“XZ SA” is a Spanish parent of a tax consolidation group which is part of a multinational group. The Spanish group participates in the group’s cash pooling system, both as a borrower and as a provider of funds. The objective of cash pooling agreements is to manage the cash positions of the participating entities, optimising the group’s financial results by channelling the excess liquidity of the group companies that generate it to the group companies that need financing, resorting to third-party financing when the group itself is not able to finance itself. This achieves greater efficiency in the use of the group’s funds, as well as improving their profitability and reducing the administrative and general financial costs of the entities participating in the agreement. The tax authorities issued an assessment in which the interest rates on deposits and withdraws had been aligned and determined based on a group credit rating. A complaint was filed with the TEAC by XZ SA. Judgement of the TEAC The TEAC dismissed the complaint and upheld the tax assessment. The asymmetry in the treatment given by the taxpayer to credit and debit transactions in cash pooling is not admissible: As this system is configured, both types of transactions should have the same treatment; The analysis of the logic and philosophy that exists in transactions with financial institutions is not transferable to the cash pooling transactions involved here; in this, transactions that are channelled through the leading entity of the cash pooling, it follows from the functional analysis that it acts as a service provider managing and administering the cash pooling, but not as a credit institution that would assume the consequences of the contributions and drawdowns to/from the cash pool. And all the companies that are part of the cash pooling can be either contributors or receivers of funds, without it being generally known a priori what the debit or credit position of each of them will be. Reference is made to previous case law – TEAC, Case Rec. 6537/2017 and Supreme Court ruling of 5 November 2020 (appeal 3000/2018). Click here for English translation Click here for other translation ...

No member of the pooling arrangement would expect to participate in the transaction if it made them any worse off than their next best option. The analysis of an MNE’s decision to participate in a cash pool arrangement should be done with reference to its options realistically available, taking into account that an MNE can obtain benefits as a member of the cash pool other than an improved interest rate (see paragraph 10.146) ...

The cash pool member is likely to be participating in providing liquidity as part of a broader group strategy, an arrangement in which the member can have a credit or debit position, which may include among its aims a range of benefits that can only be achieved as part of a collective strategy involving the pool members, done for the benefit of all of the pool participants, and the membership of which is limited to entities within the MNE group. Pool participants deposit cash to the pool (or withdraw cash from the pool), and not to (or from) a particular cash pool member ...

The accurate delineation of cash pooling arrangements would need to take into account not only the facts and circumstances of the balances transferred but the wider context of the conditions of the pooling arrangement as a whole. For example, a cash pool is likely to differ from a straightforward overnight deposit with a bank or similar financial institution in that a cash pool member with a credit position is not depositing money as a transaction in isolation with a view to a simple depositor return ...

The accurate delineation of the cash pooling transactions will depend on the particular facts and circumstances of each case. As cash pooling is not undertaken regularly, if at all, by independent enterprises, the application of transfer pricing principles requires careful consideration. As paragraph 1.11 notes “Where independent enterprises seldom undertake transactions of the type entered into by associated enterprises, the arm’s length principle can be difficult to apply because there is little or no direct evidence of what conditions would have been established by independent enterprises.” ...

No member of the pooling arrangement would expect to participate in the transaction if it made them any worse off than their next best option. The analysis of an MNE’s decision to participate in a cash pool arrangement should be done with reference to its options realistically available, taking into account that an MNE can obtain benefits as a member of the cash pool other than an improved interest rate (see paragraph 10.146) ...

The cash pool member is likely to be participating in providing liquidity as part of a broader group strategy, an arrangement in which the member can have a credit or debit position, which may include among its aims a range of benefits that can only be achieved as part of a collective strategy involving the pool members, done for the benefit of all of the pool participants, and the membership of which is limited to entities within the MNE group. Pool participants deposit cash to the pool (or withdraw cash from the pool), and not to (or from) a particular cash pool member ...

