1. I. Legal framework for cash pooling
  2. II. Liability risks
  3. III. Legal structure to reduce liability risks
  4. IV. Tax issues
  5. V. Other Elements

jurisdiction

North Macedonia

a) Intro

North Macedonia has no specific legislation on cash pooling. Cash pooling arrangements should therefore comply with general company laws on directors’ duties, shareholder loans, liquidity protection, and company solvency, amongst others.

b) Social interest and due diligence

Per Article (361) Company Law 2004 directors have a duty to perform their role with due care and diligence, and in line with the provisions of Company Law 2004 and/or the company’s constitution. Failure to do so may make directors liable for damages pursuant to Article (362).

In the context of cash pools, due care and diligence may require that the director ensures his/her company is able to seek repayment of the funds contributed and/or is able to benefit from partaking in the arrangement through, for example, preferential interest rates or easy access to liquid finance.

c) Shareholder’s loan provisions

The interest on loans received for the purposes of conducting the company's business activity is fully tax deductible, provided it is in line with the arm’s length principle and does not fall under the thin capitalisation rules, set out in part 4b of this guide.

d) Liquidity protection

Directors have a duty to act with due care and diligence in order to keep the company solvent. In the context of cash pooling, this may mean the directors of the parent company ought not to draw on a subsidiary’s cash if to do so would put the subsidiary in a state of insolvency. Similarly, directors ought to have regard to the consequences that joining a cash pool would have on their company’s solvency. 

Directors owe their duties first and foremost to the company. They are to put their company’s success and interests above those of the group. Per Article (354) Company Law 2004, if the company shows new losses higher than 30% of the value of its assets, or 50% of the charter capital, the directors must, without delay, prepare a written report and call a general meeting of the shareholders. 

e) Hidden distribution of profits

There are three types of hidden profit distribution. Namely:

  • Provision of services or goods to shareholders or to their related parties at terms below the market ones;
  • Application of lower interest rate than the market rate upon the provision of loans to the above persons;
  • Purchases from the above persons at terms which exceed market ones.

Hidden profit distributions make up part of the annual corporate income tax (CIT).

f) Insolvency proceedings – contestation of transactions

Article (354) Company Law 2004 provides that a general meeting of the shareholders must be called when a condition for initiating a bankruptcy procedure occurs. This must be done within 21 days of the condition occurring. Following occurrence of bankruptcy, the directors shall not make any payments except for the ones necessary in the ordinary course of business. Failure to comply with the aforementioned requirements will result in the directors becoming jointly and severally liable to the creditors and to the shareholders.

II. Liability risks

a) Intro

Cash pools are a convenient tool which corporate groups use to minimise expenditure incurred in connection with banking facilities through economies of scale. However, various liability risks may become relevant when setting up a cash pool structure, especially with reference to the directors and shareholders of the participant company.

b) Liability of directors

Under Article (362) Company Law 2004 a company’s directors may be held jointly liable for the damage caused to the company. They may be liable to pay damages to the company if they are found to have breached their duty to act with due care and diligence. Article (362)(2) sets out a list of actions for which directors may incur liability. Paragraphs (3), (4), and (5) set out the conditions for making directors personally liable. It is to be noted that the right to request compensation for damages becomes time-barred after five years, by virtue of paragraph (6).

For liability in the context of cash pools, the directors must have failed to take adequate steps to ensure the repayment of the funds their company has contributed to the cash pool.

c) Liability of shareholders

Typically, shareholders are not liable with respect to the corporate governance of their companies. In the case of insolvency, shareholders’ liability is limited to the amount that is unpaid on their shares. Per Article (327)(1) shareholders are personally liable for the unpaid portion of the amount at which the shares were issued. Shareholders who have fully paid up on their shares prior to liquidation are generally not liable to contribute any more to the company upon its liquidation. 

Shareholders may, however, be liable if they received a prohibited payment. Per Art (330) a shareholder who received an advance dividend / payment shall be obliged to refund the amount received to the company, provided he/she was aware of the illegality of the payment. In insolvency proceedings a shareholder who received an unauthorised payment may become liable to repay the amount to the company’s creditors (Art (330)(2)). The right to hold a shareholder liable on the aforementioned grounds becomes time-barred after five years following the receipt of the prohibited payment (Art (330)(3)).

a) Intro

In order to reduce the possible liability risks that may stem from cash pooling arrangements, the participants in the cash pool would be well-advised to enter into a cash pooling agreement. This provides them with foreseeability and clarity regarding their obligations. It must, however, be noted that due to the lack of specific cash pooling legislation it is, at this stage, difficult to anticipate all the possible risks. 

b) Corporate power

Before entering into any arrangement, the directors must ensure they are authorised to do so. The authority may stem either from the company’s constitution or, alternatively, it may be granted by a positive shareholder resolution. 

c) Cash pooling agreement

A cash pooling agreement clarifies the rights and obligations of the participants. It is for the directors to assess whether it would be beneficial for their company to enter into the cash pooling agreement. Considerations of solvency should play a primary role at this stage, precisely because the insolvency of one of the participating companies may negatively affect the solvency of the others. Further, consideration must be given to any possible conflicts of interest, which directors have a duty to avoid under Articles (348) and (349) Company Law 2004.

