Following an audit of Otis Servizi s.r.l. for FY 2007, 2008 and 2009 an assessment of additional taxable income was issued by the Italian tax authorities. The first part of the assessment related to interest received by OTIS in relation to the contract called “Cash management service for Group Treasury” (hereinafter “Cash Pooling Contract”) signed on 20 March 2001 between OTIS and the company United Technologies Intercompany Lending Ireland Limited (hereinafter “UTILI”) based in Ireland (hereinafter “Cash Pooling Relief”). In particular, the tax authorities reclassified the Cash Pooling Agreement as a financing contract and recalculated the rate of the interest income received by OTIS to be between 5.1 and 6.5 per cent (instead of the rate applied by the Company, which ranged between 3.5 and 4.8 per cent); The second part of the assessment related to of the royalty paid by OTIS to the American company Otis Elevator Company in relation to the “Licence Agreement relating to trademarks and company names” and the “Agreement for technical assistance and licence to use technical data, know-how and patents” signed on 1 January 2004 (hereinafter referred to as the “Royalty Relief”). In particular, the tax authorities had deemed the royalty agreed upon in the aforesaid contracts equal to 3.5% of the turnover as not congruous, recalculating it at 2% and disallowing its deductibility to the extent of the difference between the aforesaid rates. Not satisfied with the assessment an appeal was filed by OTIS. The Regional Tax Commission upheld the assessments and an appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Court decided in favour of OTIS, set aside the assessment and refered the case back to the Regional Tax Commission in a different composition. Excerpt related to interest received by OTIS under the cash pooling contract “In the present case, the Agenzia delle Entrate redetermined the rate of the interest income received by the OTIS in relation to the contract between the same and UTILI (cash pooling contract) concerning the establishment of a current account relationship for the unitary management of the group treasury. UTILI, as pooler or group treasurer, had entered into a bank account agreement with a credit institution in its own name, but on behalf of the group companies. At the same time, OTIS had mandated that bank to carry out the various tasks in order to fully implement the cash pooling agreement. Under this contract, all participating companies undertook to transfer their bank account balances (assets or liabilities) daily to the pooling company, crediting or debiting these balances to the pool account. As a result of this transfer, the individual current account balances of each participating company are zeroed out (‘zero balance cash pooling’). Notwithstanding the fact that the tax authorities do not dispute that this is a case relating to “zero balance cash pooling” (a circumstance that is, moreover, confirmed by the documents attached to the appeal), it should be noted that the same practice documentation of the Revenue Agency leads to the exclusion that, in the hypothesis in question, the cause of the transaction can be assimilated to a loan. In particular, in Circular 21/E of 3 June 2015, it is stated (p. 32) that “with reference to the sums moved within the group on the basis of cash pooling contracts in the form of the so-called zero balance system, it is considered that a financing transaction cannot be configured, pursuant to Article 10 of the ACE Decree. This is because the characteristics of the contract – which provides for the daily zeroing of the asset and liability balances of the group companies and their automatic transfer to the centralised account of the parent company, with no obligation to repay the sums thus transferred and with accrual of interest income or expense exclusively on that account – do not allow the actual possibility of disposing of the sums in question in order to carry out potentially elusive transactions’. These conclusions are confirmed in the answer to Interpretation No. 396 of 29 July 2022 (p. 5) where it is specified that ‘cash pooling contracts in the form of the so-called zero balance stipulated between group companies are characterised by reciprocal credits and debits of sums of money that originate from the daily transfer of the bank balance of the subsidiary/subsidiary to the parent company. As a result of this contract, the balance of the bank account held by the subsidiary/subsidiary will always be zero, since it is always transferred to the parent company. The absence of the obligation to repay the remittances receivable, the reciprocity of those remittances and the fact that the balance of the current account is uncollectible and unavailable until the account is closed combine to qualify the negotiated agreement as having characteristics that are not attributable to a loan of money in the relationship between the companies of the group’. That being so, the reasoning of the judgment under appeal falls below the constitutional minimum in so far as the CTR qualified the cash pooling relationship as a loan on the basis of the mere assertion that “the obligation to repay each other by the closing date of the account is not found in the case”. In so doing, the Regional Commission identified a generic financing contract function in the cash pooling without distinguishing between “notional cash pooling” and “zero balance cash pooling”, instead excluding, on the basis of the same documentation of practice of the Tax Administration, that in the second case (“zero balance”), a loan contract can be configured. The reasoning of the contested decision does not therefore make the basis of the decision discernible, because it contains arguments objectively incapable of making known the reasoning followed by the judge in forming his own conviction, since it cannot be left to the interpreter to supplement it with the most varied, hypothetical conjectures” (Sez. U. no. 22232 of 2016), the trial judge having failed to indicate in a congruous manner the elements from which he drew ...

