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Part 2: Structural & Tax Considerations for Pooling

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June 30, 2003

By Susan Hillman Griffiths & William J. Zink

The second of a two-part series on crossborder pooling, this article focuses on the key tax ramifications of notional pools vs. ZBAs.

For many MNCs, the impetus for pooling may be effective management of global liquidity (see related story here), but the decision of whether to choose notional pooling or use ZBAs is grounded in tax implications.

And while obtaining a favorable tax treatment is of utmost importance, it is not necessarily the liquidity technique which determines the tax outcome (assuming both are allowed). Rather, it’s the content of the underlying agency agreement between the main account holder and the pool participants.

Who’s the main ‘holder?’

One important consideration is whether the main account holder (be it the corporate treasury, a treasury center, BV etc.) acts as the principal for the group, or else as an agent on behalf of the various participants.

Typically, if the main holder acts as “principal,” it will deem the interest as intercompany. If the main account holder is acting as an agent for the subsidiaries, the interest will be considered bank interest.

Just how interest is defined (interco or not) then becomes a key determination of tax treatment. For example, the type of interest will affect the allocation back to the participants, and the taxation levied on them in their own tax jurisdiction.

Withholding tax applicable in each respective country may be applied to the interest earned by each participant, even in a notional pooling arrangement.

In addition to withholding tax, the interest earned in the centralized arrangement can raise other tax and accounting concerns. For example, there may be a mismatch between the tax treatment allowed under interest recognized on a cash vs accrual basis.


If a company has multiple operations in each country, individual, country-level pools should be set up first, before any regional or global arrangements.

For mid-size MNCs, it may not be then necessary to impose the regional overlay; this results in fewer tax “headaches” as cross jurisdictional issues do not arise.

Also, pooling might affect a company’s foreign tax credits (FTCs). Here, the question would be where (in which basket) to include the interest income, since the latter is considered “passive” income under subpart F rules, which means US taxes on it cannot be deferred (see IT, 6/16/03).

Also, if treasury in the US is the holder of the main account, the arrangement would most likely raise further subpart F issues (i.e., deemed dividends). As a result of these rules, the US treasury should not be a direct participant in any bank pooling arrangement.

Non-US tax agencies are not passive on this issue either. If the main account holder or Manager is an existing Dutch BV, treasury/tax would have to examine existing arrangements with local tax authorities. Very often, BV incorporation regulations contain specific rules that no management fees can be charged. However, by acting as an agent, the BV has treasury functionality, which may in turn raise thin-capitalization issue with local regulators.

Three rules of thumb

Basically, any liquidity management structure —either physical (ZBA) or notional pooling—must comply with three basic requirements:

(1) Arm’s-length interest allocation. The arrangements, including deposits, credit lines, etc., among the participants should reflect an arms-length market price.

Although the manager or agent may have discretion in allocating the interest income and expense among participants, this interest should be based on supportable arm’s-length pricing.

(2) Business purpose. The entire structure must have a bona fide business purpose other than tax avoidance or circumvention of non-tax legal constraints.

In cases when the net lending and net borrowing positions of the various participants are brief in duration or de minimus in amount, and the pool is used by the corporate treasury primarily as a liquidity management tool, the risk of recharacterization would be small.

(3) Economic substance. The participants are responsible legally, which includes duty to pay, rate risk, risk of default, etc. Cross-guarantees, cross-indemnities and other rights of offset are used as protective measures for the banks and should not be a concern as long as all participants are legitimate and solvent. Intercompany compensation at arm’s-length rates with respect to guarantees provides additional support.

Cross-jurisdictional issues

Even if these basic requirements are in place, one of the main difficulties in any cross border pooling or ZBA scheme is the cross-jurisdictional nature of the arrangement.

The participants are subsidiaries in different countries, each subject to the tax and regulatory requirements in that location. Even in Europe (despite the EU, the euro and the supposed benefits of a single market), tax harmonization does not exist yet.

And yet it is often within Europe that companies are most interested in pooling, since the euro enables more efficient ZBA structures; plus, some of the barriers to notional pooling have been removed with the aid of technological advancement (see IT, 5/6/02).

Some of the cross-jurisdictional considerations for treasuries include:

(1) Who earns the interest? If the company is viewed as lending and borrowing among corporate members, certain jurisdictions will insist that interest is earned by a lending corporate member.

This is especially true if the fiscal authorities of the particular jurisdiction follow the arm’s-length principle. In more lenient jurisdictions, the decision to charge interest on related party lending will be at the discretion of corporate treasury.

