Cash Pooling Arrangements

Transcription

1 Cash Pooling Arrangements 4th Annual IBA Tax Conference: Current International Tax Issues in Cross-Border Corporate Finance and Capital Markets 9-11 February 2015 Holborn Bars, London, England Session Chair Sam K. Kaywood, Jr. Alston & Bird LLP Atlanta, GA, USA Speakers Pano Pliotis GE Capital International London Alain Ranger Fasken Martineau DuMoulin Montreal Ewout van Asbeck Van Doorne N.V. Amsterdam /

2 Agenda (1) General background regarding cash pooling arrangements (2) Cash Pool Leader Perspective NL/Lux (3) Parent Perspective U.S. (4) Opco Perspective - Canada 2/

3 General Aspects of Cash Pooling Arrangements 3/

4 Physical Cash Pooling Advantages Better visibility/oversight for cash management Centralized management of cash and investments Centralized forex management Disadvantages Transfer pricing issues Thin cap rules to navigate Potential withholding tax 4/

5 Physical Cash Pooling US Parent HoldCo (NL) OpCo 1 Canada OpCo 2 UK OpCo 3 Germany FinCo NL/Lux Cash pool Bank Intercompany Loans/Deposits OpCos lend excess cash w/ FinCo Each OpCo borrows from FinCo to meet short-term cash needs OpCos have Interest expense/income on borrowings/ deposits FinCo meets cash needs of OpCos w/ excess cash deposited from other OpCos, and drawdowns from Bank FinCo deposits net excess cash w/ Bank FinCo has interest income/expense on bank deposits, loans to & deposits from OpCos 5/

6 Notional Pooling Parent Opco 1 (Germany) Opco 2 (Canada) Opco 3 (France) Finco (NL) German a/c Canadian a/c French a/c N/L a/c Bank Separate accounts in each country minimizes cross-border movement of cash Bank agrees to offset loans and deposits in all countries so that interest owed to or by Bank is calculated on the net amount Avoids intercompany loans 6/

7 General Tax Considerations Deductibility of interest paid Reasonableness test Foreign exchange gain / loss Guarantee fees Reasonableness test Deductibility VAT issues Services fees and others 7/

8 Non-Tax Considerations Corporate law: restrictions on guarantees, upstream / downstream governance corporate liability Banking law Restrictions on «banking» activities Foreign exchange control regulations Anti-money laundering obligations and reporting 8/

9 Dutch/Lux Tax Aspects of Cash Pooling 9/

10 Cash Pooling in NL/Lux NL often base for cash pool leader (CPL) accounts NLCo or Luxco usually cash pool leader Physical cash pooling vs notional cash pooling Single vs multi currency Remuneration of CPL 10/

11 Cash Pooling Benefits in NL/Lux Extensive tax treaty networks Absence withholding taxes on interest/fees Access to EU directives Tax rulings Excellent infrastructure legal/tax/admin services providers top quality banking system excellent internet connectivity 11/

12 Remuneration of CPL In-House bank interest spreads equity at risk Agent/Financial service entity based on functions performed (e.g. cost plus) equity at risk 12/

13 Interest Rates Each member at arms length i.e. different interest rates Credit risks Cross guarantees Cash pool benefits allocation 13/

14 NL/Lux Tax Considerations Tax rulings No thin cap No stamp duties No withholding taxes No PE for cash pool members Proper substance requirements Reputation 14/

15 NL Tax Aspects NL tax rate: 25% (20% up to 200,000) Equity requirement for group financing: 1% of funds borrowed and onlent with maximum of 2 million Profit participating loans - less than 50 years - no tax ruling 15/

16 Holding Company Jurisdictions Luxembourg Participation exemption on capital gains and dividends 10.5% subject to tax requirement 29.22% corporate tax rate* (2015) on interest, royalties or other types of non-exempt income Tax planning to shelter royalties and interest income IP box for 80% deduction against royalty income No capital duty Easier to declare dividends to a qualified parent with no withholding tax. Parent must be in a treaty jurisdiction with a comparable tax system *Including corporate income tax; municipal business tax for companies located in Luxembourg city and solidarity surcharge. 16/

