CMS Expert Guide to cash pooling in The Netherlands

a) Intro 

No specific statutory framework exists under Dutch law in relation to cash pooling, nor has the concept of cash pooling given rise to discussion in Dutch case law. The rules applicable to cash pooling are based on generally applicable provisions of the Dutch Civil Code. This chapter provides an overview of certain provisions of the Dutch Civil Code that are relevant to (cross border) cash pooling activities undertaken by Dutch companies. This overview further touches on regulatory, tax and (certain) insolvency aspects to take into account when participating in a cash pooling arrangement.

b) Social interest and due diligence

Objects, ultra vires and group interest

The authority of the management board of a Dutch company (the ''Board'') is limited by the objects set out in the articles of association of that company (statutaire doelomschrijving). As such, a legal act (rechtshandeling) performed by a company that exceeds its objects (''ultra vires'') may be rendered void by such company (or, in case of insolvency, by the company's bankruptcy trustee) if it can be established that the relevant counterparty was aware or should have reasonably been aware (without making further enquiry) that such legal act exceeded that company's objects.

In general, the fact that a company's articles of association have been filed with the commercial register will not automatically result in constructive awareness of their content by a contractual counterparty. However, Dutch courts have determined that financial institutions may, under certain circumstances, be under a stricter obligation to ensure that a transaction falls within the scope of the company's objects.

In assessing whether or not a legal act falls within the scope of a company’s objects, all circumstances (e.g. commercial and factual matters) must be taken into account, such as whether the legal act is considered to be (i) in the corporate interest of the company (vennootschappelijke belang), (ii) in the corporate interest of the group to which the company belongs, (iii) conducive to the realisation of, and useful in connection with, the company's objects, and (iv) not prejudicial to the interests of the company's (present and future) creditors.

The Board is also obliged to, at all times, serve the company's corporate interest, which means that the Board should act according to what is most conducive to that company's continued success. One of the objections raised against cash pooling arrangements (particularly zero balancing arrangements) in the Netherlands is that the companies involved could potentially worsen their financial position by giving up their financial independence and that therefore such arrangements may not be in the company's corporate interest. Even where, in the context of a cash pooling arrangement, a parent company grants a loan to a subsidiary to enable the subsidiary to pay its creditors (thus benefiting such subsidiary), it cannot be ruled out that the parent company will not act in its own corporate interest. However, the Dutch Supreme Court ruled that a credit facility provided to an ultimate parent company by a third party for the purposes of supporting the activities of the group will generally be considered to be for the benefit of all companies within the group.

On the basis of this ruling, it can be argued that if the cash pooling arrangement serves to support the activities within the group, then all the companies involved can be deemed to benefit from it (even if it is a zero balancing arrangement) and therefore even if the companies relinquish a certain amount of financial independence in connection with it, it does not necessarily conflict with the corporate interest of the relevant companies.

Furthermore, legal scholars are of the opinion that the degree of commercial and financial interdependence (e.g. degree of influence of a parent over one or several group companies) is a strong determinant of the degree to which the corporate interest of an individual company aligns itself with that of the group as a whole. While the corporate interests will generally be most aligned when all participants are solvent, the corporate interests of the company vis-à-vis the group are more likely to diverge when one of the participating group companies becomes financially distressed. The Board of a financially healthy company will need to consider its corporate interests and as such continually weigh the benefits of the cash pooling arrangement, to the potential or increasing loss of excess cash to the financially distressed group company.

Conflict of interest

A conflict of interest can arise if individuals sit on the Board of more than one of the group companies participating in a cash pooling arrangement. More specifically, if a company enters into a transaction with a member of the Board or with a party in relation to whom a Board member has a specific interest (also referred to as a 'personal' conflict of interest. A conflict of interest may also occur when a member of the Board is the parent company and both companies enter into a transaction with a third party or a member of the Board acts on behalf of several parties to an agreement in its capacity of a Board member (also referred to as a 'qualitative' conflict of interest).