(2) Withholding taxes. Local tax authorities may also insist that if interest is actually or notionally present, a withholding tax on such interest could apply.

Consider, for example, a Canadian subsidiary of a US MNC, which participates in a London-based pool: Interest earned by the Canadian sub in the UK could be subject to UK withholding tax.

(3) Related vs. not. Cash pooling could also be viewed as a transaction between the bank and the borrowing member, rather than as a related party loan. In such jurisdictions, the interest rate is at the discretion of corporate treasury, irrespective of whether or not the arm’s-length principle applies.

(4) Dividends. If a US corporate participant is viewed as drawing directly against its foreign affiliate, this transaction could be viewed as a taxable dividend to the US corporate participant. And even if the US corporate parent is viewed as drawing on the bank, with the guarantee of a foreign affiliate, it may face the same taxable dividend exposure.

(5) CFC impact. Another complication arises from the interest income of pooling arrangements, particularly where the corporate parent of a foreign corporate participant is in a country that has adopted controlled foreign corporation (CFC) legislation, e.g., US, UK, Germany, Japan, etc.

In these jurisdictions, the interest income earned by the foreign corporate participant could be treated as a taxable dividend to its corporate parent, despite the fact that no cash has been transferred.

(6) Cross-guarantees. The confusing cross-guarantee aspect of the transaction may trigger US income-tax consequences to a US corporate participant, depending upon whether the US corporate participant is in a surplus or deficit position:

Surplus position—when non-US affiliates are in a deficit position, and draw against the surplus position of the US parent. If cross-guarantees exist, the US tax authorities may insist the US entity has performed a service for its affiliates, i.e., guaranteed their repayment of the draws to the bank. Accordingly, a service fee would be deemed earned by the US corporation.

Deficit position—drawing against its affiliate’s surplus position, where cross-guarantees exist, the guarantee will be viewed as a taxable dividend from the foreign surplus affiliate to the US corporate participant.

Although the US tax effect of this dividend can be reduced by available foreign tax credits, the deemed dividend impact normally discourages US participation.

(7) Co-mingling. Whenever funds are commingled, and a US corporation participates in the arrangement, the US corporate member will be viewed as having constructive receipts and thus create a tax liability in advance of what would otherwise be expected.

Thus, a US-incorporated subsidiary (a Delaware company, for example) cannot participate in a pooling arrangement, even if it is in London. However, this often erases the whole benefit of the arrangement as (usually) the US parent has the largest cash flows and requirements.

‘Taxing’ tax items

Here’s a checklist of some of the key items to consider when evaluating the corporate tax impact of crossborder pooling:

• Principal or agent as main account holder.

• Impact on the company’s foreign tax credit (FTC) position.

• Subpart F income issues—i.e., does the arrangement generate passive income?

• Jurisdictional considerations in terms of paying and/or charging interest.

• Cross-guarantees in a notional pool.

• Intercompany loans for ZBAs.

So, before crossborder pooling arrangements are set up, the company should consider some type of offshore company to manage the pool depending on whether such an approach is compatible with the company’s overall tax strategy.

(8) Accounting complications. Finally, companies must also consider FASB Interpretation No. 39 (Offsetting of Amounts Related to Certain Contracts; see IT5/30/94)

This FASB guidance tells banks which contracts on their books can be condensed into a single line item, and whether the right of off-set can be upheld in the event of bankruptcy.

It may be very difficult for a bank to justify the offset (the basis of a pooling arrangement) in those jurisdictions (countries) where the provisions for offset are not clearly stated. Because the UK has clear rules regarding offset, many banks have opted to set up their pooling services in London.


For efficient and more centralized international treasury management, crossborder pooling, including ZBAs and notional cash pooling, can be excellent tools.

However, these arrangements can’t be considered a panacea or a quick fix solution. There are numerous tax issues as well as difficulties in implementatiom. Often, it involves stripping some cash management responsibilities from affiliates and their finance staff.

Plus, such arrangements are only offered by a small number of banking institutions.

Pooling arrangements often sound elegant and effective in theory, but treasurers are cautioned not to be swayed by presentations by enormous multinationals and large banks, which praise the efficiency of their pooling system. Instead, treasury should review the operational and tax parameters of different pooling approaches, based on the company’s business and legal first, to determine if it offers a solution to global liquidity challenges.


Susan Hillman Griffiths is a principal with Treasury Alliance LLC, +847-295-6414; William Zink is a tax partner with Grant Thornton International, +312-602-9036.

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