CMS Expert Guide to cash pooling in Slovenia

a) Intro

There is no specific legal framework that governs cash pooling in Slovenia. It is, however, important to ensure that any cash pooling structure meets the requirements imposed by general provisions relating to the companies in order to minimize the risks of any liability.

In Slovenia, any company can implement cash pooling, regardless of their organization, if this is permitted under a company’s articles of association or any bylaws. There are no provisions addressing the requirements on the current account used for cash pooling purposes, no restrictions on foreign investments in Slovenia and hence no restrictions to international cash-pooling.

b) Social interest and due diligence

As a general rule, the directors of a company have to act in line with the best interests of the company, in accordance with instructions given by the shareholders and with the due diligence of a prudent businessman. Thus, a director must not allow a company to enter into a cash pooling agreement if such an agreement would be detrimental to the company and the company does not receive adequate remuneration for its liabilities or contributions. 

c) Shareholder’s loan provisions

Cash pooling triggers the application of the general provisions on shareholder’s loans. When a shareholder of a limited liability company (in Slovenian “družba z omejeno odgovornostjo”) provides a loan to a company in such circumstances where he should have instead (acting with due diligence) provided capital, such member may not later pursue a claim against the company for repayment of the loan in bankruptcy or compulsory composition proceedings. The loan is considered to be a part of the assets of the company, for distribution to creditors. 

If a company repaid the loan in the year prior to the commencement of bankruptcy or compulsory composition proceedings, the member must compensate the company for a sum equal to the repaid loan amount. The above-mentioned rules similarly apply to shareholders of a joint stock company (in Slovenian “delniška družba”) who have more than a 25% share in the voting rights of the company.

d) Liquidity protection

Directors of a company are required to manage liquidity risks and observe the liquidity protection regulations. Directors could be liable for any damages caused by the company becoming illiquid, over-indebted or otherwise insolvent. 

e) Hidden distribution of profits

A company’s equity may not be used to make payments, or give other benefits, to the company’s shareholders unless there is a shareholder resolution providing for such payment or benefit (distribution of dividends or share capital decrease). However, distribution of profit should be interpreted broadly and does not mean only a payment made to the shareholder in the absence of a corporate resolution. It includes any benefit, service, permission or omission with the described economic effect. If transactions with no equivalent consideration decrease the subsidiary company’s assets, necessary for the maintenance of the registered capital and restricted reserves, such hidden profit distribution would be considered a violation of the capital maintenance rules.

From the tax perspective, when a shareholder owning directly or indirectly at least 25% of the capital in the tax payer (or controlling the payer on the basis of the contract or having influence over the payer) the following payments, that may be applicable to cash pooling structures are considered as hidden profit distributions: (i) interest on loans granted at an interest rate that differs from the arm’s length interest rate, (ii) interest on loans exceeding the thin-capitalization limit, (iii) providing assets or performing services, including the discharge of debts, without consideration or at a price that is lower than the comparable market prices. Hidden profit distributions are non-deductible expenditures and are subject to withholding tax as deemed dividends.

f) Insolvency proceedings – contestation of transactions

A contract executed by a company may be challenged if it was executed within 12 months before initiation of a bankruptcy proceeding if: 

• (i) the net value of company’s assets was reduced, and other creditors receive less, or (ii) the creditor received more beneficial conditions compared to other creditors for the repayment of its claim (i.e. security);
• but only (iii) if the creditor knew or should have known that the company is insolvent at the time such contract was executed.

The claw back period is longer (i.e. 3 years) when the contract is executed without a debtor receiving any counter-fulfilment or of a low value, even if the creditor did not know or should have known that the company is insolvent at the time such contract was executed.   

Please also see above under Shareholder’s loan provisions.

a) Intro

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

b) Liability of directors

Every director of a company must act with the due diligence of a prudent businessman and should not enter into agreements that are detrimental to the company. Thus, a director must not allow a company to enter into a cash pooling agreement if the company does not receive adequate remuneration for its liabilities or contributions. This will be an issue in a cash pooling arrangement where mutual settlement of participating accounts (i.e. net credit for net debt) is of detriment to a participating company and the cash pooling agreement does not provide for proper compensation for loss of net credit. A director will be liable to the company for damage arising because of a violation of his duties, unless the director can demonstrate that he fulfilled his duties fairly and conscientiously. Creditors of the company may also pursue a compensation claim by the company against the director if the company is unable to repay its debts.

c) Liability of shareholders

Unless there is an underlying shareholder resolution providing basis for the payment or benefit (e.g. a resolution on distribution of dividends or share capital decrease), a company’s equity may not be used to make payments, or give other benefits, to the company’s shareholders. Further, restrictions regarding up-stream and side-stream loans must be taken into the account. Up-stream loans in favor of a parent company by a subsidiary, which is a limited liability company, are allowed, if they do not contravene the capital maintenance rules. According to these rules, a limited liability company must not pay to its shareholders any assets necessary for the maintenance of the company’s registered capital and restricted reserves. The rule does not protect the registered capital of the company on a balance sheet only, but assets of the company for the purposes of paying the creditors in equivalent amount. 