The accurate delineation of cash pooling arrangements would need to take into account not only the facts and circumstances of the balances transferred but the wider context of the conditions of the pooling arrangement as a whole. For example, a cash pool is likely to differ from a straightforward overnight deposit with a bank or similar financial institution in that a cash pool member with a credit position is not depositing money as a transaction in isolation with a view to a simple depositor return ...

The accurate delineation of the cash pooling transactions will depend on the particular facts and circumstances of each case. As cash pooling is not undertaken regularly, if at all, by independent enterprises, the application of transfer pricing principles requires careful consideration. As paragraph 1.11 notes “Where independent enterprises seldom undertake transactions of the type entered into by associated enterprises, the arm’s length principle can be difficult to apply because there is little or no direct evidence of what conditions would have been established by independent enterprises.” ...

“X Iberica SA” is a Spanish subsidiary of a multinational group and also a participant in the group’s cash pooling system, both as a borrower and as a provider of funds. When the group is not able to finance itself, the vehicle called THE X TES US comes into play, which raises these funds from outside the group as a group and on the basis of the group’s credit quality. The objective of cash pooling agreements is to manage the cash positions of the participating entities, optimising the group’s financial results by channelling the excess liquidity of the group companies that generate it to the group companies that need financing, resorting to third-party financing when the group itself is not able to finance itself. This achieves greater efficiency in the use of the group’s funds, as well as improving their profitability and reducing the administrative and general financial costs of the entities participating in the agreement. The tax authorities issued an assessment in which the interest rates on deposits and withdraws had been aligned and determined based on a group credit rating. A complaint was filed with the TEAC by X Iberica SA. Judgement of the TEAC The TEAC dismissed the complaint and upheld the tax assessment. The asymmetry in the treatment given by the taxpayer to credit and debit transactions in cash pooling is not admissible: As this system is configured, both types of transactions should have the same treatment; The analysis of the logic and philosophy that exists in transactions with financial institutions is not transferable to the cash pooling transactions involved here; in this, transactions that are channelled through the cash pooling lead entity, it follows from the functional analysis that it acts as a service provider managing and administering the cash pooling, but not as a credit institution that would assume the consequences of the contributions and drawdowns to/from the cash pool. And all the companies that form part of the cash pooling can be either contributors or receivers of funds, without it being generally known a priori what the debtor or creditor position of each of them will be. For the determination of the arm’s length price, in the selection of the type of transaction used as comparable, it is not appropriate to start from the stand alone credit rating of the operating entities or economic beneficiaries of the financing, in this case, the Spanish subsidiary X IBERICA SA, but instead what is appropriate is the credit rating of the group. Excerpts “In the cash pooling system to which X Iberica SA belongs, the cash pool leader does not assume the same position as a bank, but merely administrative and management tasks, but does not assume the risk of default either from the economic or contractual point of view (in fact, there is no mention of this issue in XF BV’s annual report, nor is it mentioned in the current account agreement), but rather this risk is assumed by all the participating entities. The lead institution centralises the cash and grants financing to cash pooling institutions, but on behalf of the contributing institutions, which are the ones that actually have the funds to lend and assume the risk of default. In the context of the functional analysis referred to in the previous legal basis of this resolution, we must reiterate that the benefits of the operation accrue to all participants, and it would therefore be inconsistent to assign the functions of a financial institution to the centralised cash pooling system’s management entity, or the benefit that would accrue to it if we assign a higher rate to the loans than that applied to fund-raising. The functions that the claimant defends in its allegations as being assigned to the system’s managing entity are clearly limited, especially as regards decisions regarding the entities that use this system, which are the group entities according to their funding needs or surpluses. In this respect, we saw that the Guidelines link a greater risk assumed by the parties to a transaction with the assumptions of greater control over the activity we are analysing, which in this case is certainly scarce. We must therefore uphold the settlement arrangements and dismiss the claimant’s claims on this point as well.” Click here for English translation Click here for other translation ...