This content is from: Germany

Germany: Global-China cash pooling and transfer pricing implications

Ulf Andresen
Yu Tao
The past year saw major movements towards liberalising the currency of the world's second largest economy, the Chinese Yuan or Renminbi (CNY). Such movements include the simplification of cross-border Yuan transaction procedures by the People's Bank of China, guidance for the Shanghai Pilot Free Trade Zone, and the opening up of global CNY offshore centres including Frankfurt.

German multinationals, some with huge accumulated CNY cash surpluses in China have had difficulty with cash repatriation. They now have the opportunity to use their surplus cash by connecting their Chinese and global cash pools. Successful pilot cases have been launched both within and outside the Shanghai Pilot Free Trade Zone (entities in this zone enjoy simplified procedures) and now banks are offering cash pool linkage as a product.

Transfer pricing challenges arise from the determination of arm's-length cash-pooling interest rates for CNY, mainly because of the co-existence of onshore and offshore interest and currency exchange systems. The two markets deliver different third-party benchmarks and mixed opportunity costs for the fund providers. On the other hand, fund users are able to borrow alternative free-trade currencies at lower interest rates. Here the rate difference is primarily driven by the evolving outlook of CNY exchange rates. This situation is further complicated by the mismatched expectations of the German and Chinese tax authorities on intercompany financing interest rates, built up from their historical experience. German multinationals that are interested in exploring this cash-pooling mechanism need to consider a number of transfer pricing factors, including the selection of benchmarked markets, identification of opportunity costs, hedging policy and costs, appropriate documentation, as well as the implication of the Chinese thin-capitalisation and German interest limitation rules.

Ulf Andresen (
Tel: +49 69 9585 3551
Yu Tao (

Tel: +49 69 9585 6408

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