CMS Expert Guide to cash pooling in Romania

a) Introduction

We often see cash-pooling arrangements used in practice by large groups of companies for the immediate needs of some of the group companies, this being considered a more flexible and faster source of financing. In Romania, cash pooling is not expressly regulated per se, therefore there is a mix of finance, corporate and tax regulations to consider before implementing a cash-pooling arrangement. 

Cash pooling is not yet implemented as a banking product by many Romanian banks, therefore we see it more often in cross-border cash-pooling arrangements coordinated by international banks either as stand-alone financing or ancillary to certain loans or factoring products offered to the banks’ customers. Cash pooling is very likely to be used more in the future, given the benefits it can generate. 

Accordingly, cash-pooling arrangements must be carefully structured to observe the relevant Romanian law and minimise liability risks that may affect participating companies at both shareholder and director level.

Although the concept of cash pooling is not specifically regulated under Romanian law, there are certain provisions that will impact on any cash-pooling arrangement.

b) Social interest and due diligence

When setting up a cash-pooling arrangement, consideration must be given to the overarching principle of corporate benefit: that any activity the company performs must be in the company’s commercial interest. There may be many reasons why a company can draw a benefit from a cash-pooling arrangement, and the directors should ensure that these clearly outweigh any disadvantages to ensure that the activity is of corporate benefit. At a practical level, directors may wish to document these reasons in the corporate resolutions approving the cash-pooling arrangements taken at the level of the board or general meetings of shareholders. 

It must also be borne in mind that, under Romanian corporate law, a company can only perform those activities specifically included in its official scope of business, as stipulated by its articles of association, and subsequently authorised with the Romanian Trade Registry. Agreements or activities that do not observe this requirement may be void and may give rise to liability for the company, typically in the form of fines and/or sanctions on the company’s directors. Although in practice it is still debatable whether companies carrying out cash-pooling activities (and thus intra-group loans) are required to include in their scope of activity the specific business activity regarding lending, it is advisable that a specific reference is nevertheless included in the company’s articles of association. This is because it is unclear whether the scope of activity regarding lending also applies to intra-group loans, which are considered as not carried out on a professional basis, or only to lending activities carried on a professional basis by credit institutions and non-banking financial institutions supervised by the National Bank of Romania (NBR).

c) Shareholder’s loan provisions

The submission of a group company’s excess cash to a cash pool, to be withdrawn by other group companies, may be construed as an intra-group loan and should be documented as such. However, under Romanian banking law the granting of loans on a professional basis can only be done by credit institutions and non-banking financial institutions. A breach of this rule can result in various sanctions, including but not limited to fines for the company, potentially corporate criminal liability, and up to three years’ imprisonment for the directors. 

However, in practice the long-standing position is that, in the absence of fulfilling the criteria for being considered a professional lending activity, intra-group loans structured as cash pooling are allowed, although there is nothing specific in law to state that. Nevertheless, it must still be noted that any business model involving the performance of activities such as credit institutions and non-banking financial institutions is subject to the ultimate assessment and control of the NBR. The NBR is therefore ultimately vested with the power to determine whether an activity, such as cash pooling, is a lending activity performed on a professional basis. 

d) Liquidity protection

The registered share capital of Romanian companies must meet the minimum amount required under Romanian law. If the directors become aware that the company’s equity is less than half of the required minimum, due to losses (negative equity), they must call a general meeting of shareholders without delay. 

The general meeting of shareholders must then resolve to dissolve the company, unless rectification measures are approved such as additional capital payments or decreasing the registered share capital. Directors should therefore be careful to ensure that the company’s contributions to the cash pool do not cause it to enter into negative equity, particularly if the contributions may not be recoverable, e.g. due to the insolvency of another cash-pool participant.

e) Hidden distribution of profits

The profit of a Romanian company should only be distributed to its shareholders based on a formal resolution of the general meeting of shareholders, with the observation of the specific Romanian corporate law requirements.

Romanian law strictly stipulates when a company’s shareholders may be entitled to receive payments (dividends) from the company, e.g. only after the shareholders pass a resolution in this respect at the end of a financial year or quarterly. 

