Cash pooling and withholding tax in light of the WHT Explanatory Notes of July 3, 2025 – question without answers

The modern world of finance is dominated by liquidity management. Companies, especially those belonging to international capital groups, focus on centralization in order to effectively manage cash surpluses and deficits. Cash pooling, a system that enables cash flow management within a group, is becoming not only a popular but also a key tool in this puzzle. However, as is often the case in life, where there is profit, doubts often arise. In the case of cash pooling, these doubts mainly concern tax issues, especially in the context of taxation of interest paid between entities from different countries.

Interest paid from Poland to foreign participants in cash pooling who make their funds available is subject to withholding tax (WHT) at a rate of 20%. However, this rate can be reduced, even to zero, if it is possible to determine who is the actual owner of this interest – the so-called beneficial owner. And here the fundamental question arises: how to determine the actual beneficiary, given that the Ministry of Finance, in its latest WHT Explanatory Notes of July 3, 2025, keeps silence on the subject of cash pooling? This topic, which is becoming increasingly common, still lacks any specifics. And yet the lack of clear guidelines is a recipe for interpretative confusion.

What exactly is cash pooling?

Cash pooling, in short, is a method of centrally managing cash flows within a capital group, allowing for the optimization of financial liquidity. Entities within the group transfer their funds to a joint account managed by a single entity, known as the Pool Leader. This may be a bank or an entity within the group. The Pool Leader ensures that the balances on the participants’ accounts are always balanced – it covers negative balances, and surpluses are transferred to its account.

However, as it happens in Poland…

Polish law still lacks clear regulations that would allow for an unambiguous definition of what cash pooling agreements should look like. And yet, if something is not named in the regulations, in practice it becomes an “innominate contract” – which results in misinterpretations and ambiguous situations.

Beneficial owner – who do we really mean?

In its Explanatory Note of July 3, 2025, the Ministry of Finance indicates that the beneficial owner must meet three basic conditions. First, they must receive payments for their own benefit and bear the economic risk associated with their loss. Second, they cannot be obliged to transfer all or part of the payment to another entity. Third, they must conduct actual business activities. Sounds logical, right? But how does this relate to the reality of cash pooling?

When the pool leader is a bank, the matter is usually relatively simple—the bank commits its own funds and is fully responsible for the interest. In the case of cash pooling organized by an entity from the group, the answer is not so obvious. If the Pool Leader commits its own funds, it seems that it should be the actual owner of the interest. But if it only “balances” the accounts and passes on the interest, it is difficult to consider it the actual beneficiary. What then? The so-called look-through approach should be used.

Look-through approach in the context of cash pooling

The explanations provided by the Ministry of Finance provide for the possibility of applying the look-through approach (LTA) in situations where the recipient of the receivable is not its actual owner. In the context of cash pooling, this may mean that the Pool Leader acts as an intermediary, transferring interest between the participants in the system. In this case, the WHT remitter may apply a reduced tax rate or exemptions in relation to the actual beneficiary.

Although the inclusion of LTA in the explanations should be viewed positively, the application of this mechanism first requires tax remitters to determine the actual owner of the receivables. However, at this point, a fundamental problem arises in determining the actual owner of the interest under cash pooling. It is necessary to determine how much interest went to each participant in the agreement. Sometimes, cash pooling agreements provide for monthly reporting of interest flows at the level of each participant, which allows for the fulfillment of withholding tax obligations and the application of a reduced rate or tax exemption.

It is worth noting that if the Pool Leader uses its own funds to cover negative balances, it may be considered the actual owner of the interest received in the relevant part. However, in most cases, obtaining such reports is not provided for and is sometimes even impossible. What then? There are at least several solutions. For example, if all companies participating in cash pooling are in the same tax residence, it is possible to take advantage of the reduced WHT rate provided for in the relevant double taxation agreement. Similarly, if each of the companies participating in the cash pooling agreement could benefit from tax exemption under the Directive. In this situation, once the other conditions are met, it is possible to exempt interest paid under cash pooling from taxation. The matter becomes more complicated when the participants in cash pooling are very diverse. In this situation, we encounter various models in practice, e.g., the application of the highest reduced rate from double taxation agreements with countries where the companies participating in the cash-pooling agreement are based (e.g., if the companies are from France, Italy, Denmark, Norway, and the highest reduced WHT rate under these agreements is 15%, the tax remitter applies a 15% rate to all interest). This approach, although common, is not always accepted by the tax authorities.

According to the Director of National Tax Information (tax ruling of November 10, 2017, ref. no.: 0114-KDIP2-1.4010.257.2017.1. JC): the tax remitter should determine the amount of tax due each time in relation to each interest payment made to individual participants. This position, given the fact that there is no legal or factual possibility of linking the interest to the recipient, requires the application of the basic withholding tax rate to the total interest paid under a cash-pooling agreement.

Ministry of Finance Eplanatory Note and cash pooling

The Explanatory Note describe several practical examples to illustrate the correct determination of the actual owner of the receivables, e.g., in connection with the operation of investment funds, holding companies, or OZZ. In the case of cash pooling transactions, however, the explanations do not provide any guidelines. It is therefore futile to look for information on who should be considered the actual beneficiary in the light of the Explanatory Note, or whether the highest reduced rate or exemption can be applied if all cash-pooling participants meet the conditions. How to deal with the lack of a factual and legal possibility to determine how much interest was attributable to each participant in the cash-pooling agreement?

The omission of this issue seems puzzling, to say the least, given that cash pooling is becoming an increasingly common way of managing cash flows and has long raised doubts about withholding tax.

Summary

Although the WHT Explanatory Note of July 3, 2025, makes a step toward systematizing the rules regarding beneficial ownership, it still fails to answer the question of cash-pooling. In practice, any analysis of the status of cash pooling will depend on the specifics of the agreement in question. And as is often the case in Poland, if the regulations do not keep pace with reality, practice will eventually force clear rules to be established – but unfortunately, this takes time.