HPI – CZ spol. s r.o. is a subsidiary in the Monier group which is active in the production, sales and services of roofing and insulation products. In June 2012 the Monier group replaced an existing cash pool arrangement with a new cash pool arrangement. The documents submitted show that on 1 April 2009 HPI concluded a cash pool agreement with Monier Group Services GmbH , which consisted in HPI sending the balance of its bank account once a week to the group’s cash pooling account – thus making those funds available to the other members of the group, who could use them to ‘cover’ the negative balances in their accounts. The companies that deposited funds into the cash pooling account received interest on these deposits at 1M PRIBOR + 3%; loans from the shared account bore interest at 1M PRIBOR + 3.75%. With effect from 1 June 2012, HPI concluded a new cash pooling agreement with a newly established company in Luxembourg, Monier Finance S.á.r.l. Under the new agreement, deposits were now remunerated at 1M PRIBOR + 0,17 % and loans at 1M PRIBOR + 4,5 %. HPI was in the position of a depositor, sending the funds at its disposal to the cash pooling account (but also having the possibility to draw funds from that account). Following an audit of HPI the tax authorities issued an assessment of additional income resulting from HPI’s participation in the new cash pool. According to the tax authorities the interest rates applied to HPI’s deposits in the new cash pool had not been at arm’s length. The tax authorities determined the arm’s length interest rates to be the same rates that had been applied by the parties in the previously cash pool arrangement from 1 January 2012 to 31 May 2012. HPI filed an appeal and in February 2022 the Regional court set aside the assessment issued by the tax authorities. The Regional Court held that the tax authority’s view, which determined the arm’s length interest rate by taking it to be the rate agreed in the old cash pool arrangement from 1 January 2012 to 31 May 2012, was contrary to the meaning of section 23(7) of the Income Tax Act. According to the Court it was for the tax authority to prove that the prices agreed between related parties differed from those agreed in normal commercial relations. In the absence of comparable market transactions between independent persons, the tax authority may determine the price as a hypothetical estimate based on logical and rational reasoning and economic experience. However, according to the Court the tax authorities did not even examine the normal price for the period from 1 January 2012 to 31 December 2012 but merely applied the interest rate from the cash pooling agreement in force until 31 May 2012. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court decided in favour of HPI and upheld the decision from the Regional Court. Excerpt “….The applicant described the operation of the cash pool until 31 May 2012. Monier Group Services GmbH was the managing member and the applicant sent the balance of the account to the cash pool after assessing its cash flow. As from 1 June 2012, Monier Finance S.a.r.l. became the managing member and the balance was automatically sent to the cash pool account on a daily basis. The balance in the applicant’s bank account was thus zero every day. In the event of a negative balance, the applicant would balance the cash pool account. As regards the sharp drop in the interest rates in the cash pool, she stated that they were set according to the interest rates provided for deposits by local banks. In order to encourage members to join the cash pool, the managing member of the group offered them a rate equivalent to 1M EURIBOR or IBOR + 0,17 % (or 0,174 % in 2016). Thanks to the automatic sending of funds to the cash pool, the applicant saved approximately CZK 100-150 thousand per year in bank charges. In the end, the members set the rate as 1M PRIBOR + 0.17%. The 0,17 % corresponds to the margin of the banks, which, however, deducted it from the reference rate of 1M PRIBOR. The members of the cash pool thus obtained a rate 0.34% higher than the conventional banks. Thanks to the interest rate on a daily basis, the appreciation was higher, and this is what made the new contract from 1 June 2012 different from the original contract. Monier Finance acted as an “in-house bank” for the members of the Group and charged a premium in the form of higher interest for the risks associated with lending money to the members of the cash pool and administrative costs. [19] The tax authorities have not demonstrated a difference between the interest rate agreed between the applicant and the managing member of the cash pool on the one hand and the benchmark rate on the other. Nor did the tax authority prove the reference price (rate) and, on the contrary, required the applicant to explain the difference itself. In short, the applicant’s profit from the interest on the cash pool deposits had decreased, the tax authorities saw no reason for such a decrease and therefore considered the rate which was higher (the rate agreed until 31 May 2012) to be in line with the arm’s length principle. However, it completely refrained from establishing the price that would have been agreed between independent parties and instead asked the applicant to explain the decrease in the agreed interest rate. … —The tax administrator required the applicant to explain the difference between the rates, without having even ascertained the comparative rate itself. Indeed, the tax authorities merely assumed that the original cash pooling agreement provided for a deposit rate of 1M PRIBOR + 3 %. The fact that the new rate was significantly lower could be a ...

A Group had established a physical cash-pool where funds from participants was transferred to and from a consolidating account (cash pool). The Polish Supreme Administrative Court concluded that every agreement in which the lender is obligated to transfer ownership of a specified amount of funds to the borrower, and the borrower is obligated to return the amount and pay interest, even if obligations of the parties to the agreement are implicit, constitutes a loan agreement. 2016 Decision Click here for translation 2015 Decision Click here for translation ...

Decision on the criteria for the arm’s length test of interest rates on inter-company loans. This case i about intercompany loans created by zero balancing cash pooling and the funding of group companies by a group finance company. The Swiss Federal Supreme Court states – If the terms of inter-company loans are not conforming to market conditions, then the payment qualifies as a distribution and a special reserve must be made in the balance sheet of the lender. The Court also states – It is questionable from the outset whether a participation in the cash pool, by which the participant disposes of its liquidity, can pass the market conditions test at all. Click here for translation ...

Zero balancing/physical cash pooling involves a physical transfer of money from the accounts of individual group companies to the accounts of the group’s cash pooling company and risks can be considerable. Group companies participating ind the cash pool may loose there funds. Loans in the form of cash pool arrangements must be agreed at arm’s length terms. Click here for translation ...