Zero Balance Cash Pooling Definition

Pooling cash offers clear business benefits. All liquid capital is collected in one place, centrally managed and can be optimally distributed throughout the Group, so that it is less dependent on debt capital as a whole. However, there is one thing you should always be aware of when setting up such a system: cash pooling is often one of the reasons why tax authorities take a closer look. However, if you follow certain principles, you can minimize the risks and reap the economic benefits of centralized liquidity management. Cash pooling, also known as liquidity pooling, is a special form of liquidity management. It is mainly used in groups in which several companies are organized under the direction of a controlling society. Although the individual companies are legally independent, as the group as a whole acts as a strategic unit, mutual financial support and the distribution of liquidity between the different companies is in the interest of all parties involved. Take away. The advantage of cash pools stems from the fact that separate subsidiaries can use the company`s internal cash instead of bank loans for daily working capital.

Some caveats have always been important, but require closer compliance in light of tax and regulatory updates. The potential legal problems of cash pools can be found in corporate law and bankruptcy law. In the corporate sector, cash pooling could involve certain risks of expropriation for minority shareholders of subsidiaries by the parent company of the group. Depending on the terms of cash pooling, a subsidiary may be negatively affected by the group, either because a large part of its cash is separate from the parent company or because its funds are lent to another holding company, which could affect its day-to-day operations. In this context, it should be noted that Judgment 2/2014 of the Provincial Court of Barcelona of 20 January prescribes the right of partners to inform about the centralized management of the Public Treasury. However, several obstacles can complicate the implementation of cash pooling: fictitious cash pooling allows any company to work with its own lines of credit without having to transfer funds from a main account. By pooling interest payments, subsidiaries benefit from more attractive interest rates on lending and debt activities than they would have had individually. You should then get an overview of the account structures of the subsidiaries. A bank that offers a cash pool is responsible for the actual processing of payments.

The costs incurred play a central role here, as the solution should be cheaper than conventional banking transactions of individual companies. Technical issues relate to the file format for transactions (e.XML) and when the bank does not process payments. A cash pooling contract is an optional agreement between the company holding the main account and the bank if the cash pooling is automated and managed by a credit institution. Before implementing international cash pooling, it is best to learn about the tax and regulatory issues related to cash pooling or to obtain professional advice. Do you know all the ins and outs of cash management? Do you need a reminder on how to manage cash? Discover our Cash Academy – it`s a completely free cash management training repository! When reviewing cash positioning for a particular cash pool, the cash leveling feature allows bank transfers to be initiated between the concentration account and daughter accounts. The proposal is displayed based on the target balance, the management of minimum and maximum payment parameters in bank accounts, as well as the actual balance and variance. In cash management, a zero-balance account (ZBA) is a cash pooling system (to consolidate cash balances of multiple accounts and/or subsidiaries of a single organization). This system is designed to concentrate liquidity on specific accounts. However, when designing common treasury systems, treasuries must take into account aspects such as the legal and tax rules in force in the country of origin and destination of the funds (e.g.

revision of the rules required by the Bank of Spain, withholding tax, international double taxation, treatment of interest on intra-group loans, etc.). The design of the system should also take into account issues such as the choice of staff to manage the administration, the limitation of their powers, the number of banks and accounts involved and communication between banks and accounts. If, on the other hand, the balance of the group company on the main account is balanced or positive, it may be a return payment if a contribution made by the cash pool manager as a shareholder of a group company subsequently ends up in the main account as a liquidity contribution. Even in this case, the contribution is deemed not to have been made because the Group company does not have the money itself, but only a claim on the common cash. In practice, the funds can actually be constituted and operated («physically») or only virtually. In the first case, the pooled cash manager actually has a main account in which one group company deposits surplus funds and in which the other draws cash. On the other hand, it is also possible to leave the funds where they are and let them circulate only virtually between the companies and the main account (so-called fictitious pooling). In this case, the interest expense and income of the individual companies will continue to be calculated on the main account. This works because, after consultation, banks are willing to grant their loans to individual companies on terms that they would grant to the central manager of the cash pool.

If the physical group funds have a concentration account and that account has surplus funds, the cash levelling proposal will be to transfer funds from the concentration account to the daughter accounts. In order to limit dependence on a single provider, it may be advantageous to have two main accounts with different banks. In addition, each currency should have its own main account (unless a hybrid cash pooling system is chosen). International cash pooling (in a defined currency) requires two-tier pooling. A clearing bank in each country where accounts are held completes the first level of pooling. A cross-border international bank then manages the international pooling.