CMS Expert Guide to cash pooling in Italy

a) Intro 

There are no specific law provisions governing cash pooling schemes under Italian law.

Entering into a cash pooling system (either zero balancing or target balancing) could trigger the application of Italian corporate law provisions on inter-company loans and "management and coordination" activity and directors' duties to preserve the company’s assets and solvency and consequently, it may have severe implications in terms of civil and criminal liability of directors and any other involved person also pursuant to the new rules set out by Italian Legislative Decree No. 14/2019 (the “New Insolvency Code”) that came into force in full on July 15, 2022. 

Cash pooling schemes are also relevant for application of the rules on the so-called “management and coordination activity” ("direzione e coordinamento") under Article 2497 and seq of the Italian Civil Code (“ICC”) to the effects better described below.

Though the law does not provide for a specific legal definition of "management and co-ordination activity", article 2497-sexies ICC assumes that an Italian company is subject to management and coordination authority of an entity directly or indirectly owning the majority of its share capital. 

Moreover, according to major scholars and case law, when an entity gives a unitary operational direction to different companies, by applying a common financial policy and strategy and managing them as a single enterprise, with a view to better achievement of the goals pursued by the entire group (i.e. constant flow of instructions relating to management, collection of financial resources, financial statements policies, etc.), it can be maintained that such entity exercises “management and coordination activity” over its subsidiaries.

b) Social interest and due diligence

In general, an Italian company is allowed to enter into a cash pooling agreement, provided that:

• its corporate purpose allows it to provide loans or financial support to, and guarantees in favour of, entities belonging to the same group; and
• it has a corporate benefit and interest in entering into the cash pooling agreement.

The bylaws of Italian companies generally allow them to enter into a cash pooling arrangement and to lend/borrow monies thereunder provided that such transaction is directly or indirectly aimed at pursuing their social purpose.

It is highly advisable that such interest and benefit are identified in the company’s resolution (i.e. the management board resolution) and normally they lay in the advantage of acceding to loans/financial support at better conditions and optimising the treasury of the Group that may be less dependent on the banking system. In any case such interest and benefit must be identified on a case by case basis.

It is also advisable for Italian companies to avoid any cross-guarantee or at least to limit it to the funds from time to time made available (and outstanding) to the company.

Moreover, by applying the rules on “management and coordination activity”, whenever the entering into the cash pooling arrangement is induced by the controlled company, the directors of the Italian company are requested to assess that it is unable to cause any substantial damage to the company and its creditors or that the possible damages are duly compensated by the related benefit or timely remedied.

c) Shareholder’s loan provisions

The Italian law provision on shareholder’s loan shall apply to the funds made available by the cash pooler in the context of a cash pooling structure in case the cash pooler is the controlling entity or is subject to the same control of the Italian participant.

Namely articles 2467 and 2497 quinquies ICC regulate loans granted to an Italian company by its shareholder(s) or by a company subject to the same controlling entity and apply when either:

1. with regard to the type of business undertaken by the Italian borrowing company, the debt-to-equity ratio of such company appears unbalanced; or
2. the financial condition of the Italian borrowing company is such as requiring a capital contribution rather than a loan.

If either of the above circumstances occur, the relevant debt of the Italian company is deemed to be subordinated and therefore the right of the lender to obtain repayment of such debt will rank behind claims of any other creditors of the Italian borrowing company. This means that the directors are not allowed to affect such repayments.

In case of opening of an insolvency proceeding, should the conditions under a) and b) be met, any reimbursement of the loan occurred during the year preceding the opening of the insolvency proceedings is ineffective vis-à-vis the company’s creditors and as such subject to clawback actions.

d) Liquidity protection

According to the Italian corporate law, directors of Italian companies are under the obligation to preserve the integrity of the company’s asset. In addition, following to implementation of the New Insolvency Code the directors are now expressly obliged to regularly assess the cash flow of the company in order to timely detect any crisis situation.

e) Hidden distribution of profits

In order to avoid that the cash pooling system is re-categorized as an instrument to carry out hidden distribution of profit, any sums made available by the Italian participant to the pool leader, and vice-versa, should be subject to arm’s length terms and conditions.

f) Insolvency proceedings – contestation of transactions

In case of insolvency of the Italian pool participant, the court-appointed receiver may start claw-back actions in relation to all (re)payments made by the Italian pool participant in favour of the cash pooler or other participating entities. 

