Cash pooling - definition and characteristics

Service Business

Cash pooling is a method of financial management that was created for enterprises operating within capital groups and having an extensive organizational structure. It is natural that there are differences between entities in terms of the need for external capital, i.e. credit. However, this is an expensive solution - it involves the need to pay often considerable interest. Cash pooling is an alternative to a loan and makes use of these natural differences between companies belonging to the capital group.

How does cash pooling work?

In short, cash pooling consists in covering the cash shortages of one company from the surpluses generated by another company in the group. This mechanism is based on transferring companies' money resources to one joint account managed by the pool leader (e.g. a bank or an entity belonging to a capital group). Its task is to plan the funds in such a way that any gaps in the accounts are covered.

This allocation of resources is technically known as netting, and can take one of two available forms:

  • zero balancing cash pooling (concentration of funds on the account), i.e. the actual transfer of money between the accounts of the capital group (the surpluses from the accounts of individual companies are transferred to a joint account and then divided into accounts with a shortage),
  • national cash pooling, i.e. virtual transfer of funds in which no money is sent, but interest is calculated based on the total balance of all entities participating in the cash pooling.

Is cash pooling a form of loan?

The above question is crucial because in the case of a loan or donation, it may be necessary to pay tax on civil law transactions. The method of organizing cash pooling, i.e. first collecting funds on one account and then sending them to individual entities, does not allow for an unambiguous statement that a loan agreement is in place here. First of all, you cannot talk about a specific amount and a declaration of its return, which is an integral part of such a contract. Moreover, none of the entities involved in this "transaction" is aware of the destination or origin of the funds being transferred.

Therefore, entrepreneurs who are parties to the cash pooling agreement are not obliged to pay tax on civil law transactions.

Cash pooling and VAT

Another question that raises doubts is the need to pay VAT for the provision of financial services. However, it should be noted that the companies participating in the cash pooling agreement do not provide each other any services - the bank, as the pool leader, deals with all settlements and transfers of funds between accounts. His activities will also not be subject to VAT, as financial intermediation services are exempt from VAT (Article 43 of the VAT Act).

As you can see - cash pooling is a very beneficial form of financial liquidity management of companies operating within one capital group. It allows you to avoid the potential costs associated with the occurrence of shortages on the account, and at the same time ensures the maximization of interest profits on the accumulated capital.