CMS Expert Guide to cash pooling in Austria

a) Intro 

Statutory laws on the one hand and jurisprudence of the Supreme Court (OGH) on the other form the legal framework governing cash pooling in Austria. Risks of liability in relation to cash pooling arrangements arise if one of the companies involved becomes insolvent or if capital maintenance provisions are not complied with.

b) Social interest and due diligence

According to the statutory Business Judgement Rule, the managing directors of a company are obliged to act with the due care of a prudent businessman, not to be guided by extraneous interests when making decisions and to act for the benefit of the company on the basis of appropriate information. Equally, in relation to cash pooling the managing director has to always pursue the interest of the company he represents and the entry into such an agreement must be operationally justified. The interest of the group to which the company belongs does as such not constitute an operational justification. 

c) Shareholder’s loan provisions

If a shareholder grants a loan to a company in financial difficulty (i.e. loss of creditworthiness), such loan will be regarded as equity capital. As a consequence, the shareholder is not entitled to repayment of the loan for as long as the company remains in financial difficulty (repayment ban). Any such repayment constitutes a disguised unlawful distribution.

In 2004, the Equity Substitution Act (EKEG) was enacted. This Act imposes a freeze on the repayment of equity-substituting loans granted by a shareholder who has a controlling position, someone who is not a shareholder but in the same way exercises a controlling influence on the company (as defined in section 5 of the Act), an indirect shareholder or an affiliated company. Equity-substituting loans are loans granted by such persons during a period of financial difficulty (defined as insolvency, over-indebtedness or an equity capital ratio below 8% together with a fictitious period of debt redemption of more than 15 years).

In insolvency proceedings, claims from shareholders who have granted a loan to the company in financial difficulty are subject to special provisions. Any rights of segregation or separation acquired by a shareholder in such a manner (i.e. a lien in favor of a loan of a controlling shareholder) expire upon the opening of insolvency proceedings.

d) Liquidity protection/Capital maintenance

A cash pooling arrangement must comply with the principle of capital maintenance and the resulting legal requirements. As a general rule, capital-based companies (i.e. limited liability companies (GmbHs) and stock corporations (AGs)) may not reduce their share capital by repaying contributed capital to the shareholders. Such a repayment will constitute an unlawful distribution under section 82 of the Limited Liability Companies Act (GmbHG) and section 52 of the Stock Corporation Act (AG). Shareholders are only entitled to receive proceeds in the form of distributed profits (dividends) or funds (if any) remaining after satisfaction of liabilities to creditors on liquidation of the company.

Any cash flow in the course of a cash pooling is usually qualified as a loan within the respective group. Thus, to adhere to the binding provisions of capital maintenance, any cash pooling arrangement must comply with the same principles as applicable in connection with general loan agreements, in particular a loan may only be granted to a shareholder who is creditworthy, there must be adequate collateral, the granting of the loan must not pose a threat to the granting company’s existence and there has to be a respective operational justification (betriebliche Rechtfertigung). 

In its most recent decision on cash pool agreements, the Supreme Court ruled that the admissibility of such agreements does not primarily depend on the arm's length principle because cash pool agreements are typically not concluded with third parties or companies outside a group. The relevant criterion is rather the operational justification of the cash pool measure (see in detail below).

Whereas in zero balancing the individual accounts of the group companies are balanced to zero via a central account (effective cash pooling), in notional, or fictitious cash pooling the bank only calculates this process without actually transferring the money. Although the Supreme Court confirmed that fictitious cash pooling is less problematic from a capital maintenance point of view, there may also be violations of the principle of capital maintenance, for example due to disadvantageous interest conditions or the assumption of a default risk.

e) Hidden distribution of profits / disguised unlawful distribution

A company is not permitted to make payments to shareholders (other than the distribution of the net profit as shown in the annual financial statements) or perform services to a shareholder in respect of which the company does not receive adequate remuneration (disguised unlawful distribution). If the shareholder receives a benefit merely by virtue of his position as a shareholder, this constitutes a breach of the rule of capital maintenance. Transactions with the company must be conducted at arm’s length. The relevant standard is whether the directors are acting with the due care which a prudent businessman would have acted with if he had made the same deal in the same circumstances with a third party not affiliated to the company. The directors’ actions are presumed to be in accordance with the requirement of due care, if respective decisions were made pursuant to the provisions of the business judgment rule (which has been implemented into the Limited Liability Companies Act and the Stock Corporation Act in 2016). 

f) Insolvency proceedings – contestation of transactions

In general, according to the Austrian Insolvency Code, payments or other transactions within a certain period of time before the opening of insolvency proceedings or the occurrence of insolvency are contestable if they were made despite the creditor’s knowledge or grossly negligent ignorance of the debtor's de facto insolvency. 