Pursuant to Dutch law, a company may be represented by its supervisory board in the event of a conflict of interest between the company and the members of its Board, unless the articles of association provide otherwise. Alternatively, the general meeting (of shareholders) has the authority to appoint an individual to represent the company in the event that a conflict of interest occurs.

In practice, the articles of association usually provide that if a company enters into a transaction with another company in its group, the members of the Board remain authorised to represent the company. However, this does not affect the right of the shareholders to appoint an alternative company representative. Under the Dutch Civil Code, the rules governing conflicts of interest intend to prevent a board member, in the performance of his duties, from being led by his personal interest instead of the interests of the company which he is obliged to serve. Pursuant to Dutch case law, a contravention of the rules regarding conflict of interest will lead to the underlying transaction being voidable at the instigation of the company (or its bankruptcy trustee). The Dutch Supreme Court has ruled that there is a conflict of interest if a member of the Board cannot safeguard the interests of the company concerned in a complete and objective manner.

It is therefore prudent to arrange for the general meeting (of shareholders) of the participating company to specifically appoint a representative of the company for the purpose of the entering into cash pooling arrangements. This representative may also be a member of the Board.

c) Shareholder’s loan provisions

Amounts transferred from one group company to another within the context of a cash pooling arrangement may be deemed inter-company loans. Participating entities should take into account that in the event that a Dutch participant becomes insolvent, all claims of related parties (i.e. including group members) against such company will be treated as subordinated claims in the insolvency proceedings under Dutch insolvency law.

d) Liquidity protection and capital maintenance

Under the Dutch Civil Code, a company may only make distributions to the extent that its 'equity capital' (i.e. share capital, share premium and reserves) exceeds the aggregate of its paid-up share capital and its reserves, which in turn must be maintained according to the statutory requirements and any requirements contained in the articles of association of the company. A resolution in respect of a distribution which is adopted by the general meeting (of shareholders) of the company or its Board in breach of these requirements may be void or voidable. However, if monies transferred at the end of each business day are construed as a loan under a cash pooling arrangement rather than a distribution of profits, these conditions do not apply.

e) Insolvency proceedings / considerations / contestation of transactions

It can be argued that cash pooling arrangements are detrimental to creditors of the companies involved, since credit and debit balances of all participating companies are consolidated, the company will no longer receive any interest on any credit balance it might otherwise have had. The creditors of the company (or its bankruptcy trustee) has the authority to annul such cash pooling arrangement if he can demonstrate that this arrangement constitutes a fraudulent act (actio pauliana) within the meaning of Section 3:45 of the Dutch Civil Code. Pursuant to this section, a legal act is fraudulent if the debtor performed an act without an obligation to do so and if the debtor knew or reasonably could have known that this act would be detrimental to its creditors. Any creditor of the company can then challenge the validity of such legal action, irrespective of whether such creditor’s claim arose before or after the legal act was performed.

However, if other arrangements are made between the group companies to compensate the companies with a credit balance, it could be argued that the cash pooling arrangement is not detrimental to the creditors of such companies.

a) Intro

Under the Dutch Civil Code, the Board of a company involved in an intra-group cash pooling arrangement is under an obligation to prevent the insolvency of that company. If the Board fails to adequately meet this obligation, the Dutch Civil Code provides multiple grounds on which to hold the Board (or individual members thereof, as the case may be) liable.

b) Liability of directors (of subsidiaries)

Mismanagement

Under the Dutch Civil Code, each member of the Board has the duty to act in accordance with certain principles of proper management (behoorlijk bestuur). Non-compliance with these principles may constitute contravention of the objects of the company if such non-compliance results in a serious loss to the company’s creditors. This will constitute mismanagement (onbehoorlijk bestuur) if it can be demonstrated that no other reasonable and rational board member would have acted in a similar manner.

