pool members with a credit balance. A notional cash pool can be a single currency or a multiplecurrency pool. Which type is used by a MNE depends on local restrictions (e.g., foreign exchange regulations, tax requirements, banking rules). Some MNEs use both types of cash pooling simultaneously. In addition to the elimination of the bank interest spread other benefits can be achieved such as the reduction of foreign exchange risks and transaction charges, more favourable interest rates, a reduction of the MNE s debt position and an improvement of the debt to equity ratio.

4 Tax aspects In order to select the country where the CPL of a cash pool should be established, the overall tax costs should be taken into account. Direct taxes The Netherlands is a popular country to establish a CPL. The CPL can be a Dutch company (BV, NV) that is subject to corporate income tax and can obtain residence certificates. The Netherlands has concluded over 90 tax treaties, most of them provide for no or a substantial lower withholding tax on interest payments by non-resident pool members to the CPL. Furthermore, interest withholding tax can also be reduced to nil on basis of the EU Interest & Royalty Directive (applicable to 27 member states, and effectively to Norway, Iceland, Liechtenstein en Switzerland). The Netherlands has no withholding tax on interest or guarantee payments. Finally, the deduction of interest is not restricted as long as the total amount of receivables and cash at banks exceed the payables. This will normally be the case. In case foreign interest withholding tax is levied, this tax can be credited against the Dutch corporate income tax provided that interest income is included in the CPL s taxable income. For that purpose, the minimum equity at risk must be 1% of the outstanding loan amounts or 2 million, if less. The risk and thus the return on equity can be kept minimal by using this minimum as maximum risk of the CPL. However, the amount of equity at risk should be fine-tuned with requirements set by interest paying countries that levy interest withholding tax and apply a beneficial owner test. The CPL may elect to compute its taxable income in a currency other than the Euro, which may be important if most of the cash flows would be denominated in for example US$. Furthermore, it is possible to obtain an Advance Tax Ruling (ATR) in the Netherlands confirming that the activities of the CPL do not create a permanent establishment for the cash pool participants in the Netherlands. For members in a cash pool it is important to carefully review the cash pooling arrangement. In a physical cash pool, it is clear that a member owes debt to the CPL and pays interest to the CPL. As the member and CPL are related parties, special care should be given to local thin cap and interest withholding tax rules. This care should also be given in a notional cash pool. The cash pooling arrangement should ideally be set up in such way that the bank is considered the beneficial owner of the interest. Indirect taxes Generally, a CPL has no or only a limited right to recover VAT on its costs ( input VAT ) as a CPL is generally considered to carry out activities that are exempted from VAT. A (partial) VAT recovery right may nevertheless exist in case the CPL receives interest from non-eu group companies. The Netherlands do not levy capital or stamp duty.

5 Transfer pricing aspects For both tax and company law it is crucial that each member of the cash pool is adequately (at arm s length) remunerated. The Netherlands adheres to the OECD guidelines with respect to transfer pricing rules. Remuneration of the CPL Where the CPL is a Dutch company in a physical cash pool, it will have intercompany current accounts with members of the pool resulting from the periodical cash sweeps. The remuneration of the CPL should be consistent with its role in the cash pool, i.e., the functions it performs, the assets it employs and the risks it assumes. This can result in a wide spectrum of functional profiles and a similar variety in remuneration schemes. Two extreme ends of the spectrum are: Financial Service Entity: if a CPL operates as a pure service entity, two separate elements should be taken into consideration to determine the arm s length remuneration: - Remuneration for the functions performed, often based on costs; and - Remuneration for the CPL s equity at risk; or. In-House Bank: if a CPL operates as an in-house bank, it should be remunerated by means of an arm s length interest spread and, generally, no additional remuneration is required. If the CPL is a Dutch company in a notional cash pool, its function is of a more coordinative and administrative nature and it will generally act as a recipient of the interest received from the bank and divide that benefit among the pool members. Generally speaking such function can be remunerated on a cost plus basis.

