CMS Expert Guide to cash pooling in Albania

Cash pooling is not a familiar concept in Albania and the Albanian law is silent in many issues of concern.

Although there is no specific legislation on cash pooling, it is important to en-sure that any cash pooling structure meets the requirements imposed by general corporate and banking regula-tory provisions.  

Further, while considering the implementa-tion of cash pooling structures in Albania a number of relevant tax issues shall be ad-dressed.  

a) Social interest and due diligence 

As general rule the directors and shareholders of an Albanian company are obliged to act in compliance with the interests of the company and of the other shareholders.

Concerning the interest of a company, a mere interest of the group would not suffice to execute a cash pooling agreement providing financial support to another company of the group which is currently suffering financial difficul-ties. The participants protection shall prevail or at least be balanced be-tween the interest of the group and the interest of the participant company shall be reached.

Pursuant to the Albanian Law on Entrepre-neurs and Commercial Companies (Law No. 9901/2008 as amended) the company directors are required to perform their duties in good faith, with professionality and due diligence. 
Therefore, the company directors shall assess the risks deriving from cash pooling with due care and diligence in the best interest of the company itself. 

b) Shareholder’s loan provisions 

Cash pooling in Albania triggers the application of the general provisions on shareholder’s loans and related re-strictions.
As a rule, it is envisaged that the re-muneration for any legal transaction implemented between the company and a shareholder shall not exceed the value applied to similar transactions on the relative market. 

If a shareholder has granted a loan to a company on terms which are less favourable than those usually applied on the market and the company is in adverse balance, the shareholder is not entitled to claim the payment should this repayment reduce the capital of the company below the min-imum [established on approx. EUR 1 for the limited liability company (here-inafter “SHPK”), approx. EUR 30.000 for private offer joint stock companies and approx. EUR 85.000 for public offer joint stock companies (hereinafter jointly “SHA”)]. 

The same provision is applied to any transaction financially comparable to a loan entered into by and between the shareholder and the company.

In addition, the Albanian corporate law provides for the prohibition of the sole director, being at the same time sole shareholder, to execute a loan agree-ment with the company itself.

Finally, as regards the company direc-tors of a limited liability company, as well as all members of the Supervisory Council/Board of Directors and direc-tors of a joint stock company, it is established that they are allowed to enter into a relationship with the com-pany only if all information on the con-dition and type of agreement to be executed is disclosed. Such agree-ment should be approved by the shareholders of the company and should be notified at the Commercial Registry.   

While concerning public offer joint stock companies, such notification should be published on the official website of the company within 72 hours, despite other possible obliga-tions imposed by the Financial Super-vision Authority (AMF) in terms of the publication of agreements approved on the conditions of the conflict of interest.     

c) Liquidity protection 

Prior to entering into a cash pooling agreement, the directors of an Albani-an company shall consider the finan-cial impact with particular concern to the liquidity protection. They might be liable to personally honour the debts of the company if they fail to gurantee that the company is in a position to meet its commitments against third parties.

d) Hidden distribution of profits

A SHPK in Albania may resolve a distribution of profits to its sharehold-ers only if such a distribution consents the company’s assets to fully cover the liabilities and the company to have sufficient liquidity to perform the pay-ment of obligations that are due in the following twelve months.

A SHA may resolve a distribution of dividends only after the tax on profit for the preceding financial year, expenses, and the amounts earmarked for legal and statutory reserves have been deducted.

In both cases hidden distribution of profits are not permitted and the com-pany directors shall be personally liable for their return.

e) Insolvency proceedings - contesta-tion of transactions

Cash pooling can become disadvanta-geous in cases where participants or header account holders become insol-vent. 

As regard the insolvency proceedings, the participant in a cash pooling struc-ture in Albania shall consider that the bankruptcy administrator may consider the transaction that “disadvantage bankruptcy creditors” as invalid if it has occurred within three months prior to the request to commence the proceed-ing or after the proceeding has started.

To declare such invalidity it is required that at the time of transaction the other party was aware or - as a result of gross negligence - was unaware of the illiquidity of the debtor or of the request to open the proceeding.  

Moreover, a transaction may be treat-ed as invalid when the debtor has entered into a transaction – up to 10 years before the request to commence the proceedings - with the intention to disadvantage his/her creditors and if the other party was aware of this inten-tion, the debtor’s illiquidity or the effect of the transaction on creditors.

When setting up a cash pool structure various liability risks may become relevant, especially with reference to the directors and shareholders of the participant company.

a) Liability of directors

As anticipated above, the directors of an Albanian company are liable to act in good faith and for the best interests of the company, avoiding any conflict of interest and exercising their proper competencies only for the realisation of the company’s goals and expectations.

The directors that violate their duties and professional standards are jointly liable against the company by reim-bursing all the damages and returning all the income gained.  

The directors especially shall be held liable for illegal return of the share-holder’s contribution, payment of inter-est and dividends, distribution of as-sets, granting of loans and continu-ance of economic activity of the com-pany in insolvency situations.  

The member of the management body is exonerated from its liabilities against the company when it is proven that he has acted in good faith and with dili-gence.

The company may act in court against the director within three years as of the occurrence or disclosure of the breach claiming compensations and/or nullity of actions.

b) Liability of shareholders 

The shareholders of both SHPK and SHA as a rule, are not held liable with respect to the corporate governance of their companies.

However, in view of the implementa-tion of a cash pooling system, some general principles shall be considered especially in relation to the control, supervision, management and compli-ance of the company.  