Incongruent transactions, i.e. transactions where the debtor's performance is not matched by an obligation or adequate consideration are contestable, if they were carried out after the occurrence of insolvency or after the application for commencement of insolvency proceedings or in the last sixty days prior thereto. This can become an issue with regard to cash pool agreements: if, for example, the debtor participating in cash pooling has assumed a default risk that has materialized, but this risk is not offset by sufficient benefits, the cash pool agreement itself, as well as transactions therefrom could be contested. In addition, transactions would be contestable if the security or satisfaction was made for the benefit of a shareholder within the meaning of the Austrian Equity Substituting Capital Act (EKEG), unless they were neither aware nor should have been aware of the debtor's intention to favor them before the other creditors.

The established case law of the Austrian Supreme Court only allows a set-off with claims for repayment from unlawful distribution within very narrow limits. In any case, unilateral set-off by the shareholder is inadmissible according to established case law.

a) Intro

If payments are made in breach of the principle of capital maintenance by way of a (disguised) unlawful distribution, the company will have the right to claim repayment. Such breach also leads to personal liability of the directors and possibly also of the (indirect) shareholders of the companies involved. The risks of liability become particularly significant in the event of insolvency of the companies concerned or where any of the companies concerned are sold.

b) Liability of directors

The directors of a company are liable for any losses incurred by the company which arise from their failure to apply the due care of a prudent businessman in managing the company’s affairs. In relation to cash pooling, the requirement to act with the due care of a prudent businessman means that the company should only participate in the cash pooling arrangement if it can be ensured that the company’s liquidity will not be adversely affected by its participation and that the funds the company transfers will be repaid. This requires regular, up-to-date information on the financial situation and ongoing risk assessment of all participating companies to be available. If the group (or a material group company participating in the cash pool) has solvency problems, the cash pooling agreement should be terminated. Furthermore, the directors are personally liable if, in contravention of the capital maintenance provisions, payments are made out of company assets in favor of a shareholder without the company receiving equivalent remuneration. Managing directors are also well advised to thoroughly document the basis for their decisions.

In respect of stock corporations, it is not fully clear whether – as proposed by the prevailing view – the company may waive such claims by unanimous resolution of the shareholders (if this can be obtained). In any event, however, claims by creditors cannot be waived by the company and will not be affected by any such resolution. In general, a director’s liability cannot be waived before five years have elapsed.

The directors of limited liability companies are bound by any instructions issued by the shareholders’ meeting. Directors acting in accordance with such instructions are generally not liable unless the instruction – and therefore its implementation – contravenes the law. Moreover, directors remain liable to the extent that compensation is needed to settle claims of creditors.
In the event of violations of the principle of capital maintenance, the managing directors are subject to civil and possibly criminal sanctions. Unlawful distribution constitutes a classic breach of duty, which leads to a liability to pay damages to the company (internal liability). The managing director of a limited liability company cannot invoke a possible instruction by the shareholders that would relieve him of liability, because such an instruction would be null and void. The managing director is obliged to reimburse the wrongful payment if the claim for reimbursement against the recipient proves to be irrecoverable. The managing director's obligation to pay compensation can also be asserted by company creditors if they do not obtain (sufficient) satisfaction from the company.

c) Liability of the parent company’s directors

The directors of the parent company may be personally liable in the event of insolvency of a subsidiary if they have interfered in a manner threatening the company’s existence or, in the case of a limited liability company, they have issued unlawful instructions (by way of shareholder resolutions).

d) Extent of due diligence to be conducted by the pool bank

In the event of collusion in relation to a disguised unlawful distribution, the company has the right to refuse the repayment of a loan to the bank. The Austrian Supreme Court stated in a decision in 1996 (Fehringer case) that a participating third-party loan creditor (such as the pool bank) has a general duty to make enquiries. Such duty would be fulfilled by the bank requesting information from the boards of the company. However, another decision of the Austrian Supreme Court in 2005 limits this duty to cases where there is a strong suspicion of disguised unlawful distribution. This later decision has been confirmed by the Austrian Supreme Court in further rulings.

e) Liability of shareholders

The legal consequence of an unlawful distribution is the absolute nullity of the transaction, at least in the part that triggers the reduction of the company's assets.