Shareholders must refund to the company all payments which they received from the company in violation of the capital maintenance rules.  Such demands for repayment may also be made by the company’s creditors if the company fails to pay its debts. If bankruptcy proceedings are commenced, the refunding of payments may also be demanded by the bankruptcy administrator.

a) Intro

As noted above, a cash pooling agreement has to be of benefit to all companies entering into the agreement. The directors of the participating companies should therefore ensure that, on balance, the arrangement is of benefit to their company – and, it is suggested, document the same in the minutes of a board meeting.

Interest paid to a company contributing funds to the master account and interest paid by a company borrowing funds from the master account should be determined by the cash pooling agreement.

b) Corporate power

There is no requirement in the Slovenian Companies Act for a shareholder’s or management’s resolution for a company entering into a cash pooling arrangement or a loan agreement. Such resolution may, however, be required under the articles of association of a company and even when they are not required, they are usually nevertheless adopted in practice.   

c) Cash pooling agreement

In order to reduce the risk of liability associated with a cash pooling arrangement, it is advisable that a cash pooling agreement is entered in writing into by all the participants, to achieve clarity as to their rights and obligations and thereby reduce legal risks. 

d) Facility agreement

The facility agreement of the group with the bank should reflect the terms and conditions of the cash pooling agreement (namely the termination rights of each company) in order to reduce the risk of liability. Modifications of the conditions concerning the pool bank should only be permitted if all the participating companies agree – not just the parent company.

e) Guarantee

If, under the cash pooling arrangement, intra-group guarantees are given (with or without security) by the participating companies, it is necessary to ensure that restrictions regarding up-stream and side-stream collateral are taken into the account. Up-stream and side-stream collateral in favour of a parent and/or associated company by a subsidiary, which is a limited liability company, are allowed, if they do not contravene the capital maintenance rules. Please also see above under Liability of shareholders.

a) Intro

Cash pooling is a financing system, an internal distribution funds intended for balancing the liquidity of the cash pool participants. Hence, the Financial Authorities treat it as a system of providing loans between related parties (participants in the cash pooling system) and not as a system implemented for appreciation of investments (deposits).

b) Thin capitalisation rules

Except in the case of loan recipients which are banks and/or insurance undertakings, interest paid on loans received from a shareholder or partner that holds (directly or indirectly, at any time during the tax year) at least 25% of the capital or voting rights of the taxpayer is tax deductible if the loan does not exceed four times the amount of the shareholder’s or partner’s holding in the company’s share capital. If the loans exceed the shareholder’s or partner’s holding by more than four times, the company cannot deduct interest paid on the exceeding amount and must pay corporate income tax (at the rate of 19%) on such interest, unless the company provides evidence that it could have received the surplus from a lender who is a non-associated enterprise.

The amount of the shareholder’s or partner’s holding in the share capital of the company is determined (for the tax period) as an average on the basis of paid-in capital, retained earnings and reserves as at the last day of each month in the tax period.
Loans provided by third parties, including banks, for which a shareholder or partner gives a guarantee, and loans provided in connection with a deposit by a shareholder and/or partner, are also deemed to be “loans” within the jurisdiction of the thin capitalisation rules.

c) Interest deductibility

The general rule that, only those expenses that are directly required for the generation of taxable revenues are allowed as deductible expenses, applies for the interest expense as well. In addition, for the interest on loans to related entities to be deductible, transfer pricing rules and thin capitalization rules need to be observed.

d) Transfer pricing

According to the Slovenian Corporate Income Tax Act, in the case of loans between related parties the acknowledged interest rate should be applied for tax purposes:

• In order to determine the amount of taxable interest income, the contractual interest rate should be at least equal to the applicable acknowledged interest rate (or higher), otherwise taxable income should be adjusted.
• In order to determine the amount of deductible interest cost, the contractual 
  interest rate should be agreed up to the level of the applicable acknowledged interest rate. If the contractual rate exceeds the acknowledged interest rate, the tax-deductible expense should be lowered accordingly.

