The Voivodship Administrative Court in Warsaw, in a judgment handed down on February 20, 2014, case ref. III SA/Wa 2562/13, held that a cash pooling agreement, as an innominate contract, is not identical to a loan agreement, and therefore is not subject to the CIT Act regulations concerning thin capitalization. The Voivodship Administrative Court in Wrocław took the same stance, in a similar case, in a judgment of February 11, 2014, case ref. I SA/Wr 2007/13, I SA/Wr 2008/13, in which it pointed out that a cash pooling agreement and a loan agreement additionally differ in that at the time of executing a cash pooling agreement, pool system members do not undertake to transfer any amounts of cash, not to mention any specific amounts of cash, to other pool members. No other entities can be identified to benefit from the positive balance of a pool system member. In consequence, all interest accrued on transfers and reimbursements made under a cash- pooling agreement will not fall within the remit of Art. 16 Sec. 1 Clause 60 or Clause 61 of the CIT Act.
The cash pooling system is a popular tool to ensure financial liquidity within a corporate group, to reduce the costs of financing and to secure a lower level of external debt, which is at the same time devoid of certain burdens and limitations resulting from the tax provisions that are characteristic to e.g. loan agreements.
Until recently, tax authorities uniformly took the view that the provisions on thin capitalization do not include cash pooling agreements in their scope. However, in the second half of 2013, the Minister of Finance altered his position (please see, inter alia, the tax ruling issued by the Director of the Tax Chamber in Poznań dated July 11, 2013, no. ILPB4/423-118/13-2/MC) and found that transfers of funds among the participants of a cash pooling system do fulfil the conditions to be classified as the loan agreement defined in Art. 16 Sec. 7b of the CIT Act. As a result, the tax authority found that the interest paid in connection with participation in the system is subject to the limitations set forth in Art. 16 Sec. 1 Clause 60 and Clause 61 of the CIT Act. A stance to the contrary is still consistently presented by tax authorities in tax rulings (please see, inter alia the tax ruling issued by the Director of the Tax Chamber in Poznań of February 26, 2014, no. ILPB4/423-473/13-2/ŁM, and the tax ruling issued by the Director of the Tax Chamber in Katowice of January 27, 2014, no. IBPBI/2/423-1414/13/AK), even despite the view expressed in administrative court judgments, which is favourable to taxpayers.
As a result, judgments of administrative courts confirming the lack of the possibility of applying the provisions on thin capitalization to cash pooling agreements might represent an argument in a potential dispute with the fiscal authorities of material significance to taxpayers who – based on the positive stance of the tax authorities – have already acceded to the cash pooling system without first obtaining a tax ruling.
On the other hand, with respect to businesses that are still intending to accede to a cash pooling agreement, they might consider seeking a positive tax ruling from the fiscal authorities as a result of an appeal to the administrative court. The choice of this strategy might turn out to be particularly beneficial in view of the planned amendments to the provisions on income tax with respect to tightening up the standards relating to thin capitalization which, after the effective date planned for early 2015, provide for a change in the ratio of debt- to-equity from 3:1 to 1:1. In the absence of a positive tax ruling, the said changes combined with the negative view of the fiscal authorities might significantly reduce the effectiveness of securing funds within the corporate group. Obtaining a positive tax ruling might, in turn, secure the position of the business and, as a result, the planned changes would not affect the tax effects of participation in the system.
Notwithstanding the above, it is our view that even despite the negative attitude of the tax authorities, cash pooling systems still constitute a solution that is attractive to business, also due to the lack of VAT and CLAT burden connected with financing.