The nullity gives rise to claims for restitution or indemnification by the company inter alia against the beneficiary shareholder and in cases of limited liability companies claims for damages against the other shareholders to the extent that the inadmissible payment/service has reduced the share capital (cf. section 83 para. 2 and 3 GmbHG).

f) Further risks

It is discussed whether the grant of shareholder loans constitutes a banking operation requiring a banking licence. This is particularly relevant for the parent company (or any special treasury company) and its directors. Although it is argued that the activities of the operating company - in contrast to those of banks - are carried out exclusively within the group, which speaks against the requirement of a banking licence due to the lach commerciality, the Austrian Financial Market Authority (FMA) does not generally consider this as an argument against commerciality. Thus, while it is generally assumed that the treasury company of a cash pooling agreement will not require a banking licence, a definite clarification in this regard does not exist.
If shareholder loans are provided according to the equity substitution law, no banking license is required.

a) Intro

Cash pooling agreements often entail a considerable risk for the participating companies, which can also result in a liability of the managing directors and shareholders. Such agreements may only be entered into under the aspect of operational justification. 

b) Corporate power

The managing directors may only undertake measures that are covered by the corporate objects of the company or that serve the realization of its corporate objects in the broadest sense. 

The corporate objects are usually formulated broadly and also cover transactions and measures that may not be part of the core corporate objects but support the corporate object. If Cash Pooling is nevertheless not covered by the corporate objects, the respective clause in the articles of association would need to be amended. 

Cash pooling constitutes a fundamental restructuring of the company’s liquidity supply, and places restrictions on the company’s financial independence. That is why the conclusion of a cash pooling agreement could be regarded as an exceptional management measure which requires the approval of the shareholders.

c) Cash pooling agreement

There is already, albeit limited, case law of the Austrian Supreme Court on the requirements of a cash pool agreement, from which some key criteria can be derived. However, the preconditions and the limits of a cash pooling have not been fully and conclusively established, which is why the following remarks can be seen as guideline, not as exhaustive or applicable in every conceivable case.

In its decision on cash pooling arrangements (case no. 17 Ob 5/19p), the Supreme Court for the first time dealt with the application of the rules on unlawful distribution to (in this case notional) cash pooling agreements. The essential criterion in the examination of their permissibility would be whether they are operationally justified, i.e. if there is a corporate benefit. Another criterion that can be considered is whether participation in the cash pool improves the company's liquidity or whether it "only" makes its surplus funds available and, if this is the case, whether it receives a corresponding consideration in return. Based on this court decision and legal doctrine, the following should be taken into consideration when entering into a cash pooling agreement: 

1. Risk evaluation before signing the cash pooling agreement
   In order to reduce their liability risks, the directors of the participating companies have to satisfy themselves in advance that the benefits of the cash pooling arrangement (e.g. more favourable banking terms, better liquidity management, etc.) outweigh the possible risks. It is particularly important to consider the solvency of the parent / treasury company and the other companies involved. A company planning to participate in a cash pooling arrangement should, at least, have access to the latest balance sheets of the other participating companies and obtain information in relation to the present and expected future profitability and financial situation of the group. It has to be ensured that a company with strong liquidity is not disadvantaged at the expense of the cash pool or individual participants with weak liquidity. Even in the event of a disadvantage occurring at a later date, further participation in cash pooling may (subsequently) become inadmissible; in this case, an extended "overall insight" is required. 
2. Appropriate interest rates and cost distribution 
   The companies involved are either granting loans by transferring the liquid funds or they become borrowers by drawing upon the liquid funds. An appropriate interest rate has to be ensured for both credit and debit amounts. The interest rate structure shall not be disadvantageous for the participant in the overall picture, so that market practice can form a reference value. To ensure that such loans are issued on arm’s length terms (to avoid disguised unlawful distribution), the receiving company must pay an adequate rate of interest. Furthermore, the costs and profits of the cash pooling arrangement and moderate remuneration for the administrative services performed by the parent / treasury company should be split evenly between the members of the group. 
3. Right to terminate the cash pooling arrangement 
   The termination clause is essential. Austrian companies participating in a cash pooling arrangement have to reserve the right to immediately terminate the cash pooling arrangement in respect of themselves and to be repaid funds they have contributed to the cash pool – even at very short notice – if the repayment of such contributions is (seriously) endangered by the financial situation of other participants. Moreover, it should be agreed that payments from and to the participating companies may be set off against each other. It has to be ensured, that a contractual termination right is not and cannot be bypassed on the basis of internal instructions.
4. Inspection and information rights 
   The company participating in the cash pool needs to be granted effective rights of inspection and information in order to be able to exercise proper risk management and react in case of a deterioration of the economic situation of the participating companies (e.g. possibility of termination). The participating group companies will only be able to ensure timely repayment of the funds they transfer if they are continuously given information about the financial situation (in particular liquidity) of the parent /treasury company and of the group. The cash pooling agreement therefore has to include rights to information and of inspection in relation to matters affecting the cash pool.
5. Assumption of risks (“Ausfallsrisiko”)
   The assumption of a default risk of other participating companies should be kept as low as possible. If the liability risk is already concretely perceivable at the time the agreement is concluded and if it goes beyond the general risk of insolvency, this may constitute a violation of the principal of capital maintenance. This includes the granting of collateral for liabilities of the group. Taking on a risk that threatens the existence of the participating company by assuming the risk of default of the whole group precludes operational justification. The risk assumed by participating companies may be secured by appropriate collateral. The necessary extent of the collateral will depend on the creditworthiness of the cash pool head and group companies.

