Netting

What it means

Netting is offsetting receivables and payables between two or more parties so that only the net difference is paid. If company A owes company B 100,000 euros and B owes A 80,000 euros, instead of two payments A pays B just 20,000 euros.

Bilateral netting takes place between two parties and corresponds to a set-off of mutual claims under Slovak law. Multilateral netting involves several parties, typically group companies, where a central netting centre calculates each company's net position and it pays or receives a single amount.

Netting is also used for derivatives and in financial market clearing systems. With derivatives, if a counterparty defaults all trades are offset into one net amount, which significantly reduces credit risk and banks' capital requirements.

How it works in practice

In groups of companies, multilateral netting reduces the number of payments, bank fees and currency conversion costs. If subsidiaries in different countries invoice each other for goods and services, each pays or receives one amount in one currency once a month instead of dozens of payments.

Netting often complements cash pooling, which concentrates the group's cash. While cash pooling deals with account balances, netting deals with intercompany invoices. Together they allow more efficient management of liquidity and currency risk at group level.

In the books, netting is recorded as a set-off of receivables and payables based on an agreement or a unilateral declaration and documented in a protocol. Invoices remain at their full amounts for VAT and income tax; netting changes only how they are settled, not the value of the supplies.

What to watch out for

Prices between group companies must reflect market terms under the transfer pricing rules. Netting does not change these rules and must not mask incorrectly set intercompany prices or financing that would be unusual between independent parties.

Some claims cannot be set off, for example certain claims against a debtor in bankruptcy or claims where the law or contract excludes it. For cross-border netting, foreign exchange and tax rules in each country must also be checked.