Cash-pooling to be treated as a loan subject | KPMG | PL

Cash-pooling to be treated as a loan subject to the transfer pricing documentation regime

Cash-pooling to be treated as a loan subject

In light of recent court verdicts regarding cash-pooling agreements, there is a practice that compensation of short-term surpluses shown by entities with shortages reported by other entities operating within the same group is treated as an event meeting the definition of a loan. Following such reasoning, if certain thresholds defined by the legal provisions are exceeded, related parties will be obligated to prepare transfer pricing documentation for such transactions.

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Cash-pooling to be treated as a loan subject to the transfer pricing documentation regime

In light of recent court verdicts regarding cash-pooling agreements, there is a practice that compensation of short-term surpluses shown by entities with shortages reported by other entities operating within the same group is treated as an event meeting the definition of a loan. Following such reasoning, if certain thresholds defined by the legal provisions are exceeded, related parties will be obligated to prepare transfer pricing documentation for such transactions.

Lately, disputes of taxpayers with tax authorities regarding the rationale of treating mutual compensation of financial shortages of one company with surpluses of another entity operating within the same group as a loan have been taking place.

Recently, cash-pooling has been a subject to analysis conducted by the Supreme Administrative Court (“SAC”). Among others, in a judgement of July 13th, 2016 the SAC concluded that the cash-pooling agreement constitutes a loan meeting the requirements of Article 16 section 7b of the CIT Act. The judgement confirmed the court’s standpoint presented in a ruling issued on September 30th, 2015 in which the SAC, after analyzing a cash-pooling agreement that assumed a daily transfer of funds from source accounts of participants to a consolidating account and/or vice versa, as well as an appropriate settlement of interest depending on the balance, concluded that every agreement in which the lender is obligated to transfer ownership of a specified amount of funds to the borrower, and the borrower is obligated to return the said amount and pay interest, even if obligations of the parties to the agreement are implicit, constitutes a loan agreement. In the latest ruling of August 3rd, 2016 (ref. no. II FSK 879/16 and II FSK 880/16), the SAC clearly confirmed that case-law relating to cash-pooling agreements is consistent and, accordingly, settlements within a cash-pooling arrangement may be treated as a form of a loan. Such view has been confirmed by rulings issued in cases analyzed by Voivodship Administrative Courts (“VACs”).

Notwithstanding, in the 1st quarter of 2016 VAC issued a single ruling that was contrary to the opinion presented by the SAC. In that ruling issued on January 20th, 2016 the VAC in Gdansk expressed its doubts as to the validity of arguments used by the SAC and consequently concluded that elements characteristic of a loan or irregular deposit agreements are not mentioned in the analyzed 

cash-pooling agreement, realized in “zero balancing cash pooling” formula, which assumes actual transfers of funds between participants’ accounts.

After the latest SAC’s ruling that was issued in August, it seems unlikely that any of the VACs will issue a judgment classifying a cash-pooling agreement differently to loan agreement. Additionally, in new transfer pricing provisions effective from January 1st, 2017 liquidity-management agreements – i.e., among others, cash-pooling agreements – are explicitly mentioned as types of agreements that are subject to transfer pricing documentation requirements.

Consequences

In the case of a transfer pricing audit performed in relation to an entity that is a party to a cash-pooling agreement within the limitation period, tax controllers might request tax documentation for such a transaction.

Undoubtedly, if taxpayers enter into or continue to participate in such arrangements in 2017 and beyond, upon fulfilling the criteria defined in the law they should prepare tax documentation, including – for larger taxpayers – a benchmarking analysis verifying the arm’s-length nature of prices applied in such transactions.

Should you have any questions related to the issue discussed here, please do not hesitate to contact us.

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