Withdrawals from the cash-pool account by the cash-pool leader, and payments into it by the Romanian company participating to the cash-pooling arrangement, should therefore not infringe the relevant rules. Otherwise, there is a risk of the cash-pool arrangement being considered an invalid distribution of dividends, which could lead to sanctions for both the directors and shareholders of the concerned Romanian company. 

Additionally, in a cash-pool scenario it is important to ensure that any loans between the cash-pool leader and cash-pool participants are subject to prevailing market interest rates. An upstream loan cannot be granted without interest being paid to the master account at standard market rates and, conversely, downstream loans cannot be granted at excessively high rates of interest.

f) Insolvency proceedings: contestation of transactions

As a rule, shareholders and directors of a company must take all necessary measures to prevent the respective company becoming subject to insolvency/bankruptcy proceedings. If they fail in this and the company becomes insolvent, they risk certain transactions concluded within the two years or six months, as applicable, before the insolvency being annulled if they were detrimental to the creditors. An example is where a parent company requires its subsidiary to contribute to the cash pool before insolvency, so that the parent company can withdraw such funds to the disadvantage of the subsidiary’s creditors. If such a transaction is annulled, the parent would have to repay the sum representing the withdrawal.

a) Introduction

When setting up a cash-pooling arrangement, various liability risks may become relevant, especially regarding the directors and shareholders of the participant company. 

b) Liability of directors

As a director’s obligations are defined in his/her service/mandate/labour agreement and the law, the liability of a director can be both civil and criminal. A director’s breach of his/her service/mandate/labour agreement may result in contractual (civil) liability to the company, whereas a violation of law may result in tortious (civil) or criminal liability.

(i) Criminal liability

Generally speaking, a director of a company can be imprisoned for up to three years or receive fines if, in bad faith, he/she uses the assets or creditworthiness of the company for a purpose contrary to the company’s interests, for personal benefit, or in favour of another company in which he/she has a direct or indirect interest. Directors of more than one company in a cash-pool account should therefore be careful not to cause one company to make contributions to the cash pool that only benefit the other company. However, a carve-out exists in Romanian company law to permit and encourage treasury operations within groups of companies, suggesting that the interests of the cash-pool group should prevail over the individual interests of each participating company. It therefore appears that, to the extent an intra-group loan is granted in good faith without the intent of creating a negative impact on the financial situation of the lending company, the director would not have committed a criminal offence. In addition, any intra-group borrowing must not damage the interests of minority shareholders and creditors. If it does, the director risks criminal liability. To prevent this, the borrowing must be concluded on an arm’s-length basis (subject to standard market conditions) without causing the lending company any insolvency issues. 

(ii) Civil liability 

In addition to being liable to the company for a breach of his/her service/mandate/labour agreement, a director’s liability may extend to third parties, such the company’s creditors (in an insolvency case) or third parties who incurred a loss because of the actions taken by the director that were beyond the scope of his/her powers. It is therefore important that directors implement cash-pooling arrangements within the main legal structure noted above, e.g.: (i) with the need for corporate benefit; (i) by protecting the share capital; (iii) by observing the company’s articles of association; and (iv) by adhering to the relevant authorisation procedures. There are also numerous other offences relevant to cash pooling of which a director should be aware, including: (1) providing false information to the parent company; (2) paying or receiving dividends resulting from false profits or profits which cannot be distributed; (3) fraudulent management; and (4) possession of cash without registering it in the accounts.

c) Liability of shareholders

The general rule under Romanian company law is that the shareholders and the company are independent entities. In the case of joint stock companies and limited liability companies (which are the two commonly used types of legal entities in Romania), shareholders are only liable for the company’s obligations up to the amount of their subscribed and paid-up share capital (limited liability). However, there are certain exceptions to this rule, which in general mean that if the creditors can prove that the shareholders abused their limited liability, by reason of a fraudulent act contrary to the creditors’ interests, the liability of the respective shareholders becomes unlimited. Thus, if a participant in a cash-pooling arrangement starts to show liquidity problems, and it has contributions sitting in the pool account, the parent company would be unwise to make a withdrawal of that money to protect its own position. 

