CMS Expert Guide to cash pooling in Portugal

a) Intro

There are no specific laws governing cash pooling activities in Portugal. As far as we are aware, no judicial decisions on cash pooling have been handed down so far. Instead, one must look to various areas of Portuguese law (in particular, banking, corporate and insolvency law) in order to establish the parameters within which cash pooling may operate.

In Portugal, cash pooling arrangements are permitted among companies which are in a group or control relationship pursuant to the Portuguese Companies Law (PCL) even if they are not financial institutions. In fact, the benefit of cash pooling is that it is an exception to the rules governing the granting of credit as an activity reserved exclusively for financial institutions. In general, no special authorisation needs to be obtained by any of the entities participating in the cash pooling arrangement (other than the bank).

For this purpose, companies are in a group relationship where the whole share capital of one company is entirely owned by the other, either directly or indirectly.

A control relationship is established if one company holds the majority of the voting rights correspondent to the share capital of another company or, in general, whenever the former is able to exert a dominant influence over the latter. On the other hand, it should be noted that cash pooling arrangements are admissible either between Portuguese companies and Portuguese and non-resident companies which are in a group or control relationship.

b) Social interest and due diligence

There are few corporate law limitations on cash pooling arrangements. Cash pooling activities need not be listed as a specific corporate object in the articles of association of the company in order for the company to lawfully engage in such activities. Instead, they are treated as an ancillary activity, undertaken in order to further the main objects of the company (in the same way as lending money, granting security and giving guarantees). However, this type of structure must not be used for purposes of financial assistance (a target company must not provide funds or a guarantee with the aim of acquiring its own share capital).

In general terms, cash pooling arrangements do not conflict with the best interests of the companies involved and in fact the individual corporate interests of each company should prevail over the interests of the remaining companies participating in the arrangement.

However, in the case of companies which are in a group relationship pursuant to the PCL, disadvantageous instructions regarding, for instance, the execution of cash pooling agreements, may be issued by the managing company to the subordinated company if such instructions serve the interests of the managing company or the corporate group.

Although the issuing of disadvantageous instructions as set forth above, in order for such instructions to be considered lawful, the instruction cannot cause a disproportionate loss to the subordinated company that would result in its bankruptcy or insolvency. Therefore, the economic survival of the subordinated company must be undertaken as a limit to the right to issue disadvantageous instructions. 

As a result, in principle, disadvantageous instructions issued by the managing company shall not be considered illegal in case they generate possible losses for the subordinated company but, in any event, such instructions cannot deprive the subordinated company of liquidity to such an extent as to jeopardize its survival.

c) Shareholder’s loan provisions

Considering that cash pooling arrangements may be considered as complex mechanism to provide intra-group loans, the relevant restrictions shall considered therein, namely, the fact that a shareholder loan will be considered as subordinated to third-party loans in case of the company’s insolvency.

d) Liquidity protection

Generally, cash pooling arrangements do not directly impact on the net equity of the participating companies and instead have an impact on the companies’ liquidity. Notwithstanding, if one or more companies participating in the scheme face financial difficulties, the remaining companies may be confronted with a reduction in their net equity. 

If the net assets of a company fall to a level below half its share capital as per the accounts of the company, the directors should immediately request the conveyance of a shareholders’ meeting in which shareholders are required to take convenient measures such as the winding-up of the company, a share capital reduction to reflect the net assets of the company or the execution of capital contributions by the shareholders in order to reinforce the net equity of the company.

Portuguese law does not generally limit the amount of debt which a company can assume (unless certain thin capitalisation rules apply). The amount a Portuguese company may borrow (i) by way of a bonds issue is limited to a financial autonomy ratio of 35% to be calculated pursuant to the applicable rules of the PCL and (ii) by way of an issue of commercial paper is limited to a financial autonomy ratio of 35% to be calculated pursuant to the rules foreseen in the Portuguese Securities Market Commission (CMVM) Regulation no. 2/2014, of 9 October.

e) Hidden distribution of profits

Profits must only be distributed to shareholders subject to a formal shareholder resolution and in compliance with statutory and legal provisions. Hidden distribution of profits is not allowed. 

Hidden distribution of profits exist whenever the company makes payments or provisions to the shareholders without an equivalent consideration. In case of cash pooling operations, this indicates interest at standard market rates. Therefore, an upstream loan shall not be granted without interest being paid at standard market rates and downstream loans may not be granted at excessively high interest rates which are inconsistent with standard market rates.

f) Insolvency proceedings – contestation of transactions

Portuguese insolvency law does not specifically cover cash pooling agreements or arrangements. However, the opening of insolvency proceedings results in specific effects on certain ongoing contracts. Management agreements and current account agreements must be terminated upon the opening of insolvency proceedings.

The administrator appointed to the proceedings will be able to claim repayment of loans that the insolvent cash pool member may have made to the cash pool arranger.