The liability of the shareholders is mostly related to abusive and mislead-ing actions taken against the interest and properties of the company.  In the context of a cash pooling, the link between the abusive and misleading actions performed during the imple-mentation of the structure and the consequent adverse financial situation endured by the company should be established.

Further, the shareholders are pre-sumed to be informed of the financial performance of the company, and in the eventuality in which the latter is facing financial problems, they should undertake the proper measures. 

Still the provision of the liability of shareholders deriving from the pre-sumption of being informed with re-gards to the financial solven-cy/insolvency of the company is not very well defined. In any case it is limited up to the total value of the obli-gations of the company against a third party raised after the moment when the shareholders have been informed about the financial solvency/insolvency of the company.  

Given that the law in Albania is under development and subject to frequent amendments, it is difficult to totally avoid potential risks and liabilities related to the selection of the right legal structure of cash pooling. How-ever, the following points shall help to mitigate the aforementioned risk and liabilities. 

a) Corporate power 

The Albanian law is silent on whether the shareholders need to favourably resolve to authorize the company to execute a loan agreement. Thus, it is to consider that the shareholders’ approval is required if it is provided in the Articles of Association of the com-pany.

b) Cash pooling agreement

Although the Law on Entrepreneurs and Commercial Companies does not provide for any mandatory form to be compliant with the agreement govern-ing the shareholders loan, it is highly advisable to opt for a written agreement in the event of a cash pooling structure. 

Further, a cash pooling agreement shall work in synchrony with the previsions of the facility agreement with the pooling bank which in many cases opt for a standardised one.  

The Albanian law is silent on the obligation of the parties to comply with notification of the agreement to any relevant regulatory authority.

c) Facility agreement 

Given the lack of specific regulation, the agreement executed between the pooling bank and the participating companies, triggers the application of general rules on loan agreement. 

Nonetheless it is conceivable that it provides with particular reference to the termination right of individual participating companies, for the right to a prompt and updated infor-mation on the pooling balance and for the respective contributions and liabilities. 

d) Guarantee

The participant’s protection has also to be considered when the bank offering the cash pooling demands a guarantee from the participant for a debit position. The guarantor should consider if a timely revocation of such a guarantee can be effected. 

An individual managing a single mem-ber company may not enter into a guarantee. Otherwise, there are no explicit restrictions that a company can guarantee the borrowings of one or more other members of its corporate group.
If the company will incur contingent debt from the guarantee amounting to more than 5% of the company’s annual turnover of the last business year, the legal representative (i.e. director) would normally seek an approval from the Board of Directors of the company.

The concept of cash-pooling is not specifically defined in Albania’s tax laws and there is uncertainty as to the provisions relevant to cash pooling arrangements. 

In the event of physical shareholder’s loan, interest may be payable on sums lent and borrowed by the participating companies. Such interest payments will be subject to the usual interests on tax rules – in particular, taxation of interest earned on sums lent, deducti-bility of interest incurred on sums bor-rowed and thin capitalisation issues.

Under Albanian income tax legislation, all expenses incurred for the purpose of generating, assuring or maintaining taxable income of a company are deductible. This includes interest ex-penses on loans under a shareholder arrangement. However, if thin capitali-sation rules are breached then any interest expenses claimed as a deduc-tion are void and the tax liability ap-plies.

a) Thin capitalisation rules 

If the total debts of an Albanian com-pany exceed four times its equity, the interest charged (and deducted as an expense for accounting purposes) on the excess debt will not be deductible for corporation tax purposes.

The debt applicable for this purpose includes, amongst other things, any debt under a cash pooling scheme.
Generally, the parties are free to de-termine a rate of interest that will be charged on loans under the share-holder arrangement, but regard should be given to the thin capitalisation and related parties’ transactions legislation. Specifically, the requirement for the transaction to be at arm’s length will necessitate the provision of such loans at commercial rates of interest prevail-ing in the loans market for unaffiliated parties.

b) Interest deductibility 

The tax-deductibility of interest should be recognised by the Albanian tax authority, as long as the loan serves the business purposes of the taxpayer. There is anyway a limitation: Interest paid, which exceed the average inter-est rate for 12-month loans the bank-ing market, according to the official publication of the Bank of Albania are non-deductible expenses.

c) Transfer pricing

If the principle of arm’s length does not apply the Albanian Tax Authority may order that an adjustment be made to the taxable income of any entity under such an arrangement. These adjust-ments take the form of either a partial exclusion from the tax deductibility of a borrower entity’s interest expenses, or an increase in the tax base of any lender entity held to be charging inter-est at a rate considered too low.

In circumstances where it is difficult or impossible to objectively assess whether particular terms of an ar-rangement comply with the arm’s length requirement, regard may be given to the OECD’s transfer pricing guidelines. 
The following transfer pricing require-ments have to be complied with by the Albanian companies:

• Yearly notification to the Albanian tax authorities of related party transac-tions and 
• maintain sufficient documentation of the related party transactions.

Besides the notification requirement, the requirement to maintain documen-tation should especially be observed; it is recommended that the cash pooling arrangement is suitably evidenced in documentary form.

d) Withholding tax 

When the Albanian beneficiary of cash pool liquidities pays interest on those liquidities to a company located out-side of Albania, withholding tax will be levied unless a tax treaty applies which enables tax to be withheld or reduced.

e) Corporation tax 

Any income earned from interest earned in a cash pool forms part of the general accounting pre-tax profits of a company, and is taxed at the rate of 15%.

f) VAT rules

Financial services (such as lending) are VAT exempted.