17 Holding Company Jurisdictions Luxembourg Preferred Equity Certificates ( PEC ) Can be debt for Luxembourg tax purposes but equity for U.S. tax purposes Usually a max. 30 year term instrument Convertible Preferred Equity Certificates ( CPEC ) Like a PEC but is convertible into equity Lower interest rate, usually 2% to 3% Interest is deductible 17/

18 Holding Company Jurisdictions Luxembourg 85% PECs, 14% CPECs and 1% real equity is fine as long as interest on PECs/CPECs is arm s length Accrued interest on PECs/CPECs deductible to the extent it is not related to exempt income Change of ruling practice as from January 2015*. Creation of a ruling commission and future rulings published in abridged/anonymous format. Recapture rules for interest deducted on exempt participations *Grand Ducal Decree dated 23 December /

19 Financing Structures Use of Hybrid Debt Loans Parent (U.S.) Finco (Lux) Opco Companies PECs CPECs Cash Pool Interest Bank Lux HoldCo accrues interest expense on PECs/CPECs to offset against interest income from Opcos Can defer paying interest as long as desired When paid, interest can be treated as dividend for U.S. purposes, carrying out foreign tax credits APB 23 considerations BEPS Action 2 19/

20 Cash Pooling & Treasury Related Tax Issues for US Multinationals 20/

21 Basic US Tax Principle Deferral US Parent Non-US opco Earnings & Profits (E&P) dividend taxed to US parent No US tax on profits of offshore subs until they repatriated as dividends Exceptions Subpart F income 956 income 21/

22 US Subpart F Rules Apply to CFCs Subpart F income of a CFC outside the basic deferral rule subject to current US tax, net of expenses, whether or not repatriated Taxable currently, though not distributed Subpart F income US Parent CFC What is a CFC? >50% vote or value >10% US voting interest attribution rules can link together shares owned by related parties 22/

23 What is Subpart F Income? Conceptually, any passive as opposed to active income Target-highly mobile income..easily shifted to a tax haven Passive Income interest, dividends, rents and royalties Gains from sales of property generating such income Foreign exchange gain or loss commodities income derivatives linked to securities or commodities 23/

24 AFE/Broker-Dealer Exceptions to Subpart F Income Active Financing Exception ( AFE ) interest, fees etc., earned by active banking or financing operations US Parent Dealer exceptions [broker- dealer/ investment banks typically] dividends/interest, gains from equity and debt securities, and commodities AND derivatives linked to such securities or commodities Non US Opco CPL (NL/Lux) 3d party Bank These exceptions generally require extensive transaction activity with thirdparty customers Bank - not the CPL s customer CPL not the sub s customer Interest income to CPL and to Opco=> generally Sub F. 24/

25 Related Party Exceptions to Subpart F Income Temporary Look-through exception - effective from tax year 2006 Must be extended to apply to 2015 Applies to interest from one CFC to a related CFC s regardless of payor/payee jurisdiction Key condition is that the interest payment does not reduce the payor s subpart F income US Parent Canadian Opco German Opco Interest CPL (NL/Lux) 3d party Bank Under look-through rules, if German Opco has no sub F income, interest it pays to CPL is not sub F Interest to Canada also non subpart F except to the extent CPL has Subpart F income e.g., from the Bank or other Opcos 25/

26 Check-The-Box Strategy U.S. Parent Not reliant on CFC look-through rule Beware of possible services trap Holdco (NL) 100% Interest Bank Cash Pool CPL (NL/Lux) UK Opco France Opco Other European Opcos UK Customers French Customers European Customers 26/