In order to counteract a threat to the company's existence, the cash pool agreement could, for example, provide that the company does not transfer the funds expected to be needed to cover its liabilities to the cash pool. Furthermore, a financial independence of the participating companies could be agreed upon in such a way that the pool companies are granted the right to independently invest available capital within a contractually fixed framework and to agree credit lines with banks. In any case, it has to be agreed and ensured that the participating company will be provided with (sufficient) liquidity at any time if required. In order to prevent an unlimited withdrawal of liquidity, it is advisable to limit the amount of the credit lines for the individual pool companies as well as for the operating company.

g) Facility agreement

The facility agreement of the group with the bank should reflect the terms and conditions of the internal cash pooling agreement (especially the termination rights of each company, also, the parent company could confirm in the external cash pool agreement with the bank that the respective pool companies can freely dispose of their liquidity and additionally undertake not to issue any instructions to the contrary) to reduce the risk of liability. Modifications of the conditions concerning the pool bank should only be permitted if all the participating companies agree – not just the parent company.

i) Limitation wording in respect of cross-guarantees 

In general, banking agreements include a provision that all participating group companies are liable jointly and severally for the balance on the master account, or that they have to provide adequate security for their obligations. In addition, the general terms and conditions of banks typically provide for a lien covering all accounts of each of the group companies with the bank. The group companies involved should avoid such joint and several liability. If this is not possible – due to the requirements of the account-holding banks – the liability should at least be restricted to the amount of funds drawn from the cash pool by the respective company (liability in excess of such funds may be considered as unlawful distribution or repayment of capital, thereby triggering the liability of the managing directors and potentially shareholders). The liability of a company should be fully excluded to the extent that a claim jeopardises the existence of such company, otherwise the personal liability of the managing director may be at stake.

h) Guarantee

The general terms and conditions of banks in Austria often require the granting of guarantees by affiliated companies. A company which guarantees the debts of the parent or another affiliated company could be breaching the rule of capital maintenance if such guarantee is not justified. In order to assess whether the guarantee is justified, the directors of the company providing the guarantee must rate the credit standing of the parent / treasury company. Furthermore, a company granting loans to – or guarantees in respect of the obligations of – other group companies or shareholders must receive adequate consideration. It is unclear what is deemed adequate. Standard interest rates are generally the minimum but may not always be appropriate, since the company in question is not normally a bank and therefore has a different risk structure.