In addition, various legal scholars hold the view that zero-balancing arrangements may under certain circumstances constitute mismanagement by the Board. If the company becomes insolvent due to a lack of sufficient funds, members can be held personally liable.

Any failure of a member of the Board to keep proper administration of and monitor the cash pool will often form the legal basis for the bankruptcy trustee to argue that members of the Board should be held liable for mismanagement. Each member of the Board is expected to monitor the company's financial health closely and to intervene should insolvency become foreseeable. If these obligations are not met, members of the Board can be held personally liable by the bankruptcy trustee, especially if the insolvency could have been prevented with more prudent oversight. The complex financial data provided by cash pooling arrangements will enable the bankruptcy trustee to examine each member of the Board's decisions retrospectively, emphasizing the importance of proactive monitoring by each member of the Board.  

Tort

The bankruptcy trustee of a company can, in exceptional circumstances, hold the Board liable on the basis of tort (onrechtmatige daad) to the extent that the company has insufficient funds to satisfy the claims of its creditors. Such exceptional circumstances would include a situation in which the Board knew or reasonably could have known that the solvency of the company would be seriously affected by the transfer of the liquidity to the cash pool at the end of each business day. This reasoning is mainly based on the general principle of independence of the Board of a company. Under this principle, the Board must ultimately be able to justify any actions it takes which may affect or threaten the existence of the company. The company’s participation in a cash pooling arrangement could be justified by the benefit such an arrangement provides to the group as a whole and thereby to the individual participating companies. The Board of the participating company will have to assess continuously whether or not the cash pooling arrangement threatens the solvency of the company.

c) Liability of the parent company directors

In exceptional circumstances, the parent company, as holder of the master account, may be liable to make payments in respect of sums owed to creditors of a participating subsidiary, on the grounds that such parent company has received funds from the participating subsidiary which would otherwise have been available to satisfy the claims of creditors. If payments made by the participating subsidiary to its parent company on an ongoing basis under the cash pooling arrangement could be expected to adversely affect the rights of such subsidiary's creditors, then the parent company may have to undertake actions to avoid or limit the extent of such consequences (including but not limited to filing for insolvency). Contravention of this obligation could lead to liability of the ultimate parent company (or the participating company's shareholder, as applicable) on the basis of tort). Generally, however, the courts rarely find a parent company liable in tort on this ground and the situations in which liability has been established are typically situations in which the parent company was closely involved in the management of its subsidiary company or affected the rights of that company's creditors. Finally, it should be noted that even when the Board and/or parent company is found liable on one of the grounds described in paragraphs (b) and (c), this does not affect the validity or the enforceability of the cash pooling arrangement itself.

a) Intro

As there are liability risks involved in cash pooling, especially for the Board of a company involved in a cash pooling arrangement, the documentation governing a cash pooling arrangement should be structured to reduce these risks. Doing so, it is important to bear in mind the below.

b) Corporate power

As a minimum requirement and to reduce risk of a transaction being deemed ultra vires, the objects clause of a company should at least enable the company to finance, and create security for the benefit of, other group companies.

A company entering into a cash pooling arrangement will need to adopt the corporate approvals required by its articles of association, approving the entering into of the relevant documents. Often, board resolutions adopted by the Board suffice for the company's involvement in the cash pooling arrangement.

However, it may also be the case that certain resolutions or approvals of the general meeting (of shareholders) or, if so instated, resolutions by the board of supervisory directors are required. Which resolutions are required by what corporate body of the company will depend on the type of company, relevant provisions of the Dutch Civil Code applicable to it, its governance structure and its articles of association (for example, articles pertaining to a conflict of interest or reserved matters).

c) Cash pooling agreement

Cash pooling is typically governed by a (written) master agreement and/or (multiple) intra-group cash pooling agreement(s). The cash pooling agreement outlines the terms and conditions of the cash pooling arrangement, including the pooling mechanism, the role and responsibilities of each participant and the distribution of funds.