Claims against the insolvent cash pool member will be filed with the administrator and be subject to subordination should the lender be considered a person or company with a special relationship to the borrower, i.e. a company which is or has in the past two years prior to the filing of insolvency proceedings been in a group or domain relationship with the borrower, or if the credit is considered to arise from a shareholder loan. In such case, the subordinated creditor would only be able to collect any portion of its credit after full redemption of privileged and common credit by the insolvent estate.

Acts carried out by the insolvent company to the detriment of the estate are subject to voidance and clawback by the administrator in the two years prior to the filing for insolvency. Maliciousness is assumed if the other party is a person or company in a special relationship with the insolvent. Redemptions of a shareholder’s loan made within one year prior to the filing for insolvency are also voidable by the administrator.

a) Intro

Cash pooling entails a range of liability risks both for management and shareholders of the participating entities.

b) Liability of directors

In general, directors of a Portuguese company are required to perform their duties with the diligence of a reasonably prudent businessman acting in the best interests of the company. Breach of such duty by directors will result in them being liable on a joint and several basis to the company, the company‘s shareholders and its creditors for any losses they suffer as a result.

The directors will be in breach of their duty if, for example, they enter into a cash pooling agreement on terms which may adversely affect the company or if they fail to withdraw from the cash pooling arrangement where the financial viability of the rest of the group deteriorates to such an extent that the company may not be able to recover sums it has contributed.

The directors may also incur liability if they fail to convey a shareholders’ meeting in circumstances where the net assets of the company fall to a level below half its share capital or if they fail to apply for a declaration of insolvency when it becomes legally mandatory.

In such circumstances, they may become jointly and severally liable for any debts of the company. This is in addition to any liability the directors may face on other grounds connected with the company‘s insolvency.

Liability of directors towards the company and its shareholders is excluded if and when the act or omission causing losses is determined by a shareholders resolution, even if such resolution may be annulled. This exclusion does not apply as far as liability as against creditors of the company is concerned.

Directors may incur in criminal liability if they cause the insolvency of the company as result of violation of their general management duties with serious negligence.

c) Liability of shareholders

Parent companies may be liable for obligations undertaken by companies they wholly own even though the companies which are in a group relationship are domiciled in different jurisdictions.

a) Intro

In order to reduce the risks of a group-wide cash pooling system to all participants and to mitigate shareholders and management liability, certain actions and provisions/procedures may be implemented in the context of the cash pooling transaction and the relevant agreements, as highlighted below. 

b) Corporate power

Pursuant to Portuguese law, a company can generally take part in a cash pooling system as an extension of the company purpose, which removes the need to amend the relevant articles of association. However, in some cases, a company's articles of association or internal rules may make participation in a cash pool structure contingent on a shareholders' resolution. As referred above, shareholder's resolution may also reduce the director's liability risk towards the company – even if liability against creditors of the company may not be excluded by way of a shareholder's resolution.

c) Cash pooling agreement

In order to reduce liability risks, the pool participants must be able to leave the cash pool agreement at any time without giving reasons. Only in this way can the directors avoid unlawful payments if a pool participant is in economic difficulties.

In order to exercise the termination right validly, the pool participants must have access to information on the financial situation of the pool leader and, if possible, of the other pool participants.

Where possible, it is advisable for the pool leader to enter into a control and profit transfer agreement with the pool participants to avoid unlawful payments.

Furthermore, it may make sense to include provisions in the cash pooling agreement prohibiting funds from being withdrawn from the pool participants if this would encroach into the pool participant's share capital or deplete its assets so far as to jeopardise its survival.

As far as the master account is concerned, the pool participant should not, if possible, have joint and several liability. In addition, if possible, upstream security should be avoided. If this cannot be achieved in negotiations with the relevant banks, limitation language should be agreed upon under which the bank agrees not to assert claims against the pool participant in a way which would deplete the assets required to preserve its share capital.

Another way of minimising risk is to agree on target balancing. This means that a certain level of funds is always keep in the pool participant's account to ensure that the pool participant has sufficient liquidity to cover its anticipated liquidity requirements for a certain period of time.

It is also important to ensure that any intragroup loans granted under the cash pooling agreement are subject to arm's length terms.

d) Facility agreement

The facility agreement should grant pool participants sufficient information rights to ensure that their management can monitor whether the company will be able to recover any relevant loan granted to the pool operator. In addition, the facility agreement should set forth the right for the pool participants to terminate at any time if there is any doubt as to the pool operator's financial standing. 

As a result, liability under PCL would be mitigated in case the directors would be able to ensure that funds are only transferred to the pool operator (master account) for as long as the individual loans can be repaid. An individual pool participant must leave the pool without undue delay if it becomes apparent that the pool operator will be unable to repay the loan. Thus, the pool participant must have access to information and must be able to leave the cash pool at any time without stating reasons.
 

e) Guarantee

Cash pooling bank agreements often require the pool participants to provide the bank with security for master account loans or to be jointly and severally liable for such loans.

Pursuant to Portuguese law, the provision of security for any debts of other entities shall be considered contrary to the purpose of the company, except in cases where the guarantor has its own justified interests on granting such security or it is in a group or control relationship. This will also apply to be jointly and severally liable for such other entities loans.

