The EU VAT committee published guidelines (page 228) on April 26 2018 on the VAT treatment of cash pooling arrangements. The committee, comprising representatives from the VAT authorities of the 28 EU member states, was set up to ensure the uniform application of the EU's VAT Directive, and issues non-binding guidance on VAT matters brought to its attention by a member state. This guidance was issued in response to a question from Poland.
Cash pooling is a commonly used financial product offered by banks that enables several affiliated entities of a group of companies to offset the balances of each of their bank accounts. It allows a negative balance of some entities that are part of the cash pooling group to be offset by the positive balance of other members, effectively concentrating the group's cash in a single place. A cash pooler manages the cash pooling and represents the participants before the bank. The committee was asked to provide guidance on whether the transfer of cash under a cash pooling arrangement could constitute a taxable service and, if so, whether any of the exemptions would apply.
The committee only examined 'zero-balancing' cash pooling, which means an actual transfer of funds between participants, rather than 'notional' cash pooling where no such transfer exists.
The committee first considered quasi-unanimously (with between 24 and 27 member states participating) that the transfers of funds between the participants and the consolidated account constitute credit transactions that are exempt from VAT under Article 135.1.b. of the VAT Directive.
The committee also looked at the treatment of the services provided by the cash pooler. These services include managing the financial liquidity of the cash pooling arrangement, maintaining the consolidated account, representing participants before the bank, and accruing interest and transferring it to other participants or charging them with interest. The committee unanimously decided that these services should be VAT exempt as services concerning deposit and current accounts under Article 135.1.d. of the VAT Directive. However, it would appear necessary to perform a case-by-case analysis of the services actually provided by the cash pooler based on their economic substance and the contractual arrangements to determine the correct VAT treatment of the services.
The committee did not address the VAT deduction right of the participants that was examined by the European Commission in its preparatory working paper released in October 2017 (and not binding on the committee). The provision of financial services does not come with the right to recover input VAT, except where the beneficiaries are not in the EU. In its working document, the commission considered that interest earned by the participants is the result of an incidental activity, so they must not include interest in the computation of the VAT deduction rights. For the cash pooler, the qualification of interest as an incidental activity will depend whether the cash pooler is an 'ad hoc' entity, a mixed holding company intervening in the management of its subsidiaries, or an operational company. A case-by-case analysis is necessary.
Although the committee's guidelines are not binding and do not address notional cash pooling, they provide a useful reference for practitioners.