1. Right to information
   
   The cash pooling agreement should grant the Board of the relevant company extensive and on-demand information rights. These information rights allow the Board to be able to continuously evaluate the company's position, liquidity and exposure under the cash pooling arrangement. It is also important for the Board to be able to evaluate other group companies' position and the cash pooling position as a whole to determine whether participation in the cash pooling arrangement continues to be in the company's corporate interest.  
   
   Information rights should also be granted to the group company overseeing the cash pooling arrangement. These rights would allow such group company to oversee the exposure of the entire group as well as mitigate the overseeing company's own risk of being held liable on the basis of tort by making use of its rights under the cash pooling agreement that may adversely affect the rights of creditors of a group company.
    
2. Right to terminate and to be repaid
   
   The Board should continuously assess the solvency of the company. If the Board has the impression that the company will no longer be in a position to satisfy its liabilities, it will have to terminate its participation in the cash pooling agreement and related documents (as applicable). The Board should be permitted to terminate its participation on short (or no) notice and have an on demand right to have the liquidity swiftly retransferred to company.
    
3. Liquidity protection
   
   Cash pooling agreements should include rights that permit the Board of a company to refuse requests to make (excess) liquidity available, in order for the Board to better protect the solvency of the company of which they are a board member and to prevent adversely affecting the rights of creditors of that company. 
    
4. Ultra vires
   
   The cash pooling agreement should reflect that the participants to the cash pooling arrangement deem that the economic and commercial benefits for the companies entering into the cash pooling agreement have been contemplated prior to entering into the arrangement.

d) Agreements with third parties

1. It is not uncommon for the holder of the master account and the cash pooling participants to enter into a facility agreement with the account bank as part of a cash pooling arrangement. A net positive balance will yield interest on the deposit and a net negative balance will be deemed to be a utilisation under the facility agreement, for which interest will be owed to the bank. As a part of the facility agreement, the holder of the master account will be permitted to make the cash available to the participating group companies by way of intra-group loans and often, the holder of the master account and each participating group company will enter into bilateral cash pooling agreements that govern the rights and obligations amongst each other.
2. It may also be the case the parent company or the group enters into a facility agreement, separate from the cash pooling arrangement. As a minimum, such a separate facility agreement should acknowledge the existence of the cash pooling arrangement and reflect and/or permit the obligations and transactions contemplated thereby. In particular, it should respect the specific rights granted to participants that mitigate the liability risks for the Board that is associated with the cash pooling arrangement.

e) Guarantees, rights of pledge

Cash pooling arrangements will be structured to meet the bank's regulatory requirements. Participating companies will therefore be required to grant rights of pledge over their credit balances for the benefit of the bank to secure any debit balances.

The bank may also require participating companies to secure the obligations of one another under the cash pooling arrangement by way of joint and several liability (hoofdelijke aansprakelijkheid) or guarantees. If providing this type of security is not feasible from a commercial or accounting perspective, it can be contractually agreed that a participating company's claims against the bank can be set-off against the bank's claims on other participating companies. This contractual method of multilateral set-off (meerpartijenverrekening) has been deemed to be insolvency proof by the Dutch Supreme Court.

If, under a cash pooling arrangement, the security discussed above is granted by participating companies, then it is necessary to ensure that (i) the company concerned derives a corporate benefit from the obligation of the third party in respect of which the security is provided, and (ii) such company’s existence is not threatened by the provision of such security. In general, a company will be deemed to benefit from the provision of such security if a strong financial and commercial interdependence exists between the company and the other group members and the company's existence is not foreseeably endangered by allowing the bank such recourse.

