Cash pooling – thin capitalisation
Tax Alert 13/2015
06 October 2015
Cash pooling contract may be perceived as a loan agreement - this is the conclusion drawn by the Supreme Administrative Court in judgements regarding cases: II FSK 2033/14 and II FSK 3137/14 which were passed on 30 September 2015. As a consequence, the tax deductibility of the interest on such contracts is possible only in view of thin capitalisation regulations.
Cash pooling – tax deductibility of interest
In the oral justification of the decisions in respect of cases: file reference nos. II FSK 2033/14 and II FSK 3137/14, the Supreme Administrative Court stated that the system of cash pooling involved a loan contract in the meaning of Article 16.7b of the Corporate Income Tax Act (further called: the CIT Act). In result, as the Supreme Administrative Court pointed out - the tax deductibility of the interest linked with cash pooling is possible only taking into account thin capitalisation restrictions.
Regarding the first of the judgments (file reference No. I FSK 2033/14), the Supreme Administrative Court reversed the decision of the Provincial Administrative Court in Bydgoszcz, file reference No. I SA/Bd 208/14, allowing the taxpayer’s appeal against the individual tax ruling issued by the Director of the Tax Chamber in Bydgosz, No. ITPB3/423-345/13/DK. According to the description of the facts of the case supplied in the relevant tax ruling application, the taxpayer planned to join a zero-balancing cash pooling structure which consisted in physical transfers of funds to and from the bank accounts of the structure participants. The taxpayer’s question concerned the applicability of Article 16.1.60 and Article 16.1.61 in conjunction with Article 16.7b of the CIT Act (concerning thin capitalisation) to the interest paid by the taxpayer for the benefit the agent pursuant to the financial liquidity management contract.
Cash pooling contracts versus loan agreements
The Director of the Tax Chamber pronounced the position of the taxpayer to be incorrect. The authority indicated that the cash pooling agreement described in the application met the conditions for being classified as a loan agreement in line with Article 16.7(b) of the CIT Act.The line of reasoning followed by the Director of the Tax Chamber was that in this case the cash was transferred between entities and simultaneously (in line with the general logic of the liquidity management system), that cash had to be returned and a fee in the form of interest was generated, which was consistent with the rules of the system.
Upon examination of the appeal filed by the taxpayer, the Provincial Administrative Court in Bydgoszcz concluded that the relations between the participants of the system and the agent arising from participation in the system should not be classified as tantamount to granting a loan in line with Article 16.7b of the CIT Act, thereby reversing the tax ruling decision appealed against.
Based on the reasons for the judgement provided orally it can be inferred that the Supreme Administrative Court does not adhere to the viewpoint expressed by the Provincial Administrative Court to the effect that cash pooling cannot be perceived as a loan in the meaning of thin capitalisation rules. According to the justification of judge Jan Rutkowski, the rationale underlying thin capitalisation regulations is that such restrictions should apply to each contract involving mutual settlements where one side accepts and the other provides funds. Hence, thin capitalisation also covers innominate agreements such as cash pooling. The Supreme Administrative Court also pointed out that the CIT Act contained its own definition of a loan and therefore, invoking the definition given in the civil code should be seen as unfounded.
An analogous decision was passed in respect of the other of the cases mentioned above (file reference No. II FSK 3137/14). The Supreme Administrative Court reversed the decision of the Provincial Administrative Court in Warsaw regarding case: file reference No. III SA/Wa 277/14, which had allowed the taxpayer’s appeal against the individual tax ruling of the Director of the Tax Chamber in Warsaw, No. IPPB5/423-660/13-2/JC. As in the former of the cases, the description of the facts of that case provided that the taxpayer entered into a zero-balancing cash pooling agreement in PLN.
The Supreme Administrative Court was of the opinion that the actual purpose of the cash pooling agreement was to make cash available to entities of the same capital group and to derive benefits by such entities in the form of interest. Hence, as stressed by judge Stefan Babiarz in the reasons for the judgment provided orally, the cash pooling fulfilled the definition of a loan.
We would like to stress that it is rather difficult to analyse the arguments considered by the panel judges without knowing full details of the reasons for their judgments. It should also be stressed that according to the information given in the reasons for the judgment provided orally, circa 60 similar cases are awaiting the decision of the Supreme Administrative Court. Therefore, all interested taxpayers should monitor the case law on an ongoing basis.