a) Introduction

With a view to reducing the risks which may be created by the cash-pooling system, the company’s financial status should be closely overseen, and the cash pooling should be adequately monitored. All companies that participate in a cash-pooling structure must sign cash-pooling agreements, under which the inter-company financing activities are properly documented.

b) Corporate power

Normally, the setting up of a cash-pooling arrangement should be approved by at least the boards of directors of the participating companies, depending also on the applicable legal provisions and the provisions of the articles of association. To avoid any potential liability of the directors and to ensure that the shareholders are aware of the cash pool’s operation, it is advisable that the general meeting of the shareholders authorises the entry by Romanian companies into cash-pooling arrangements and directors to carry out a cash-pooling arrangement by a resolution of the general meeting of shareholders. In any event, the company’s articles of association should always be checked for the specific authorisation procedures.

Any potential conflict of interest should also be carefully considered and addressed. A director who has a personal interest in a certain matter should refrain from voting and taking part in the decision-making process of the board.

c) Cash-pooling agreement

(i) Formalisation of the cash-pooling arrangement in a written agreement

To reduce the risk of liability associated with a cash-pooling arrangement, it is highly recommended for the arrangement to be set out in a written agreement. In the absence of a written document, it may be difficult to provide evidence of the rights and obligations of the participating companies. Moreover, the written form is necessary for fiscal purposes, to allow the deductibility of interest and net losses resulting from currency rate fluctuations.

(ii) Precautions to be taken regarding written agreements

The information rights and the suspension and termination provisions anchored in the cash-pooling agreement should provide adequate means to monitor the status of the participating companies effectively and be able to react appropriately to possible developments. 

Right to information

Once the cash-pooling system has been introduced, it is necessary to monitor constantly the credit status of the participants. If a group company suffers a liquidity crisis and fails to withdraw from the cash pool in sufficient time, it could endanger the liquidity of the entire group. Therefore, companies participating in a cash-pooling arrangement should be continuously updated about the financial situation, especially regarding the liquidity of the parent/treasury company and of the group in general.

Right to suspend or terminate the cash-pooling arrangement

The cash-pooling agreement should include provisions that allow participating companies to suspend or withdraw from the agreement if participation in the cash pool is no longer in the company’s interests.

d) Facility agreement

Large groups of companies considering implementing a cash-pooling programme usually already have financings in place obtained from credit institutions. When negotiating such financing, it would be useful for the companies to include upfront appropriate carve-outs from financial indebtedness and lending negative covenants in the facility agreement to allow the concerned companies to enter into cash-pooling arrangements. Otherwise, companies that are obligors under such facility agreement would first need to obtain the lenders’ consent under the facility agreement before entering into cash-pooling arrangements.

Further, at the company level intra-group loans will need to be documented via loan agreements/one master loan agreement to reflect the transfers under the cash pooling.

e) Guarantee

To the extent that the cash-pooling structure involves a bank providing group-wide credit facilities, the group companies involved may be required to provide guarantees to the bank regarding each other. As detailed above, as in the case of intra-group lending, to create a guarantee in favour of another company in the group, it is advisable to show the corporate benefit received by the guarantor in exchange for creating the guarantee, to protect the guarantee from challenges.

a) Introduction

Cash-pooling structures are not specifically regulated under Romanian tax legislation. However, from a domestic tax perspective, transactions carried out based on cash-pooling arrangements are considered to have a financing nature. While, as a general principle, a cash-pooling scheme could be contractually structured between the parties, from a tax perspective the transactions carried out pursuant to the cash-pooling contract should specifically be analysed on a case-by-case basis, also depending on the excess/shortfall position of the relevant party.

b) Thin capitalisation rules

Thin capitalisation rules no longer apply, as the interest deductibility is subject to the limitations provided in the Anti-Tax Avoidance Directive (2016/1164) (ATAD).

c) Interest deductibility

With effect from 1 January 2018, thin capitalisation rules have been abolished and replaced by the interest limitation rule in the ATAD. Under the transposed interest limitation rule, exceeding borrowing costs which are higher than EUR 1 million are deductible in the period in which they are incurred up to 30% of the calculation base. 