If and to the extent there appears to be an imbalance between the commercial benefit gained by the company and the detriment it would suffer if the security is enforced, then the company (or its bankruptcy trustee) will be able to contest the validity of such security. The validity can be contested irrespective of the wording of the objects as set out in the company’s articles of association.

a) Intro

There is no specific statutory tax framework in the Netherlands for cash pooling arrangements. The general Dutch corporate income tax ("DCIT") rules and principles apply (including the at arm's length principle). However, in the Transfer Pricing Decree issued by the State Secretary of Finance, dated 14 June 2022, nr. 2022-0000139020 ("TP Decree 2022"), specific guidance is provided with respect to certain transfer pricing aspects of cash pooling arrangements. The TP Decree 2022 also goes into the tax characterization of cash pooling arrangements.

b) Thin capitalization rules

Dutch tax law does not contain a specific thin capitalization rule. However, from a transfer pricing perspective, an appropriate debt-to-equity level should be observed. If the taxpayer would not have been able to obtain a loan under similar conditions (e.g., with a similar level of equity) in a third-party situation, the Dutch tax authorities may take the position that the interest on such intercompany loan is (partly) non-deductible for DCIT purposes. The arm’s length character of the debt-to-equity ratio of the taxpayer should preferably be sustained with a transfer pricing report.

c) Interest deductibility

Intercompany loans may arise under cash pooling arrangements, in case of other than short-term debit and credit positions of individual cash pool participants, on which interest will be payable by one participant in the cash pool to another participant (possibly through the cash pool leader). Provided that such interest payments have an arm's length character, the interest payments loan should be tax deductible for DCIT purposes, subject to any restrictions following from the Dutch interest deduction limitation rules. We touch upon the most important ones below.

a. ATAD 2

Based on Dutch rules transposing EU Directive to prevent the tax impact of hybrid mismatches (ATAD 2), the tax deductibility of interest costs may be restricted if such deduction would broadly speaking result in:

• a payment being deductible, without the corresponding income being taxed anywhere (deduction without inclusion due to a tax qualification mismatch), or
• one and the same payment or expense being deductible multiple times (double deduction due to a tax qualification mismatch).

ATAD 2 also applies to (imported) hybrid mismatches between third countries that are used to erode the tax base in EU Member States. Such a hybrid mismatch occurs when a deductible payment made by a taxpayer serves to finance deductible expenses that give rise to a hybrid mismatch with one or a series of transactions between related entities within the group structure.

b. Earnings stripping rule (ATAD 1)

Exceeding net borrowing costs, such as interest expenses and currency exchange results, are only deductible at the level of the Dutch taxpayer (i.e., a single entity or a fiscal unity) up to the highest amount of the following two:

• 20% of the EBITDA (i.e., earnings before interest, tax, depreciation and amortisation); or
• EUR 1,000,000.

Net borrowing costs means that interest income in respect of loans granted can be deducted from the interest costs incurred in respect of loans obtained in order to calculate the amount of the net borrowing costs impacted by this earnings stripping rule.

Any amount in excess thereof would be deemed non-deductible and may be carried forward indefinitely to subsequent years to the extent that in these years there is sufficient tax-based EBITDA to deduct this interest carry forward.

Dutch tax law does not include a group escape, nor do grandfathering rules apply to existing loans and no specific exceptions are made for financial undertakings.

d) Transfer pricing

The characterization of the transactions under the cash pool arrangement and determining an arm’s length remuneration for these transactions is generally a complex exercise. The TP Decree 2022 provides guidance on the following transfer pricing aspects of cash pooling:

• Characterization of the transaction
• Benefits of the cash pool
• Cross-guarantees within the cash pool

a.  Characterization of the transaction

When a participant in the cash pool holds a debit or credit position for a longer period of time, it is necessary to determine whether this transaction qualifies as a deposit with a longer term or a loan for Dutch tax purposes. Such long-term qualification may require a different arm's-length remuneration compared to short-term positions.

b. Benefits of the cash pool

Depending on the type of cash pooling arrangement, a physical cash pool or target balancing, for the participants in a cash pool, the benefits consist of, amongst other, favourable interest rates, reduced need to obtain external loans, less administration and more efficient management of the liquidity position.

Savings and other benefits resulting from participation in the cash pool may be the result of group synergies. As such, the synergy benefits will have to be shared among the participants in the cash pool.