The relevant transaction may also be declared void if fund contrary to the social interest of the company/ultra vires (e.g. in respect of cross-guarantees given to the pooling bank)

In addition the receiver of the company in bankruptcy may start legal actions against the directors (and to some extent also against the other companies of the Group benefiting from funds transferred from the Italian company) for violations of the rules and good management principles and direction and coordination.

a) Intro

Directors of the Italian companies have a specific duty to preserve the company's assets and to refrain from entering into transactions that may adversely affect the company's financial situation and the integrity of its assets, as well as the cash flow of the company. 

b) Liability of directors

According to Italian law, directors are liable towards the company’s creditors for failure to comply with the obligation to preserve the integrity of the company’s assets and for not having set adequate organizational, administrative and accounting structure to timely detect unbalance situation which are detrimental for the business continuity of the company’s and as such to its creditors. 

According to Article 2086 ICC as amended in 2019 by the New Insolvency Code, the directors are under the obligations to take the necessary steps to adopt an organizational, administrative and accounting structure that is adequate for the nature and dimensions of the company and to promptly detect a situation of crisis and the loss of the business continuity as well as promptly adopt and implement the instruments provided by the law to overcome the state of crisis and restore the going concern (e.g. by asking the shareholders to cover losses).

Creditors are therefore entitled to bring liability action against the directors when the company’s assets are insufficient to satisfy their claims (as a consequence of the company entering into the cash pooling scheme). The waiver of such action by the company does not prevent the exercise of similar actions by its creditors. Additionally, any settlement in this regard can be challenged by the company’s creditors with a clawback action if certain circumstances occur.

The directors of the Italian participant may also incur in criminal liabilities if the company goes bankrupt (i.e. is subject to “judicial liquidation”) and the entering into the cash pooling scheme is proved to be contrary to the company’s interest and to have jeopardised/worsened the financial situation of the company by distracting its assets/liquidity, so contributing to its insolvency.

c) Liability of shareholders

Liability of shareholders may arise in application of the provisions concerning “management and coordination activity” ("direzione e coordinamento") under article 2497 et seq. ICC.

Therefore, if the decision of the Italian cash pool participant to accede to the cash pooling scheme is found as being influenced by its controlling company(ies) the transaction will by way of presumption be deemed to be contrary to the interest of the company to the effect that the controlling company and any entity benefiting from the transaction may be liable for the relevant damages.

Any damage shall be evaluated in the context of the economic and business interests of the group as a whole and taking into account the overall results of the management and coordination acts on the basis of an after-the-fact evaluation, including both the damages and benefits derived by the company subject to management and coordination.

In order to bring legal action under the above rules, the damaged parties (including the receiver of the Italian company in insolvency) are requested to give evidence of (i) the effective exercise of management and coordination activity by the alleged responsible entity; (ii) the relevant acts being against principles of correct management; and (iii) the damage actually suffered by the controlled company as a consequence of the controlling company’s undue influence.

According to recent case law, also the directors of the controlling company and of the controlled company may be held liable in tort.

Additionally, as mentioned above in case of insolvency of the Italian controlled companies, the directors of the controlling entities may be also held liable (jointly with the Italian directors) for certain bankruptcy crimes (privileged payments and distraction of assets), though to our knowledge in very few cases the liabilities of Italian directors have been extended to the controlling companies’ management. 

a) Intro

From a corporate standpoint, since transfer of liquidity (sweeps or covers) under the cash pooling agreement (both zero balance and notional) likely qualifies as a loan, directors are under the duty to carefully evaluate the interest and benefit of the company in the transaction by adopting proper resolutions and structuring contracts aimed at protecting the assets of the company.

b) Corporate power

As mentioned, Italian cash pool participants are allowed to enter into a cash pooling scheme, provided that (i) the corporate purpose allows to provide loans/financial support to controlling, controlled and affiliated companies and issue guarantees in their interest; (ii) it has corporate benefit and interest in entering in the cash pooling scheme; and (iii) its potential liability under the cash pooling scheme is not able to trigger its insolvency.