The applicable acknowledged interest rate is determined for each individual case as a sum of:

• the published acknowledged interest rate component by the Minister of Finance;
• the mark-up for maturity of a loan; and
• the mark-up for the debtor’s credit rating based on Standard & Poor’s ranking or that of another similar credit rating agency.

Since 2008, the legislation has enabled taxpayers to prove that their contractual inter-company interest rate, which is not in line with the applicable acknowledged interest rate, is at arm’s length. Consequently, the contractual interest rate agreed between affiliated persons can be used for tax purposes only if its arm’s length nature can be proved.

The parties involved can prove the arm’s length nature of their contractual interest rates by conducting a transfer pricing study. Furthermore, the tax authorities have issued written clarification that taxpayers can also use comparable interest rate quotes received from third parties or commercial banks. The acceptability of such quotes will, however, be considered by the tax authorities on a case-by-case basis.

In practice, this means that should the party to the cash pooling agreement, a tax resident of Slovenia, not be able to prove the arm’s length nature of the contractual interest rate, which would also not be in line with the acknowledged 
interest rate, it should make the necessary adjustments to the level of deductible / taxable interest through its annual corporate tax returns.

Additionally, note that any non-arm’s length interest paid by a Slovenian tax resident to an entity which directly or indirectly holds at least 25% of its shares 
or voting rights may be regarded as a hidden profit distribution and subject to withholding tax as a deemed dividend.

e) Withholding tax

As a general rule, tax will be calculated, withheld and paid at a rate of 15% on interest payments, except for interest:

• on loans issued, where the interest recipient is a Slovene resident and has notified the payer of his Slovene tax number;
• on loans, where the interest is paid to the Republic of Slovenia, local authorities in Slovenia or the Bank of Slovenia;
• on loans raised by and securities issued by the Republic of Slovenia;
• on loans raised and issued by an authorized institution, in accordance with the law regulating insurance and financing of international business transactions, for which guarantees are issued by Slovenia;
• paid by banks – other than interest paid to companies which have their seat, or place of effective management, or residence, in a country other than an EU member state, where the general and/or 
• the average nominal company tax rate is lower than 12.5% and the country is on a list published by the minister responsible for finance.
• on loans paid by Slovenia to a borrower of state debt securities on assets in line with Article 83 of the Public Finance Act.

Furthermore, in line with the implemented Interest & Royalties Directive, the tax will not be withheld on interest payments made to companies assuming a form to which the common system of taxation for interest payments made between associated companies (of different EU member states) applies, as laid down by the minister responsible for finance, provided that, at the time of payment:

1. the interest payments are made to the beneficial owner of a company of an EU member state (other than Slovenia) or a business unit of a company of an EU member state (other than Slovenia); and
2. the payer and the beneficial owner are related, so that
   1. the payer of the tax directly participates in at least 25% of the beneficial owner’s share capital or
   2. the beneficial owner directly participates in at least 25% of the share capital of the payer or
   3. where participation between companies of the EU is concerned, a parent company directly participates in at least 25% of the capital of both the beneficial owner and the payer;
   4. and, in each instance, the minimum 25% participation lasts at least 24 months; and
3. the payer or the beneficial owner is:
   1. a company assuming a form to which the common system of taxation for interest payments and royalty payments made between associated companies of different EU member states applies, and which are laid down by the finance Minister;
   2. in accordance with the tax laws of an EU member state considered to be a resident of that state for tax purposes and, under the terms of a double taxation agreement concluded with a third state, is not considered to be resident outside the EU; and
   3. a company subject to either one of the taxes to which the common system of taxation for interest payments and royalty payments made between associated companies of different EU member states applies, that are laid down by the finance minister, where a company exempt from tax is not deemed to be a taxpayer, or subject to a tax which is identical or substantially similar, and is additionally introduced, or replaces, the existing tax.

To apply for this exemption, permission from the Slovenian tax authority must 
be sought.

Finally, withholding tax may be reduced or even completely eliminated if interest is paid to a company resident in a country with which Slovenia has concluded a double taxation treaty providing for withholding-tax relief/exemption.

f) Corporation tax

Interest income declared in the annual corporate income tax return is subject to a general corporate tax rate of 19%. For deductibility of interest expense see above.

g) VAT rules

Interest income is exempt from VAT.

N/A