The allocation of these benefits should take place through the determination of the at arm's-length interest rate on the debit and credit positions of the participants in the cash pool, considering an appropriate remuneration for the cash pool leader. Generally, the remuneration for the cash pool leader will be higher in the case of a zero balancing cash pooling given that the cash pool leader generally contributes less value under notional cash pooling.

c.  Cross-guarantees within the cash pool

Individual participants generally have no influence on who participates in the cash pool and the amounts they may guarantee. In addition, the cash pool participants will not have relevant information about the other participants for whom they are guarantors. In case of cross guarantees between the participants in the cash pool, generally no guarantee fee should be considered for Dutch tax purposes. The support of a participant in the event of the default of one or more participants should be considered an act in the capital sphere that has no effect on the taxable profits of the participants concerned.

Any interest income at the level of a participating Dutch entity in the cash pool (and any remuneration for a Dutch cash pool leader) will are taxed at regular Dutch tax rates. The 2024 DCIT rates are 19% for a taxable income up to EUR 200,000; and the excess is subject to a rate of 25.8%.

d. Dutch withholding tax

Arm’s length interest payments on genuine loans do not attract a withholding tax.

However, the Netherlands applies a conditional withholding tax ("CWTH") at the DCIT headline rate of 25.8% (2024) on interest (and royalty) payments to affiliated companies (>50%) in designated low-tax jurisdictions, to hybrid entities and in certain tax abuse situations.

In the case that interest is due by a Dutch participant in the cash pool to an affiliated participating entity that is residing in a low-tax jurisdiction, qualifies as a hybrid entity or is part of an abusive structure, such interest payment may fall within the scope of the CWTH and may become subject to 25.8% CWTH.

e. VAT

A Dutch company engaged in a cash pooling arrangement in principle qualifies as a taxable person for Dutch VAT purposes. In case this transaction involves actual transfers of funds between its participants, a cash pooling participant in a credit position transferring funds to the consolidated account and receiving remuneration in the form of interest shall be regarded as rendering a supply of services, albeit that such services are exempt from VAT. As a consequence, participating in a (physical) cash pool arrangement may potentially trigger a restriction to the right to a full recovery of input VAT (unless and to the extent such activities are performed vis-à-vis parties outside the European Union).

f. In short

If the cash pooling participant in a debit position is established in the EU: in principle no right to deduct input VAT at the level of the cash pooling participant in a credit position to the extent that such input-VAT concerns these specific activities and a reduction of that participant's pro rata.

If the borrowing participant is established inside the EU: the lending participant's right to recover input-VAT is negatively impacted as a result of these activities.

Furthermore, under circumstances it may be possible that the cash pool participants are part of one VAT Group. This is in principle only possible if the relevant participants are established in the Netherlands or if (and to the extent that) they have an establishment in the Netherlands. In that case, it should not affect the right to deduct input VAT.

There are no specific regulatory restrictions concerning the provision of cash pooling arrangements by banks under Dutch regulatory law. In general, Dutch banks are willing to offer cash pooling arrangements on competitive conditions if this does not adversely affect their compliance with the solvency and liquidity requirements applicable to them pursuant to, for example, the Capital Requirements Regulation (CRR).

There are no specific regulatory restrictions and no authorisation or registrations are required from a Dutch regulatory law perspective for a company to participate in a cash pooling arrangement, provided that the participating company does not conduct the business of a credit institution (bank) within the meaning of Article 4 CRR. Article 4 CRR defines a credit institution as ‘an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account’. Under Dutch regulatory law, it is prohibited to conduct the business of a credit institution or to solely obtain repayable funds from the public in the course of a business without having a licence granted for that purpose. In the prevailing interpretation of Dutch regulatory law, the participation in a cash pooling arrangement is not considered to be in conflict with this prohibition, provided that only intra-group lending and only the raising of funds from within the group of companies takes place under the cash pooling arrangement.