Compliance with said requirements must be assessed by the directors, who must prove the existence of a direct (or even indirect) interest and benefit (e.g. deriving from the enhancement of the liquidity management of the company or the group as a whole) in entering into the cash pooling system. If there is no such interest and benefit, this may result in (i) the company’s directors being liable to the company, its shareholders and its creditors for any damages or losses they may suffer, and (ii) the relevant agreement(s) being declared void and/or revoked upon initiative of the receiver of the company in bankruptcy (now renamed as “judicial liquidation by the New Insolvency Code).
The decision to enter into a cash pooling agreement is normally taken by the board of directors, which must consider all implications of the transaction for the company. 

Moreover, it can happen that directors might have a conflicting interest in entering in such transaction (e.g. directors may vest the same role on the board of other group participating companies) in which case they must disclose any such interest and under certain circumstances abstain from voting the relevant resolution.

In case the Italian cash pool participant is owned by a sole shareholder a specific board of directors’ meeting must be mandatorily held or the relevant agreements must bear a date certain at law under pain of nullity.

c) Cash pooling agreement

The cash pooling agreement should grant pool participants information rights to ensure that their management is in the position to monitor that the company is at all times able to recover the funds granted to the pooler/other participants. In addition, it is important the directors of Italian participating companies receive updated information about the pooler and other participants’ financial conditions from time to time and are able to terminate the cash pool with very short notice if there is a risk of insolvency of the pooler/group. 

Equally, also the cash pooler should be able to monitor the financial conditions of all participants and terminate the agreement in respect of any pool participant getting into financial difficulties. 

All those rights should be clearly indicated in the contractual documents. It is also advisable that the participants are informed about the destination of funds made available to the cash pooler that should not be used for risky investments.

A recent case law, on cash pooling (Supreme Criminal Court dated 05-04-2018, No. 34457) has indicated some guidelines to comply with in order to properly structure the cash pooling system so as to avoid liabilities and criminal consequences for directors; in particular, it is inter alia required to set out: (i) a prior and punctual contractual regulation of the relationships among the group companies with clear indications of the terms and conditions of the transfer of the balance from the accounts of the pool participants to the concentration account of the pooler, (ii) the terms and conditions concerning the re-transfer of the liquidity from the account of the pooler to the accounts of the pool participants, (i) the interest rates applicable to the amounts shown in the account of the pooler as well as (iv) the terms and conditions on payment of interest and any commission due to the pooler for carrying out the treasury activity.

d) Guarantees

Italian law does not provide for any specific rules restricting the companies’ indebtedness, nonetheless, the directors have a specific duty to preserve the company’s assets and to refrain from entering into transactions that may adversely affect the financial capability of the company or its assets. 

In case Italian participants are requested to provide cross-guarantees it is highly advisable that such guarantees are limited to the amount that the Italian participant is able to afford based on its contingent financial situation.

As a market practice, in order to mitigate risks for the directors, the cash pooling agreement (or a specific side letter) normally provides that (i) the Italian pool participant is able to set off its intra group debts against any amount paid to the bank under the cross-guarantee and/or (ii) the amount of any cross-guarantee is capped to the funds made available to the Italian company under the cash pooling scheme, as from time to time outstanding.

a) Intro

Italian tax law does not provide for specific provisions related to cash pooling agreements. Nevertheless, a cash pooling scheme involving Italian entities has impacts on different aspects of tax law, the ones described in the following paragraphs are the most relevant to be considered.

As a general premise, please consider that only cash pooling schemes structured as a “zero balance” cash pool with the characteristics of a “current account” pursuant to the Italian Civil Code (ICC) may benefit from some favourable tax implications (as described below in par c. and e.). To these purposes, a cash pooling scheme qualifying as a “zero balance” provides a top/master account, normally held by the parent company/pooler of the group, and several sub-accounts, one for each subsidiary. The sub-accounts are automatically cleared (at the end of the day the balance is zero) on a daily basis and the balances are transferred to the top/master account at the end of each day with original value dates. The top account will therefore hold the overall net cash position of the group. In other words, the sub-accounts are linked to the top account which daily collects all the funds belonging to the group’s companies. Furthermore, for the purposes to be qualified as a “current account” under the Italian legal definition (art. 1823 of ICC) - and not as a “loan”- the credit or debt positions recorded in the top/master account should not be payable (and not transferable) for the entire duration of the agreement or for a certain period (e.g. on a yearly basis).