27 Section 956 Investments in US Property Deemed repatriation of offshore profits - if a CFC holds investments in US property US Property - broadly defined includes a loan to a US affiliate US Parent Canadian Opco German Opco Loans crossing one or more q/e dates CPL (NL/Lux) amount repatriated is based the amount of US property measured as the average balance over quarter end (q/e) dates Amounts can be netted for specific charges to which US property assets are subject Section 956 Restricts deployment of offshore funds to manage balance sheet at US parent level - especially over q/e test dates can be very costly if, e.g., the Canadian Opco has significant low-tax earnings US parent should not be your CPL entity 27/

28 Section 956 Investments in US Property Structuring/managing loans to US parent within 956 limits US Parent German Opco Loan to US Don t cross q/e dates repayment before q/e, and re-lending shortly after, can be collapsed into single loan crossing q/e and triggering 956. Rev. Rul re-lending 2 months after repayment Short-term exception Loan can cross q/e loan and NOT COUNT if repaid within 30 days. Notice Must make sure the CFC has no other loans to the US exceeding 60 days. A single receivable owing from the US inadvertently left unsettled for >60 days can be a problem Regardless of size and or whether a q/e is crossed. 28/

29 Section 956 Investments in US Property Netting considerations for amount of US parent loans Loan 1 CFC payable owing to US US Parent German Opco Loan 2 Receivable owing from US Netting of separate obligations available only if CFC s Loan 2 obligation is secured by and with recourse limited to Loan 1 Can netting agreement reduce/ avoid 956 issue for US Parent? What if Loan 1 and Loan 2 are in different currencies? 29/

30 Section 956 Investments in US Property Conduit issues T(b)(4) a CFC will be treated as holding US Property held by an affiliate if one of the principal purposes of funding such affiliate through capital contributions or debt is to avoid application of 956 to the CFC 30/

31 Section 956 Investments in US Property Conduit issues - US Parent 956 Loan Opco CPL (NL/Lux) Minimal E&P US Parent Opco Deposit funding Or equity funding Loan CPL (NL/Lux) CPL may be ignored as a conduit with the Loan attributed to Opco Cash rich profitable low taxed E&P 31/

32 Section 956 Investments in US Property Pledges and guarantees can trigger 956 inclusions US Parent Loan to US P Lender wants credit support from offshore cash If a CFC guarantees or pledges assets to secure US P s debt, CFC is treated as holding the US P s debt US P pledging of > 2/3rds of CFC shares Neths Opco Low-taxed earnings Deposit from Neths CPL (NL) cash rich minimal earnings minimal exposure at CPL level but conduit rules could apply to treat Opco as having repatriated Similarly if Opco deposit is pledged as security for US Parent s borrowing 32/

33 Subpart F - Foreign Exchange Issues US Parent Fx gains net of Fx losses generally Subpart F income Exceptions: Dealer likely N/A to CPL UK OPCO 1 GBP UK OPCO 2 GBP GBP Deposit GBP Loan CPL (NL) EUR 3 month forward contract Short GBP Long EUR Business Needs CPL s GBP receivable cannot produce any sub F income other than Fx (e.g. interest income per the look through rules) Interest-bearing liabilities Fx is sub F /non-sub F based on CFC s overall mix of sub F/ non Sub F gross income. Asymmetric treatment net sub F income can result from receivables and payables e.g., if Fx loss is non Sub F... even if Fx gains/losses are matched as to timing/amounts G4 election to treat all Fx gains/losses as Sub F subject to netting, regardless of how treated under other the Fx exceptions 33/

34 US Parent Subpart F - Foreign Exchange Issues - Sub F Fx forwards UK OPCO 1 GBP GBP Deposit Sub F exceptions may be available if properly identified as as a hedge of a receivable that itself meets business needs exception. CPL (NL) EUR Receivable must be an ordinary asset under the hedging regime. UK OPCO 2 GBP GBP Loan 3 month forward contract Short GBP Long EUR Hedge of a liability generally easier... Both in terms of liability being ordinary and meeting business needs test. 34/