Since Portuguese law does not recognize a group relation for corporate law purposes when one of the companies has its headquarters outside Portugal, it is advisable for the shareholders resolution to be passed for purposes of the entering into of the cash pooling transaction by the participating company to state that the entering into the cash pool transaction and the granting of the relevant security is in the best individual interest of the company.

If security is nonetheless granted in breach of the above or in case there is evidence that the entering into the cash pooling is not in the own justified interests of the participant, such security will be deemed null and void and the pool participant's directors shall be liable for any losses thereby incurred by the company. This will also apply to be jointly and severally liable for such other entities loans.

a) Intro

Cash pooling schemes involving Portuguese entities may trigger Stamp Tax issues in Portugal. 

As a general rule, loans and guarantees (except if they are ancillary to a contract specifically taxed under the Stamp Tax General Table, and granted simultaneously to the secured obligation) whose contracts are deemed to take place in Portugal are subject to Portuguese Stamp Tax, at the applicable rates. 

Considering the mechanics of cash pooling, Portuguese entities involved in a cash pooling scheme should assess and deliver to the Portuguese Tax Authorities (“PTA”) Stamp Tax at a 0.04% rate per month, levied on the monthly average of the total daily debtor balances during each month divided by thirty.

However, a Stamp Tax exemption should apply to short-term loans (with a term of less than one year) granted in the context of a centralized cash management agreement (cash pooling agreement) provided that the relevant companies are in a control or group relationship . For this purpose, a control or group relationship is deemed to exist when one company holds, directly or indirectly, at least 75% of the share capital of other company (provided such participation confers more than 50% of the voting rights).

b) Thin capitalisation rules

No specific thin capitalisation rules apply in Portugal.

c) Interest deductibility

Financial costs related to loans used in the business of the company can be deducted for CIT purposes.

However, the Portuguese CIT Code sets out an interest barrier rule, under which the tax deductibility of net financial expenses incurred is limited to the highest of the following amounts:

• EUR 1M; or
• 30% of EBITDA

The net financial expenses that were not deducted for having exceeded the mentioned limits, can be carried forward over 5 fiscal years (“FY”), as long as, together with the interest expenses of such FY, they do not exceed the referred limits. Additionally, whenever the threshold is not reached in a given FY, the amounts that were not used will be added to this limit for the following 5 FY, until its effective utilization. 

d) Transfer pricing

Under the Portuguese transfer pricing rules, transactions carried out between related parties are to be valued at fair market value (on an arm’s length basis). For this purpose, the CIT Code refers to the OECD transfer pricing methods of valuation.

A special relationship is deemed to exist if one entity has the capacity to, directly or indirectly, influence, in a decisive manner, the management decisions of another entity (such a capability is deemed to exist, for example, in the event of a direct or indirect shareholding of at least 20%).

e) Withholding tax

(i) Domestic regime

As a general rule, interest due by Portuguese resident entities are liable to withholding tax at a 25% domestic rate.

(ii) Tax Treaty regime

Under the Portuguese Tax Treaties network, interest paid by a Portuguese resident entity to an eligible tax treaty entity is subject to reduced withholding tax rates of between 10% and 15%. Application of the reduced withholding tax rates on an upfront basis requires the completion of certain formal requirements aimed at certifying the eligibility of the beneficiary for the tax treaty protection provisions.

if, the relevant formalities are complied with (i.e., the non-resident entity should provide the Portuguese entity with a specific form, together with a document issued by tax authorities of its country of residence certifying its residency in that country).

(iii) EU regime

In addition, the withholding tax may be eliminated pursuant to the Interest and Royalties Directive, as transposed into the CIT Code, if the following requirements are met:

1. The beneficiary company is considered to be resident in an EU Member State;
2. The beneficiary company is subject to, and not exempt from, CIT;
3. The beneficiary company adopts a corporate form within those listed in the Interest and Royalties Directive relevant annex; 
4. The beneficial owner of the interest is an “associated company” or a permanent establishment of an “associated company.” A company is an “associated company” of a second company if: (a) the first company has a direct holding of at least 25% in the capital of the second company; (b) the second company has a direct holding of at least 25% in the capital of the first company; or (c) a third company has a direct holding of at least 25% in the capital of both the first company and the second company. The minimum holding must be maintained for an uninterrupted period of at least two-years; and
5. The non-resident “associated company” provides evidence, prior to payment, that it qualifies for purposes of the Interest and Royalty Directive.

Please note that until the two-years holding period requirement is met, any dividend distribution will be liable to withholding tax at the domestic rate of 25% or at the DTT rate (10% / 15%), which may be fully reimbursed once the minimum holding period is achieved. 

f) Corporation tax

Interest received by Portuguese entities should be included in the taxable profits, subject to CIT in general terms (CIT rate of up to 21%, plus a municipal surcharge of up to 1.5% and, possibly a state surcharge levied on taxable income in excess of EUR 1.5 M of up to 9%)

g) VAT rules

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

Not applicable.