It has also to be pointed out, that irrespective of the rules stated in the cash-pooling agreement, also the actual implementation of the agreement plays a role in its classification under the typical categories of contracts regulated by Italian civil law (loan or current account). Indeed, in order to prevent an abusive utilization of a cash-pooling agreement aimed at taking advantage of the more favourable regime provided for current accounts, Italian tax Authorities may characterize the current account agreement as a loan arrangement, if the actual implementation of the agreement may support such conclusion, as it may happen, for instance, in case of constant and long-term deficit position of the Italian company.

b) Thin capitalization rules

No specific thin capitalization rules apply in Italy: see next paragraph for interest deductibility.

c) Interest deductibility

If the scheme qualifies as a “zero balance” cash pooling “current account”, and not as a “loan” (see above par. a), interest expenses paid by the Italian company of the group are fully deductible for CIT purposes.

On the contrary, if the cash pooling scheme qualifies as a “loan”, the deduction of the interest expenses is subject to the general limitation rules (i.e., up to interest income and for the excess up to 30% of the adjusted tax EBITDA).

d) Transfer pricing

Italian tax law requires that all related entities should apply the arm’s-length principle in their transactions. Italian transfer pricing rules generally follow OECD Transfer Pricing Guidelines.

e) Withholding tax

A cross-border cash pooling raises the issue of the possible application of withholding tax on interest payments from the Italian companies participating to the cash pooling arrangement to the non-resident pooler.

Indeed, as a general rule outbound interest payments are subject to Italian withholding tax at the rate of 26%, subject to reduction under applicable tax treaty provisions.

However, there are two following exemptions from Italian withholding tax which may be available in case of a cash pooling:

a) The tax exemption under art. 26-bis DPR no. 600/1973

Interests deriving from a “zero balance” cash pooling scheme qualifying as “current account” (see the previous par. a) may benefit from a full exemption from withholding tax. Hence, Italian domestic provision embedded in art. 26-bis DPR no. 600/1973 provides that interest expenses deriving from, among others, “current account” paid to beneficiary companies resident, for tax purposes, in a State or territory with which Italy has an adequate exchange of information (the “White List Country”) are exempted from withholding tax. White List Country are identified by Ministerial Decree (Decree 4 September 1996, as subsequently amended and restated). The list is updated on a bi-annual basis through a decree of the Italian Ministry of Finance.

b) The tax exemption under EU Interest and Royalties Directive

If the exemption granted by art. 26 – bis of DPR no. 600/1973 is not available on interest payments deriving from the cash pooling, the tax exemption provided by EU Interest and Royalties Directive (Council Directive 2003/49/EC – “Directive”) may be invoked.

Art. 26-quarter, DPR no. 600/1973, which implemented the Directive in Italy, provides for a withholding tax exemption on condition that:

1. both the payor and the payee have a qualified legal form indicated in the Annex A of the Directive;
2. the payee is resident for tax purposes in EU Member States without being considered resident outside the European Union according to a convention with a third State for the avoidance of double taxation;
3. the payee is subject to one of the taxes listed under Annex B of the Directive;
4. interest expenses paid are subject in the hand of the payee to one of the taxes listed under Annex B of the Directive;
5. the payor owns at least 25% of the payees' share capital or the payee owns at least 25% of the payor's share capital or a third party owns at least 25% of the share capital of both the payee and the payor from an uninterrupted period of at least 1 year.

Further, in order to benefit from the Directive, the payee should be the beneficial owner of the payments.

f) Corporation tax

Interest received by Italian entities should be included in the taxable profits, subject to CIT in general terms (CIT – Ires - rate of up to 24%)

g) Income tax rules for holding and financial institutions

If the company qualifies as a “holding” company according to Italian Tax Code or carries out financial activities (like banking and insurance activities), different tax rules apply with regard to the deduction and taxation of interest expenses and interest income.

h) VAT rules

Finance transactions, including cash pooling arrangements and current accounts, are VAT-exempt.