The calculation base is determined as the difference between the gross accounting profit and the tax-exempt income to which expenses with corporate income tax, exceeding borrowing costs and deductible tax depreciation, are added back. If the base calculation is zero or negative, the difference between exceeding borrowing costs and EUR 1 million cannot be deducted in the respective tax period and is carried forward without a time limitation. 

Exceeding borrowing costs represent the amount by which the deductible borrowing costs of a taxpayer exceed taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives.

d) Transfer pricing

Transactions concluded between related parties must comply with the arm’s-length principle (the price of the transaction must be set at the market value). Although not specifically regulated by Romanian transfer pricing legislation, lending and borrowing under a cash-pool mechanism can be classified as lending (crediting) operations. Therefore, irrespective of the position of the entities participating in the cash pool mechanism (excess cash and cash shortfall position), the actions taken as part of the cash-pool mechanism should be viewed as crediting (lending) operations and the related interest rates should reflect the market interest rates applicable to loans. 

Separately, Romanian companies might be obligated to prepare a local transfer pricing file, depending on various factors, e.g. the taxpayer’s category (large, medium or small), the applicable materiality thresholds (based on the annual value of the inter-company transactions) and the type of transaction (financial transactions, supply of services or purchases).

e) Withholding tax

Romanian income (interest or commission or service fees, depending on the specific type of cash pool arrangement) payers must withhold 16% tax of the gross payments. 

However, this withholding rate may be decreased or even eliminated under the double taxation treaties (DTTs) concluded by Romania or the EU Interest and Royalties Directive (the Directive). To claim the benefit of a DTT, an original valid certificate of tax residence must be provided by the income beneficiary, valid for the year in which the interest payments are made. Additionally, for certain DTTs that provide an interest exemption, other supporting documentation may have to be provided.

Similarly, to claim the benefits under the Directive, a valid certificate of tax residence must be provided by the income beneficiary, together with an affidavit attesting that the requirements under the Directive have been met. Separately, EU/EEA resident income beneficiaries may choose to adjust the domestic withholding tax through assessment on a net basis, i.e. by deducting costs related to the financing, subject to compliance with the relevant tax procedure.

f) Corporation tax

(i) Creditor (excess position) 

Interest earned by Romanian companies is included in the taxable profits and subject to 16% corporate income tax. 

(ii) Debtor (shortfall position)

Under the general tax deductibility rule, expenses (including interest expenses) are deductible if incurred for business purposes. However, the deductibility of interest expenses is subject to the specific ATAD limitation described above in the Interest deductibility section.

g) VAT rules

Transfers of funds between participants and the consolidated account constitute credit transactions that are exempt from VAT. The same should apply to the services provided by the cash pooler (managing the financial liquidity of the arrangement, maintaining the consolidated account, representing participants before the bank, and accruing interest and transferring it to other participants or charging interest), meaning VAT exempt as services concerning deposit and current accounts. 

However, a case-by-case analysis of the services provided by the cash pooler should be performed based on its economic substance and the contractual arrangements to determine the correct VAT treatment of the services.

Statistical reporting to the NBR 

If a group cash-pooling arrangement involves the participation of both Romanian and foreign companies, certain statistical reporting requirements of the NBR may need to be observed. One such example is that resident companies that have signed contracts with non-resident companies for foreign currency arrangements in the form of long-term private debt (e.g. a resident company receiving loans for more than one year), must notify the NBR’s statistics department of such arrangements within 30 days of the date of signing. 

However, due to recent changes to the applicable Romanian regulations, it may be the case that a cash-pooling arrangement does not fall under the reporting obligations related to long-term private external debt, but under reporting for statistical purposes regarding foreign direct investments. It is therefore advisable to check with the NBR all the required reporting obligations when entering the cash-pooling programme.