In a decision in 2005, the Austrian Supreme Court ruled that such a guarantee may be justified by the specific internal / operational characteristics of a company. In this case, a limited liability company and its minority shareholder took out a loan together. Both were liable for the complete repayment, even though the funds were used solely by the individual and not the company. The company, acting as co-debtor, essentially performed the function of a guarantor. The Court decided that although the company had not received adequate remuneration for acting in this capacity, the close economic collaboration between the company and the shareholder (close to interdependence) justified the transaction and the risk incurred. While the reasoning has since been reconfirmed in further rulings of the Austrian Supreme Court, this case law depends heavily on the facts of the individual case and the limits and conditions for agreeing on a justification because of the specific relationship or dependency of companies remain largely vague and unclear..

i) Warranties and representations in the event of the sale of a group company

Where a group company which has been involved in a cash pooling arrangement is sold, the seller should ask for an indemnity regarding potential liabilities of the seller and the remainder of its group arising from the cash pooling arrangement. The seller should avoid any guarantee or indemnity with regard to capital maintenance provisions.

The buyer should ask for representations and warranties that the capital maintenance rules have been complied with (and for an indemnity in the case of contravention), since as a new shareholder the buyer could be liable for payments previously made in contravention of the capital maintenance provisions.

a) Intro

Austrian tax law does not provide for specific provisions regarding cash pooling systems. The following is an overview of the most sensitive tax areas regarding cash pooling systems implemented between affiliated companies:

b) Thin capitalization rules

There are no statutory thin capitalization rules in Austria. However, (cross border) intra-group financing must comply with general arm's-length requirements.

The tax authorities tend (i.e. no "safe-harbour" or reliable rule) to accept a debt-to-equity ratio of approximately 3:1 to 4:1 (stand-alone basis). However, the ratio accepted by tax authorities inter alia strongly depends on the ratios in the respective industry sector.

If the equity of the borrowing company is inadequately low, a portion of the intra-group indebtedness may be regarded as equity equivalent. Consequently, interest on such debt may not be deducted from taxable income of the borrowing company. 
In addition, interest paid on intra-group loans that are regarded as “hidden equity” may be treated as "hidden profit distributions", which is subject to withholding tax in the amount of 27.5% or 25% (special income tax; KESt) of the hidden profit distribution.

c) Interest deductibility

Interest paid to foreign related parties is not deductible if the income derived from the interest is not taxed in the recipient’s state or is, at the recipient’s level, subject to a tax rate of less than 10%.

Furthermore, with effect from 1 January 2021, Austria implemented an interest barrier rule (Zinsschranke) based on the model provided by the ATAD. 

According to this rule, interest expenses of an Austrian company exceeding interest income (i.e. net interest expenses) can only be deducted up to an amount of 30% of the so-called “tax EBITDA”. 

The tax EBITDA is the sum of the company’s income (before applying the interest barrier rule) increased by the net interest expenses netted with write-ups and write-offs made for tax purposes. The exact method of calculation was set out in the regulation for the determination of the tax EBITDA (EBITDA-Ermittlungs-VO).

However, the interest barrier rule provides for several exemptions, the most important of which is that net interest expenses up to an amount of EUR 3 million per year can be deducted in any case.

d) Transfer pricing

In general, interest payments within the cash pooling system must comply with the arm’s length principle according to international transfer pricing guidelines. Otherwise, Austrian tax authorities may make adjustments, either in the form of a (partial) exclusion of interest payments from tax deductibility at the level of the borrowing company or in the form of an increase in taxable income at the level of the lending company.

According to the Austrian Transfer Pricing Guidelines, synergies from the cash pooling must be allocated to all participating pool members (group companies) after appropriate costs are charged.

Furthermore, the cash pool master company, generally, must not skim off any residual interest income but is only entitled to a cost-plus remuneration if the master company does not have substantial substance (staff and capital to take over the default risk). 

In practice, Austrian tax auditors increasingly try to challenge cash pool systems; in particular, if an Austrian company having high deposits participating in a cash pool receives the same deposit interest rate as participants who borrow money and sometimes only have small deposits. 

According to the tax auditors, participants with high deposits based on the bargaining theory would either try to receive higher deposit interest rates or would not participate in the cash pooling system.

Finally, as with all intra-group relationships, the arm's length nature of services within the cash pooling system needs to be properly documented (i.e. according to the Austrian Transfer Pricing Documentation Act; Verrechnungspreisdokumentationsgesetz and/or the Austrian Federal Fiscal Act; Bundesabgabenordnung).

e) Withholding tax

There are generally no withholding taxes on intra-group interest payments.

f) Corporation tax

Interest income earned by an Austrian company in a cash pool is subject to the regular Austrian corporate income tax provisions and to a corporate income tax rate in the amount of 25% (24% as of 2023, 23% as of 2024).

g) VAT rules

Financial services are generally VAT exempt.

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