Cash pooling

What it means

Cash pooling is a bank service for a group of related companies that concentrates the money in their accounts in one place. A company with surplus cash need not leave it idle while another group company pays interest on its overdraft.

In physical cash pooling the bank moves the balances of the subsidiaries’ accounts to a master account and back every day, leaving zero or an agreed amount on the subsidiaries’ accounts. In notional pooling the money stays where it is and the bank simply pays or charges interest on the combined balance.

In the physical variant every transfer creates a loan between the company and the pool leader. Each company therefore holds a receivable or payable towards the centre on which interest is calculated, and the whole group improves its liquidity.

How it works in practice

Because these are loans between related parties, the interest must match what independent parties would agree. Transfer pricing here covers both the interest rate and how the benefit of the pool is shared, and the group must support it with transfer pricing documentation.

Interest a subsidiary pays to the pool leader may run into the thin capitalisation rule that limits its deductibility. For larger volumes we therefore work out how much of the interest will be deductible and how much has to be added back to the tax base.

In the subsidiary’s books the transfers are not recorded as movements on a bank current account but as a receivable or payable towards the centre. At closing we reconcile the balances with the bank statements and with the pool statement, otherwise a mismatch carries over month after month.

What to watch out for

Cash pooling can draw money out of a subsidiary just when it needs it. The subsidiary’s director is responsible for the company being able to pay its own liabilities, and when the company is in crisis, sweeping cash into the pool may be a prohibited payment in favour of a shareholder.

The pool framework agreement tends to be complex and banks draft it for the whole group. Pay attention to each company’s liability for the others’ obligations and to the rules for leaving the group, for example on a sale, when the balance with the centre has to be settled.