CMS Expert Guide to cash pooling in Poland

a) Introduction

Cash-pooling agreements are generally not regulated under Polish law, which means that market participants have to structure cash pooling transactions within the general principle of contractual freedom functioning in Polish law. All forms of cash-pooling (zero-balancing cash pooling, notional cash pooling) are possible under Polish law. However, parties to a cash pooling transaction must bear in mind several general provisions of Polish law that may be applicable to such a transaction.

Cash pooling enables a group of companies to benefit from their surplus cash by transferring it to a bank account and using the funds when necessary. Until now, there have been no Polish law guidelines for managers on balancing the interests of the individual company with the interests of the entire group. However, the so-called holding law, which will enter into force on 13 October 2022, will provide such rules, by allowing the parent company to issue binding guidelines to the subsidiaries, as described in paragraph 2. a) below. 

b) No distribution

The Polish Commercial Companies Code provides that a company is prohibited from:

• returning any capital contributions made by the shareholders;
• paying any interest on the capital contributions made or shares held by the shareholders; 
• making any payments from a company’s assets to the shareholders to the extent required to cover the company’s share capital.

Consequently, shareholders only receive a return from their contributions, or the assets of the company, after a share capital decrease or liquidation of the company (if such an event occurs). Cash pool participants should, therefore, be sure that payments made into the account by a subsidiary – and subsequent withdrawals by its parent company – do not breach these rules.

c) Insolvency proceedings – contestation of transactions

• A general risk of participating in cash pooling is that a company may become insolvent if the monies transferred to the master account are not invested properly or are not transferred back to the company. This may be especially true if the insolvency of one of the participants has an adverse effect on the functioning of the other participants (for example, it may be that the insolvent company had provided liquidity to the other participants). The other key risks surrounding insolvency are as follows: 
  • The company’s insolvency is declared. Although such a declaration does not, generally speaking, cause the termination of a cash pooling agreement, the insolvency trustee/administrator may terminate the agreement or the agreement may be subject to other restrictions and limitations arising under Polish insolvency law, such as hardening periods.
  • If a company within a cash pooling arrangement acts to the detriment of its creditors by distributing cash to other cash pool participants instead of its creditors, and there is a benefit to the other participants, the creditors may demand that such actions be declared ineffective.
  • If a company declares insolvency, a loan granted by a shareholder to the company is in the last category of receivables to be satisfied from the bankruptcy estate, which determines the order of its satisfaction.
  • If a company encounters financial difficulties, the management board must immediately convene a shareholders’ meeting to decide on the future existence of the company (when the balance sheet shows a loss exceeding the aggregate supplementary and reserve capitals, and half of the share capital) or apply to the relevant court for a declaration of the company’s bankruptcy (if the company fails either or both of the two insolvency tests applicable under Polish law). Otherwise, they are threatened with personal civil and criminal liability for not filing for bankruptcy in due time. They may, however, discharge themselves from responsibility in this respect, in particular if they prove that, within the time limit provided for filing the bankruptcy petition, the restructuring proceedings were opened or an arrangement in the course of such proceedings regarding the approval of an arrangement was accepted. 
  • It should also be noted that a cash pooling arrangement may result in a violation of Polish capital maintenance rules (see paragraph 1 (b) above for details). For example, this may arise if participants contribute funds to the cash pool account with the effect that the assets of the company fall below what is required to maintain the company’s share capital.

a) Introduction

Until now, under Polish law there were no guidelines for managers on balancing the interests of the individual company with the interests of the entire group, and there was no possibility of subordinating the management board of one company to the interests of a dominant company or group of companies. 

Recently, new legislation implementing the so-called holding law was adopted. The new law, which will enter into force on 13 October 2022, introduces the concept of a group of companies (parent company and subsidiaries) following a common economic strategy, as long as it does not conflict with the interests of the minority shareholders and creditors. Under certain circumstances, the dominant companies will be authorised to give binding instructions to their subsidiaries, in which case the members of the subsidiaries’ corporate bodies will be released from liability. This opportunity may mitigate some of the liability risks connected with cash pooling agreements. 

However, in order to benefit from the above regime, the participants (both the dominant company and its subsidiaries) must take certain corporate steps – adopt necessary resolutions and reflect the creation of the group of companies in the National Court Register. In practice, this may result in many of the capital groups deciding to continue to operate in the current manner, i.e. without formalising the group of companies.

b) Liability of directors

In principle, the directors of a company are responsible for the financial safety of the company. This means that they are obliged to act with the due diligence of a person holding such office, and to avoid any situations that may lead to the company’s insolvency. Their actions should, therefore, be compliant with statutory laws and the provisions of the company’s articles of association. Therefore, the directors of a company envisaging to enter into a cash pooling arrangement will need to evaluate the risks of damage to the company against any benefit it may gain; a failure to make such proper consideration may place the directors in breach of their duties.