6 Interest rates For each member of the cash pool, including the CPL, arm s length interest rates must be determined. In setting interest rates, an independent party would, inter alia, determine the relevant risk factors, such as credit/default risk. An entity s creditworthiness is often expressed by means of a credit rating, which can be established by using econometric credit scoring models licensed by renowned credit rating agencies. The issuance of cross-guarantees or parental-guarantees in relation to the cash pool and its members can impact the credit risk assumed by the CPL and, as such, the arm s length interest rates applied. After quantifying the credit risk assumed, one can establish arm s length interest rates by identifying market prices for comparable transactions. Sharing of the cash pool benefit The benefit generated by pooling the cash consists of a reduction in external financing costs and secondly the more favourable interest rates that can be obtained as a result of economies of scale. The cash pool advantage is essentially generated by the contributors to the cash pool, i.e. the members which generally have credit balances. These members replace their bank deposits by more risky intercompany receivables or provide a valuable cross guarantee or pledge to the bank. Therefore, it needs to be ascertained that the cash pool benefits are properly allocated to these members. Advance Pricing Agreement A Dutch CPL can file an APA request with the Dutch tax authorities, provided it is supported by a transfer pricing study. In such APA the applied prices (remuneration for the CPL, interest rates and division of the cash pool benefits) can be agreed on in advance for a period of usually 4 years. No fee is charged by the Dutch tax authorities. The Dutch company must comply with certain substance rules. Legal and regulatory issues In case a CPL or a member is established in the Netherlands, it needs to be assessed whether it could result in a violation of the financial supervision rules. In the Netherlands a company can in principle participate in a cash pool structure without a (banking) license if cash is only pooled within a corporate group of companies. Dutch cash pooling members may be required to report transactions and positions in domestic and foreign assets and liabilities to the Dutch Central Bank, in order to compile the Dutch balance of payments.

7 Prior to entering into a cash pool, the directors of the Dutch company must assess whether it is in the best interest of the company and its stake holders to join such cash pool and which corporate approvals are required to sign the agreements. The directors must for example assess whether the decision to become a party to the cash pool is subject to the advice of the works council and whether such decision to enter into the cash pool may be considered an ultra vires act. Furthermore, cash pooling results in financial obligations for each member. Other finance documents to which a member is a party could contain limitations on the member s authority to enter into additional financial obligations. Therefore, such documents need to be reviewed. Cash pooling generally results in additional credit risks for the members. Depending on the circumstances, certain safety precautions can be helpful to minimize the risk of mismanagement and thus the liability claim for the managing director(s). It is important to determine that the cash pooling arrangement is in compliance with Dutch financial assistance laws. A Dutch company may not grant loans or any other form of financial assistance in connection with the subscription to, or the acquisition of, its own shares by others. Such prohibition also applies to its subsidiaries. Our services Our tax and transfer pricing team can advise you on how to best structure the cash pool arrangement so to be compliant with the transfer pricing regulations in the various jurisdictions and ascertain that the economic benefit of the cash pool system is not materially affected by possible adverse tax consequences. Our banking & finance team can assist you in the negotiation of the cash pool agreement with the bank, review the articles of association of the members and contracts entered into by them to assess the allowance of participating in the cash pool, and they can prepare the necessary intra-group legal documentation such as current account agreements and cross guarantees. Furthermore, we can coordinate global cash pooling projects and provide our client with a main point of contact who is responsible for directing, progress, reporting, budgeting and implementation of the project.

8 Baker & McKenzie has been global since inception. Being global is part of our DNA. Our difference is the way we think, work and behave we combine an instinctively global perspective with a genuinely multicultural approach, enabled by collaborative relationships and yielding practical, innovative advice. Serving our clients with more than 4,000 lawyers in over 40 countries, we have a deep understanding of the culture of business the world over and are able to bring the talent and experience needed to navigate complexity across practices and borders with ease. Visit For more information, please contact: Heico Reinoud Partner, Corporate & International Tax Erik Scheer Partner, Indirect Tax Antonio Russo Partner, Transfer Pricing Baker & McKenzie. All rights reserved. Baker & McKenzie Amsterdam N.V. is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.

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