35 US Parent Subpart F - Foreign Exchange Issues Timing Fx gain triggered on recognition/ settlement basis not a revaluing basis per accounting rules UK OPCO 1 GBP GBP Deposit CPL (NL) EUR Mismatch of Fx gains/losses unless positions are settled in same year. CPL may be able to use market-to-market (MTM) accounting Depends on how regular/frequent CPL s lending activities are UK OPCO 2 GBP GBP Loan 3 month forward contract Short GBP Long EUR MTM applies to receivables and forwards but not as clearly to payables Straddle rules may hold up losses until gains are triggered but not vice versa 35/

36 US Parent Subpart F - Foreign Exchange Issues Timing Accelerated income can cause Sub F inclusions with no carryback of subsequent losses UK OPCO 1 GBP GBP Deposit CPL (NL) EUR Accelerated losses can create e&p deficit, potentially trapping FTCs Fx forwards - timing issues can be managed through appropriate identification (ID) of a forward as a hedge of a payable UK OPCO 2 GBP GBP Loan 3 month forward contract Short GBP Long EUR ID s as hedge of a receivable potentially more difficult. Receivables must be an ordinary asset under the hedging regime Timing issues for offsetting payables and receivables... Most difficult... no hedging regime is available... must manage the timing of repayments. 36/

37 Supply Chain Cash Pool USCo Foreign Holdco (NL/Lux) Cash Pool Bank Manufacturing CFCs (China, Indonesia) Toll Mfg Foreign Principal (Singapore) Sales Commission Cash Pool Sales Agents/ LRDs (EMEA) IP & Management Customers (EMEA) Cash pooling tougher / not feasible in highly regulated economies (e.g., Brazil, China, Argentina) 37/

38 Cash Pooling Arrangements Canadian Perspective 38/

39 Cash Pooling Arrangement Physical pooling within the group Inbound (i.e. borrower status) Outbound (i.e. lender status) Notional pooling with a third party Inbound (i.e. borrower status) Outbound (i.e. creditor / deposit status) 39/

40 Canadian Tax Issues Physical Pooling Outbound Loan Treatment of FinCo Parent (Europe) CanCo FinCo (NL) Cash Pool Bank Loan Loans to shareholders or persons not dealing at arm s length or affiliated with shareholders Must be repaid within one year after the end of the taxation year in which the loan was made (max: 24 months) Repayment must not be part of a series of loans and repayments Amount of the loan required to be included in debtor s income, i.e. a deemed dividend! 25% withholding tax (subject to treaty reduction) FinCo as a sister would not satisfy ownership thresholds Withholding tax may be refunded upon repayment of the loan Interest factor: rate and annual payment - 25% withholding tax (subject to treaty reduction) 40/

41 Canadian Tax Issues Physical Pooling Outbound Loan Treatment of CanCo Parent (Europe) CanCo FinCo (NL) Cash Pool Bank Loan CanCo required to recognize interest up to prescribed rate of interest, subject to limited exceptions (e.g. commercial activities) If the loan is deemed to be a dividend, CanCo can receive a refund of tax paid on interest income 41/

42 Canadian Tax Issues Physical Pooling Inbound Loan Loan 1 Parent (Europe) CanCo FinCo (NL) Loan 2 Treatment of CanCo Loan 1 Upstream loans must be repaid within two years Repayment must not be part of a series of loans and repayments Amount of the loan required to be included in debtor s income Treatment of Parent Loan 2 42/

43 Canadian Tax Issues Notional Pooling Outbound Loan Treatment of CanCo Lender Treatment CanCo Canadian alc Parent USCo US alc FinCo (NL) Dutch alc Bank Deposit with third party financial institution i.e. not a loan to a shareholder or a person not dealing at arm s length or affiliated with shareholders No tax implication for CanCo or third party financial institution or affiliates with respect to the amount of the deposit and the interest component GAAR issue? CanCo Treatment Canadian lender not required to recognize interest up to prescribed rate of interest GAAR issue? 43/