An example of where liability may arise is when a company has become insolvent as a result of a transfer of funds to the cash pool, such funds being swallowed as a result, for example, of another participant’s insolvency. In such instance, the members of the management board may be held personally liable if they failed in their duty to ensure repayment of the funds.

In addition, management board members are, in certain situations, jointly and personally responsible with the company for its liabilities.

As a general rule, the above liability must not be excluded or limited (unless the management acted upon binding instructions of the dominant company, where a group of companies was established). In particular, the board must not seek to rely on a resolution of a shareholders’ meeting granting directors discharge from their duties or claim that the company waived claims in respect of the activities undertaken by the board.

c) Liability of shareholders

The general rule is that the shareholders of capital-based companies are not responsible for a company’s debts; their liability is limited only to the value of the contribution they made to the company’s share capital.

a) Introduction

Cash pooling is generally not regulated under Polish banking law, so the parties to a cash pooling arrangement must devise a legal structure for such arrangement based on conventional legal instruments and concepts (such as inter-company loans or subrogation), or on the principle of freedom of contracting.

b) Regulatory issues

The only Polish-law regulatory provision relating to cash pooling is Article 93 a) of the Polish Banking Law, which provides a limited regulation of notional cash pooling: it allows companies in a tax group to enter into an agreement with a bank, setting out consolidated interest rates for funds (and debits) collected in the accounts of such companies. This does not mean, of course, that other forms of cash pooling are not allowed.

When entering into a cash pooling agreement, one must remember the capital maintenance issues discussed in paragraph 1. b) above and the fact that Polish law sets out a maximum level of interest fees that cannot be exceeded.

Entering into a cash pooling arrangement does not require a banking licence and is not a regulated activity. However, the participation of a Polish entity in a multi-jurisdictional cash pooling arrangement may be subject to restrictions imposed by Polish foreign exchange regulations, especially when it involves entities from non-EU/EEA jurisdictions. Additionally, Polish foreign exchange regulations impose certain reporting obligations on residents that enter into financial arrangements with non-residents (including non-residents from within the EU/EEA). Depending on the volume of a given resident’s foreign operations, reports to the National Bank of Poland may have to be submitted on a monthly or quarterly basis (residents with low volumes of foreign operations are fully exempt from those reporting obligations). 

a) Introduction

Cash pooling arrangements are not specifically regulated under Polish tax law. It is advisable to apply for an individual ruling to avoid a dispute with the tax authorities. The most sensitive tax areas related to cash pooling are: thin capitalisation, transfer pricing, withholding tax, VAT tax, and tax on civil law transactions.

b) Company income tax 

Under the Polish CIT Act, the transfer of funds to and from the Cash Pooling Participants’ Accounts using the Pool Leader Technical Account, resulting in their balancing, will be tax-neutral (i.e. it will not result in either income or a tax expense on the part of the Participants), and income and expenses will arise only with respect to interest settlements related to the transfer and non-repayment interest.

c) Thin capitalisation rules

Interest costs incurred by cash pooling system participants and related to obtaining funds under the cash-pooling system will be subject to restrictions from the Polish CIT Act if the excess of debt financing costs exceeds: the amount of PLN 3,000,000 or the amount calculated according to the formula established in the Polish CIT Act. Above these amounts, interest will not be treated as a tax expense. 

d) Transfer pricing

It is recommended, therefore, that the agreement’s provisions be verified every time if cash pooling documentation is required. In general, transfer pricing documentation should be prepared if the transaction value exceeds the transactional threshold mentioned in the Polish CIT Act.

e) Withholding tax

Interest paid abroad is subject to a 20% withholding tax. Interest paid by a Polish entity into a foreign cash pool will, therefore, be subject to withholding tax. The tax can be reduced (even to zero) by the relevant taxation treaties. Many of them provide for a zero withholding-tax rate on interest paid to banks, provided that the bank is a beneficial owner of the interest.
However, the tax authorities tend to challenge the beneficial nature of the bank’s ownership of received interest (although in some cases this approach has been rejected by the courts). Therefore, to make sure that interest paid by a Polish entity will not be subject to withholding tax, a binding ruling will be required.

f) VAT rules

Activities performed by an entity acting as an agent in cash pooling which does not collect separate remuneration in addition to interest are considered – in the practice of the tax authorities – to be excluded from VAT taxation.

Other participants in cash pooling – if they perform only ancillary activities for the bank to provide liquidity management services, without collecting remuneration (only collecting interest with respect to the obligations/receivables of the participants in the structure) – do not act as VAT taxpayers, and the activities performed by them should be treated as excluded from the scope of VAT taxation. The participant’s role is mainly to make funds available in the source account. These funds are then transferred to the agent’s account (through the participant’s account), in order to draw funds from the agent’s account (through the participant’s account) in case of shortages in the source account, in order to pay and receive interest.

g) Tax on civil law transactions 

In principle, a cash pooling agreement understood as a complex financial liquidity agreement should not be subject to tax on civil law transactions. However, specific provisions in the agreement could generate tax liabilities.