Understanding the Difference
Within multinational groups, cash pools, current accounts and short-term loans are commonly used financing tools to effectively manage liquidity requirements, ensuring that cash is available where needed and that excess cash is properly invested, whilst reducing the need for external financing.
As these three short-term funding arrangements pursue the same objective of efficient cash management and have similar features, they are often mixed up in practice. However, it is important to understand the distinctions, as each financing tool has different implications from a transfer pricing (TP) perspective.
Below we aim to shed light on each arrangement, whilst highlighting their key differences and outlining the most important TP considerations.
Cash pools are financing arrangements in which the cash balances of multiple affiliate entities (the cash pool participants) are consolidated on an overnight basis. Typically managed centrally by a treasury entity (the cash pool leader), the cash pool allows cash surpluses from certain entities to be offset against cash deficits from others, optimizing the allocation of working capital across the group.
Cash pools have particular features, notably that they are rarely, if ever, seen between independent enterprises, which requires careful consideration from a TP perspective. Furthermore, cash pools create synergy benefits by netting cash surpluses and deficits. These benefits need to be appropriately allocated among the cash pool members, depending on the functional profile of the cash pool leader. The involvement of a cash pool leader, who is entitled to an arm’s length remuneration for managing the cash pool, along with the potential inclusion of multiple currencies, adds another layer of complexity to cash pool set-ups.
Interest and deposit rates are initially (prior to allocating the cash pool benefit) set in line with the conditions the cash pool leader receives from a third-party bank. Given that these conditions might already be better than the conditions some cash pool participants would receive from third-party banks, it is already clear for those participants why they participate in the cash pool.
However, for other participants, the allocation of the cash pool benefit (i.e., the netting effect resulting in less interest to be paid by the cash pool leader, or the shift from paying interest to earning interest due to an overall deposit position, as displayed in the above figure) is crucial in showing why those cash pool participants are actually participating in the company’s cash pool.
Intercompany current accounts (or internal bank accounts) refer to a flexible financing form where one affiliate makes funds available to another affiliate, typically as a result of operational activities between them. The balances in these accounts typically fluctuate on a regular basis, with interest accruing on the outstanding amounts. Current accounts can usually be terminated at any time by each of the parties, with the balance and interest becoming payable upon termination.
Current accounts differ from cash pools in that they are bilateral arrangements between two affiliates, whereas cash pools involve multilateral agreements among multiple affiliates, and often involving an external bank rendering cash pool services. Given the one-on-one relationship between lender and borrower, the debt capacity and creditworthiness of the borrower in view of short-term funding (i.e., current accounts and short-term loans) are an important factor to determine arm’s length interest rates.
Unlike short-term loans, on the other hand, current accounts have no fixed term and are typically settled on demand. While current accounts are the most flexible financial instrument, given the lack of specific terms and conditions in view of tenor, seniority, etc., they can present challenges in discussions with tax authorities. It is particularly important to annually update the interest rate applied to current accounts and to avoid significant structural positions.
Intercompany short- and mid-term loans are debt instruments where a lender provides a specified sum of money to an affiliated borrower, with a defined maturity, typically up to a maximum of three years. Like cash pools and current accounts, they are commonly used to address temporary financing needs related to working capital. However, unlike these other financing forms, short-term loans involve a fixed principal amount that must be repaid according to a defined repayment schedule within the agreed-upon maturity period.
Like any other intercompany transaction, taxpayers should appropriately identify their intercompany financing arrangements, taking into account the specific facts and circumstances. For instance, it is important to determine whether a cash management structure qualifies as a cash pool from a TP perspective, or if it simply pertains to the management of current accounts. Additionally, taxpayers should ensure that the interest charges applied to these instruments are and remain at arm’s length. Considering the volatility on the markets, failing to regularly update interest rates comes with a risk.
For cash pools, putting a proper TP policy in place can be challenging, as this involves determining the arm’s length remuneration of the cash pool leader and allocating the cash pool benefit. In case the benefit is not shared but rather kept at the level of the cash pool leader, it is important to note that Tiberghien economics uses automated solutions that allocate the cash pool benefit to the different cash pool participants, allowing companies to keep their fixed interest and deposit rate margins but determine the monthly, quarterly or annual adjustment to be made in order to reflect those benefits in the cash pool rates to ensure compliance with TP regulations. These tools are easy to implement and require minimal intervention once established, with our assistance throughout the implementation process and thereafter.
Another important consideration is that when cash pool balances or current accounts become structural in nature (e.g., fluctuations only above a certain outstanding amount), they may be reclassified by tax authorities as loans. This reclassification can result in tax consequences, including the application of higher interest rates to reflect the longer-term nature of the positions. The existence of structural positions within a cash pool or current account should therefore be closely monitored.
It is important to ensure that financial transactions are properly documented in agreements and robust TP documentation. In this view, Belgian TP documentation requirements should be considered. Specifically, the Belgian local file form 275 LF requires qualifying taxpayers to disclose, for instance, the opening and closing positions of cash pools, as well as (cross-border) interest income and payments on cash pools, intercompany loans, intercompany payables and receivables (please see the table of the 275 LF form below for reference, which requires detailed information on cross-border financial transactions per business unit).
Furthermore, starting from the financial year 2025, the Belgian master file requires a more detailed description of the multinational's financing policies and arrangements, requiring to describe the financing mix as well as the intercompany financing instruments applied, which are, then, detailed in the local files. Hence, it is a good time to reconsider your financing mix as well as the financing instruments applied, i.e., your treasury policy, and document it accordingly.
Additionally, we note that tax authorities focus more on financial intercompany transactions with questions raised on the rationale of the financing itself. Where structural positions can result in tax consequences, the rationale of having a certain transaction in place as well as the debt capacity of a specific group entity can result in significant tax consequences. If tax authorities argue that certain financing transactions do not align with the arm's length principle, they may recharacterize them as (partial) intercompany equity transactions or relationships
We can provide comprehensive support in ensuring that your company applies and maintains consistent and compliant TP policies, both from a Belgian and a global perspective, and appropriately document those policies. Additionally, we provide customized solutions to optimize treasury operations in a tax-efficient manner, including comprehensive treasury policies.
Please do not hesitate to contact our specialists Kenny, Ive or Vincent if you want to know more about these solutions, or whether you have any question on the above.