Poland vs Cash Pool B sp z.o.o., November 2019, Supreme Administrative Court, Case No II FSK 3798/17

At issue in this case was whether a deposit in a cash pool constituted a loan. According to the company, cash transfers made as part of cash pooling cannot be considered a loan agreement because they do not contain elements that are material to the content of such contracts.

In 2018 the provincial court issued a decision stating that a cash pool deposit constituted the granting of a loan irrespective of lacking written contracts.

This decision was then appealed to the Supreme Administrative Court by the company.

From the decision of the Supreme Administrative Court

From an economic point of view, the financial system presented in the application involves the granting of loans because, as a result of financing the negative balance shown by the contractual participant by a surplus of funds accumulated by other participants, the participant is not obliged to pay interest to the bank for his debit an invoice that would have arisen if the shortcoming had not been covered by another contracting party. In place of debt debit crediting, which appears on the account maintained by a given participant, such crediting is carried out under a cash pooling agreement with the funds not of the bank, but of other or other participants of the agreement, who showed a positive balance and who thereby also financed the negative balance of other participants.

In the light of the above, it should be considered that the actual purpose of the cash pooling agreement is to provide cash between entities of the group and to obtain benefits in the form of interest by these entities. Therefore, it is a type of loans granted between entities participating in this system. The form of carrying out the cash pooling agreement is irrelevant, since its purpose is to provide cash between entities from the group and to obtain benefits in the form of interest by these entities.

It is widely accepted that a cash pooling agreement is a form of effective financial management, used by entities belonging to one capital group or entities affiliated economically in any other way. It amounts to concentrating cash from individual accounts of individual entities on a joint group account and managing the amount accumulated in this way, using economies of scale . This allows offsetting the temporary surpluses shown by one of the entities with temporary shortages in other entities. Thanks to this, the costs of crediting the activities of the group’s entities are minimized by crediting with the use of the group’s own funds. As part of the cash pooling agreement, participants indicate an entity organizing cash pooling and managing the system, the so-called Pool Leader ( agent ), which can be a specialized bank, as well as a unit from a group. The system manager under the agreement provides financial resources for all system participants to cover negative balances, and in the event of positive balances on participants’ accounts, funds are credited to his account (see K. Szymaniak, Cash pooling and insufficient capitalization and transfer pricing documentation obligation) in the light of NSA judgments – the beginning of a new case-law or isolated decisions, Monitor Podatkowy 2016, No. 5, p. 18).

Contrary to the company’s view, the cash pooling agreement described in the application for individual interpretation meets the necessary conditions (essentialia negotii) of the loan agreement referred to in art. 16 clause 7b. Therefore, it can not reasonably be demanded that a cash pooling agreement , which should be included in unnamed contracts under Polish civil law, should fulfill all the material elements relevant to the contract named in a literally accepted manner in civil law. The lack of loan agreements prepared on the basis of the provisions of the Civil Code between participants of cash pooling does not preclude the possibility of recognizing certain transactions as meeting the definition in art. 16 clause 7b. This provision introduces its own definition of the aforementioned contract for the purposes of the provisions on so-called thin capitalization . It is also impossible to agree with the company’s arguments that in the agreement described in the application there is no obligation necessary for recognizing it as a type of loan an obligation to transfer a certain amount of money to the entity specified in the agreement , because the participants of this agreement do not know whether these funds will be used , in what amount and by which participant the other party to the transaction is not specified , there is no requirement to obtain the consent of the participant with a positive balance to transfer a specific amount of funds . On the contrary , the agreement described in the application expressly consented to the transfer of a certain amount of money to a specific entity – only by specifying the method of identifying and determining that entity . As the Court of First Instance rightly pointed out , in the same way it was indicated that there would be an agreement to commit to transfer funds to a specific entity . The other party to the transaction was determined by indicating how it was determined . Since the criteria and zeroing of balances are given , and the number of group members is constant , it is known in advance who and to what extent will be the other party to the transaction . Each of the participants in the agreement also agreed in advance to transfer the specified amount and method of funds in a positive cash balance . Therefore, the position of the Court of First Instance does not raise any objections that in the facts described in the application we are dealing with a loan agreement referred to in art. 16 clause 7b.

Acknowledgment that the provisions of Art. 16 clause 1 point 60 and point 61 in connection with art. 16 clause 7. causes the applicant to be obliged to draw up the documentation referred to in art. 9a. The position of the Provincial Administrative Court in Warsaw in this respect is correct . In accordance with art. 9a paragraph 1., Taxpayers making, among others transactions with related entities (within the meaning of Article 11 ( 1) and ( 4).) are required to prepare tax documentation of such transactions , taking into account the requirements set out in points 1-6 of this article . On the basis of art. 9a paragraph 2., The obligation to prepare documentation occurs when the total amount ( or its equivalent ) of transactions between related entities under the contract or actually paid in the tax year the total amount of benefits due in the tax year exceeds the values indicated in this provision . Therefore , it is necessary to prepare transfer pricing documentation when the following conditions are cumulatively met : transactions occur ; the transaction is carried out between related entities and the total amount of the transaction exceeds the amounts indicated in art. 9a paragraph 2.

The term ” transaction ” is not defined in art. 9a., Or in other provisions of tax or civil law, as a consequence of which it can be considered that it has no legal definition. In this case, according to the rule of priority of language interpretation, the dictionary’s meaning of the term, which appears in the general language, should be used ( see B. Brzeziński, Interpretation of tax law , Gdańsk 2013, p. 23 et seq., L. Morawski, Principles of interpretation of the law, Toruń 2006, p. 67 et seq., M. Zieliński, Law interpretation , Rules-rules-guidelines, Warsaw 2017 p. 291; resolutions of the Supreme Administrative Court composed of seven judges : from March 14, 2011, reference number II FPS 8/10 and from June 22, 2011 reference number I GPS 1/11). In terms of language, a ” transaction ” is a bank or trade agreement regarding the purchase or sale of something ; also conclusion of such a contract ; arrangement , agreement ( see E. Sobol (ed.), New Polish Dictionary , Warsaw 2003, p. 1041 ). The dictionary definitions of the term transaction also emphasize that the term also includes services and indicate that the transaction is a commercial operation involving the purchase or sale of goods or services ; commercial contract for the purchase or sale of goods or services ; also : conclusion of such an agreement.

Considering the above statements, it should be stated that this concept also covers the provision of services for consideration. Since making funds available to another entity for payment in the form of interest constitutes a loan within the meaning of Art. 16 clause 7b., The subject of which is the provision of a financial service against payment, this operation should be considered a transaction within the meaning of the common language. The consequence of this is the fact that this agreement covers the scope of art. 9a.

For these reasons, the allegations of the appeal as a misinterpretation and application of the indicated provisions of the Corporate Income Tax Act is considered unfounded. This obliged the Supreme Administrative Court to dismiss the complaint pursuant to art. 184 pps.

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Poland II 2019

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