The participants would also be well-advised to have the right to be regularly informed and updated on the status of the cash pool and its participants, in particular with regard to the participants’ solvency. The agreement may also contain an obligation for participants to inform the other companies should their solvency be threatened. It follows that participants should then have the right to terminate the cash pooling agreement. This both allows a solvent company to protect its assets, as well as a company threatened with insolvency to reclaim its deposited funds and avoid negatively affecting the liquidity of the group. 
A company should terminate the agreement when its board of directors concludes that the risks of participation outweigh the benefits. A practical example is the deteriorating financial position of an affiliate that makes it likely for the bank to call upon the cross-guarantee (discussed in part 3e of this guide).

d) Facility agreement

Cash pooling agreements usually operate alongside facility agreements. This is an agreement between each company and the pooling bank. It may provide that the participating companies are jointly and severally liable for any negative balance on the master account and it may require intra-group security for the same. Often, facility agreements are standardised and reflect the terms of the cash pooling agreement. Much like with cash pooling agreements, it is recommended that the facility agreement contains a right of termination. To minimise liability risks, the right should be identical in both the cash pooling and facility agreement.

e) Guarantee

Cross-guarantees are normally required in a cash pooling arrangement. By granting a guarantee the company enters into a legally binding obligation to the bank to cover the parent company’s / affiliate’s debts. This offers certainty when a company lends or borrows money to and from the other participants and maximises the available overdraft facility. Usually, a guarantee must be granted in return for adequate consideration or a corporate benefit. Whether the consideration provided is adequate is to be assessed on a case-by-case basis. 

Once the bank has exercised its offset rights in the credit balances and has been paid off (Art 75 Law on the National Bank of the Republic of North Macedonia), the company whose balance has been offset may, if there is an indemnity agreement in place, seek to recover its losses from the defaulting participant.   

In line with a director’s duty of due care, diligence, and capital maintenance a guarantor should consider if a timely revocation of such a guarantee can be effected. Lastly, it is important to refer to the company’s articles in order to ensure that the company is permitted to grant guarantees.

IV. Tax issues

a) Intro

The following North Macedonian tax rules may have particular importance for the structuring of the cash pool arrangements.

b) Thin capitalisation rules

Interest expense incurred on loans granted by shareholders holding at least 25% of the capital of the company is non-deductible if the total amount of the loan exceeds three times the interest of the shareholder. The thin capitalisation rules do not apply to financial institutions.

c) Interest deductibility

The interest received on repayment of a loan is deductible for tax purposes, as long as the interest is equivalent to the one achieved on the current market. This is commonly referred to as the arm’s length principle. It is based on the notion that financial transactions between related parties / companies are performed at prices and under conditions which are identical to the ones of transactions between unrelated persons in comparable circumstances (Article 12(2) Profit Tax Law).

d) Transfer pricing

Cash pools can lead to interest expense that is non-deductible for tax purposes. Per Articles 13 and 14 Profit Tax Law if the amount of interest received on a loan from a related company (as defined in Art 16 Profit Tax Law) exceeds the amount that would be received from an unrelated company, then that excess amount is non-deductible. The amount that would be received from an unrelated company is determined by reference to the rate achieved on the financial market in the country.

The difference between the market price and the transfer price applied on transactions between related entities is subject to profit tax. The transfer pricing rules apply also with respect to loans received/granted to related parties. Upon a request by the tax authorities, the companies should present sufficient documentation and analysis to confirm that the conditions of their related-parties transactions respect the arm’s length principle.

e) Withholding tax

Article 21(1) Profit Tax Law provides that interest accrued by a North Macedonian company to a foreign company that is resident or has a permanent place of business in North Macedonia is subject to withholding tax. Similarly, money paid out in the form of dividends to a foreign legal person is also subject to withholding tax. Per Art 22, the amount withheld is 10% of the full value that would be paid to the foreign legal entity, not taking into account the withheld value.

If the foreign person receiving the income is resident in a state with which North Macedonia has concluded an agreement for the avoidance of double taxation, then the withholding tax may be no larger than the figure stipulated in that agreement (Art 23(1) Profit Tax Law). The same rules apply for dividends paid to a non-resident.

f) Corporation tax

The corporate income tax (CIT) in North Macedonia is 10% (Art 2 Profit Tax Law). Under the simplified tax regime in Chapter VII Profit Tax Law, companies which realise a gross annual income between MKD 3 million – MKD 6 million (€49,071 – €98,143) may choose to pay a tax of 1% on their gross income (Art 33).

g) VAT rules

Legal persons who carry out economic activity in North Macedonia are subject to 18% VAT. Legal persons who have in the past calendar year generated a total taxable income of more than 2,000,000 MKD (€32,756) have an obligation to register for VAT purposes. 

V. Other Elements

Sources: