Intra-Group Lending: How to Set Up Cash Pooling to Avoid Unjust Enrichment
Within a corporate group, money moves faster than the documentation is created. The accountant books it as a receivable, no one worries about it for years, and the bill eventually comes from the financial administration or the insolvency administrator of the other company. The Prague-based legal team at ARROWS sets up intra-group financing for Czech holding companies. Below is a procedure for how to make money transfers between companies in a way that will hold up under scrutiny.
Key takeaways
Decision-making framework: whose money and which way it flows
Before setting it up, two things must be decided: which model you will use and which way the money will flow. The direction determines where the risk lies.
There are three models in practice. True cash pooling through a bank with daily balance settlement to a master account; ad hoc intra-group loans; and a combination where the group has a bank framework and re-invoices its drawdown among the companies. The first model requires the most documentation but holds up best because the money movements have a legal title in advance.
There are also three directions. Downstream financing, from parent to subsidiary, is the least risky: the parent is deciding about its own assets. Upstream financing, from subsidiary to parent, is the riskiest because the subsidiary deprives its assets of liquidity for the benefit of its shareholder. Cross-stream financing between sister companies is in the middle and must be justifiable from the perspective of the company providing the money; the group interest only applies within a formal group structure (koncern).
The decision-making also includes who decides in the individual companies. The executive director of a subsidiary sending money upstream bears the responsibility for acting with due managerial care, even when it is an instruction from the sole shareholder. We discuss setting up relationships in a holding structure in the article Prevention of disputes in a holding company.
Step-by-step procedure
The order is more important here than elsewhere, because a missing document cannot be retroactively supplied without tax risk.
The first step is to choose the model and determine the company that will manage the pool. For bank pooling, this includes the contract with the bank and the mutual collateral that the bank will require.
The second step is a framework agreement signed before the first transfer. It should include the interest rate for both parties, the maturity or notice period, drawdown limits for each company, rules for collateral, and the provider's right to refuse a transfer if it would endanger its operations.
The third step is to set the interest rate and document it. The rate is set for both parties, i.e., for deposits and for drawdowns, and must be supported by a transfer pricing analysis for your specific structure. A bank's offer is one of the comparative documents, but it is not sufficient on its own: the credit profile of the participant, the currency, the duration of the balance, the collateral, and the function of the company managing the pool are all assessed. Without this documentation, any discussion with the tax administrator about the interest rate is lost in advance.
The fourth step is to verify the capacity of the company providing the money. In addition to liquidity, this includes checking whether the transfer will not jeopardise the maturity of its own debts, and for profit distributions, the statutory insolvency test.
The fifth step is the decision on collateral and limits. In a group where one subsidiary generates cash and another consumes it, a cap on exposure to a single company and reporting when this cap is approached has proven effective.
The sixth step is corporate housekeeping. In the case of a contract with a controlling person or a sister company, the executive director informs the supervisory body, or if one is not established, the supreme body; this obligation does not apply within a formal group (koncern). This also includes the disclosure of the group, an assessment of any conflict of interest for an executive director acting on both sides, and minutes showing the basis on which the decision was made.
The seventh step is a regular review. Once a year, the rates are checked against the market, the ratio of loans from related parties to equity is reviewed, and it is determined whether receivables within the group are in fact unenforceable. For loans with no agreed maturity, the statute of limitations is also monitored, where the Grand Chamber of the Supreme Court changed the starting point in its judgment 31 Cdo 3263/2024: the three-year period does not run from the provision of the money, but from the day the lender knew or should and could have known that the notice period had expired upon termination. We discuss this in the article Statute of limitations for a loan with no agreed maturity.
What is standard on the market and what is a warning sign
For well-structured groups, the standard is a framework agreement on intra-group financing, in which each company has a set limit and two rates, along with simple transfer pricing documentation and a quarterly balance sheet summary submitted to the statutory bodies. It is also standard for the agreement to allow the provider to refuse a transfer—without this right, the executive director of a subsidiary finds themselves in an untenable position.
It is also standard to separate short-term liquidity balancing from long-term investment financing: the former is handled by pooling, the latter by a separate loan with a repayment plan and collateral.
There are three warning signs. The first is a receivable within the group that only grows and is never repaid—after years, it is effectively a contribution to another company, but without corporate treatment and with tax consequences. The second is a zero or symbolic interest rate on a transfer to a shareholder, because this combination brings together both corporate and tax risk; we cover loans between a company and its owner in the article Loans between a company and its owner.
The third sign is an unmonitored ratio of financing from related parties to equity and an unmonitored volume of interest expenses. Both end with part of the interest ceasing to be tax-deductible, and the company only finds out during an audit.
Where the legal line is drawn
Intra-group financing is assessed on three levels: civil law (is there a legal title?), corporate law (did you not cause harm to the company?), and tax law (is the price at arm's length?).
The civil law level is the simplest and most often overlooked. According to Section 2390 of the Czech Civil Code, a loan agreement is created when the lender provides a fungible item to the borrower to use and, after a time, return an item of the same kind. A written form is therefore not a condition, and a loan can be created orally or by the conduct of the parties; this was also how the case decided by the Grand Chamber under file no. 31 Cdo 3263/2024 was assessed. Without a written record, however, you cannot prove either the interest or the maturity: according to Section 2392, interest can be agreed upon, meaning it does not arise without an agreement, and according to Section 2393, if the repayment date is not specified, maturity depends on the termination of the contract with a six-week notice period. Only if no legal title can be proven does it become unjust enrichment under Section 2991, i.e., an obligation to surrender what the other party was enriched by, with a different maturity and statute of limitations regime.
The corporate law level is tougher. According to Section 71 of the Czech Business Corporations Act, anyone who, through their decisive influence, significantly affects the behaviour of a corporation to its detriment shall compensate for the damage, unless they prove that they could have reasonably assumed in good faith that they were acting in an informed manner and in the justifiable interest of the influenced person. If the influential person does not compensate for the damage by the end of the accounting period in which it arose, or within another agreed reasonable period, they shall also compensate for the damage caused to the shareholders of the influenced person. In addition, the influential person is liable to the creditors of the influenced person for those debts that the influenced person cannot meet as a result of the influence. The defence that the damage arose in the interest of the group and was or will be compensated is provided by Section 72—but only where the controlled person is actually subject to unified management under Section 79, and only for those who have disclosed the existence of the group on their website; and it does not apply at all if the conduct of the controlling person led to the insolvency of the controlled person.
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Furthermore, under Section 40 of the Czech Business Corporations Act, a corporation may not pay out a share of profits if it would thereby cause its own insolvency, which also applies to advances, and may not provide a gratuitous benefit to a shareholder or a person close to them, with the exception of customary occasional gifts and a few other cases. For an interest-free loan to a shareholder, it is therefore necessary to assess whether it is not a performance without consideration. The insolvency test under Section 41 also applies mutatis mutandis to financial assistance, i.e., a loan or security provided by the corporation for the purpose of acquiring its own shares.
The tax level has three rules. According to Section 23 of the Czech Income Tax Act, the tax base is adjusted if the prices agreed between related parties differ from prices between unrelated parties and the difference is not satisfactorily documented; related parties are mainly persons with a share of at least 25% in the capital or voting rights. The law makes one practical exception to this rule: it does not apply if the agreed interest is lower than the market rate and the creditor is a tax non-resident or a member of the corporation who is a Czech tax resident, or an individual income tax payer. The status of the creditor is therefore decisive, not the direction of the money: the exception typically applies to a low-interest loan from a parent to its subsidiary, because the parent is a member of the corporation, whereas the opposite direction generally does not meet the condition.
The second tax rule is thin capitalisation. Under Section 25 of the same Act, financial expenses from that part of credit financial instruments from related parties that exceeds four times the equity, and six times for a bank or insurance company as the recipient, are not deductible; demonstrably interest-free instruments are not included in the test. In addition, for non-residents, non-deductible interest is considered a share of profits under Section 22(1)(g), which changes the withholding tax regime; an exception is interest paid to residents of another European Union state, the European Economic Area, or Switzerland.
The third rule is the limitation on the deductibility of excess borrowing costs under Section 23e of the Czech Income Tax Act. The profit or loss is increased by the amount by which excess borrowing costs exceed the limit, which is the higher of 30% of the tax profit before interest, tax, depreciation, and amortisation (EBITDA), or CZK 80,000,000. This test is separate, is not limited to financing from related parties, and may apply even if the interest is at market rate and you comply with the thin capitalisation rule. The non-deductible amount may be claimed in subsequent periods under further conditions.
Potential problems | How ARROWS can help (consultation@arws.cz) |
|---|---|
Transfers without a contract: money has been sent within the group for years without a legal title | We will prepare a framework agreement and rectify the existing situation. We will also assess the statute of limitations and maturity of existing receivables |
Low or zero interest: the tax administrator adjusts the tax base | We will set the rates and prepare transfer pricing documentation. We will assess which transfers the exception for lower interest applies to |
Money flows upstream to the shareholder: the subsidiary lacks liquidity for its own debts | We will assess the risk of harm and the executive director's liability. We will add limits and the right to refuse the transfer |
Unmonitored interest expenses: part of the interest ceases to be tax-deductible | We will calculate the thin capitalisation and the excess borrowing costs limit. We will propose adjustments to the structure, or the capitalisation of the receivable |
Undisclosed group (koncern): the group cannot use the defence of compensation within the group | We will disclose the group (koncern) and set up the decision-making and approval process. We will prepare the documentation for the minutes of the corporate bodies |
Final summary
Set up intra-group financing as a product, not an accounting operation. Sign a framework agreement before the first payment is sent, set two rates and limits for each company, give the provider the right to refuse a transfer, and review it once a year against the market and your own equity.
There are three legal boundaries, and each can delay a project in a different way. If no legal title is proven, it is not a loan but unjust enrichment; a transfer to the detriment of the company creates an obligation to compensate for the damage and, in addition, the liability of the influential person for debts that the subsidiary cannot meet due to the influence; and a price outside the arm's length level means an adjustment of the tax base, and for non-residents, also an impact on withholding tax. The Prague-based law firm ARROWS builds these structures as part of its Corporate Law, Holdings, Structures service and is insured for professional liability with a limit of CZK 350,000,000. Write to consultation@arws.cz.