German Federal Finance Court (BFH) on the add-back of debt interest in a cash pool under the trade tax law (“Gewerbesteuer”)

The pooling of liquidity is widespread in corporate groups because the advantages are obvious: expensive bank loans are avoided with regard to the amount of liquidity required by individual group companies and group companies with surplus liquidity can invest the same at better conditions than the usual bank interest rate. However, the economic risk of the individual group companies also increases as a result of the economic interdependence.

The forms of cash pooling are manifold. They range from de facto cash pooling (the manual balancing of liquidity) to automated physical cash pools implemented with the help of banks (in which the accounts of the participating group companies are balanced daily for the benefit of the cash pool leader) to fictitious cash pools (in which the managing bank only virtually balances the accounts and calculates the debit/credit interest of the group companies on this basis).

The cash pooling leads to legal and tax issues, e.g. with the add-back of debt interest under the German trade tax law (“Gewerbesteuer”). According to Section 8 No. 1 lit. a GewStG (German Trade Tax Act), the interest on debt, which is considered as an expense and as such reduces taxable profits in the first place, is to be added again to the trade income at one quarter and increases the profit on which the trade tax is based. Interest on debt may only exceptionally be offset against interest on credit balances if the underlying legal relationships are consistent, serve the same purpose and the interest is actually offset. The German Federal Finance Court (BFH) recently clarified (decision dated 11 October 2018) that this also applies in the case of cash pooling if a company is involved in the cash pool with several receivables/payables on the basis of the contractual structure. In order to avoid tax disadvantages, care must be taken to comply with the tax requirements when designing the cash pool.