In the context of German tax audits, the tax authorities are increasingly focusing on structural deposits made by German cash pool participants. The term ‘structural deposits’ is used when a participant’s cash pool balance remains consistently positive over a prolonged period, i.e. it maintains a minimum level that is not fallen below for years on end, despite operational fluctuations in day-to-day business.

From an economic perspective, such a portion of the balance that is permanently tied up in the cash pool may take on the character of a long-term deposit. Both the OECD Transfer Pricing Guidelines (paragraphs [para.] 10.122 et seq.) and the Administrative Principles on Transfer Pricing 2024 (para. 3.154) provide for a separate treatment of such long-term cash pool positions. In particular, in inbound scenarios involving a foreign cash pool leader, the tax authorities scrutinise these positions closely and attempt to impose profit-increasing adjustments with significant financial implications by reclassifying them as long-term deposits and applying higher benchmark interest rates. Companies should therefore review their cash pool structures and transfer pricing documentation at an early stage in order to minimise potential risks during a tax audit.Im Folgenden haben wir für Sie die wichtigsten Prüfungsaspekte sowie Empfehlungen zur Dokumentation und Risikominimierung zusammengefasst.

The starting point for any tax audit is an analysis of the balance trends of the German cash pool participant over the audit period. If the tax authorities identify a permanently positive minimum balance, they assume that this portion of the balance is no longer supported by a short-term liquidity function and is therefore no longer adequately remunerated by short-term money market rates. However, the tax authorities often carry out only a limited analysis of the actual economic function that this portion of the balance fulfils within the specific group context.

However, a purely quantitative assessment of the balance falls short. There are a number of economically plausible reasons why a cash pool balance may remain positive over a longer period without the underlying deposit thereby losing its short-term nature. A proper assessment must take these economic factors behind the balance development into account.

Closely linked to the question of the economic reasons behind the development of the balance is the point in time to be taken as the basis for assessing arm’s-length conditions. In practice, the tax authorities typically adopt an ex post approach: they analyse the historical development of the balance over several financial years and, based on the consistently positive minimum balance, retrospectively infer the long-term nature of the contribution.

From a transfer pricing perspective, however, an ex-ante assessment is decisive (Section 1(3) sentence 4 of the German Foreign Tax Act (AStG); paragraph 3.74 of the OECD Transfer Pricing Guidelines). The decisive factors are the expectations and plans of the cash pool participant at the time of the deposit, particularly with regard to the planned use of funds and foreseeable liquidity requirements. If funds are contributed to the cash pool on the basis of a short-term intended use that is verifiable ex ante, their short-term nature may be retained even if economic circumstances subsequently develop differently and the balance remains positive for longer than originally expected. A retrospective reclassification based solely on the actual development of the balance fails to take this perspective into account.

A particular aspect of the audit approach becomes apparent in situations where the German company reports interest-bearing intra-group loan liabilities alongside its structural surplus of capital contributions. In such cases, the tax authorities argue that the liquidity tied up in the cash pool could have been used economically to repay the higher-interest group loans, and base the interest adjustment accordingly on the interest rate of these loans.

However, this link is not mandatory. In business practice, liquidity provision and long-term financing are managed separately; the underlying economic functions and maturity profiles are not comparable. Furthermore, repaying the group loans using the liquidity tied up in the cash pool would significantly restrict the company’s liquidity flexibility. The interest rate on parallel group loans therefore generally does not constitute an appropriate benchmark for the interest rate on a reclassified cash pool position.

Structural deposits in cash pools are becoming a key focus of German tax audits, with potentially significant financial implications for German group companies. Companies should therefore proactively take the following steps:

• ongoing monitoring of cash pool balances with the establishment of mechanisms to reclassify genuinely long-term balance components into positions bearing appropriate interest, either by transferring them to a separate intra-group loan or by applying a differentiated, higher interest rate within the cash pool,
• comprehensive documentation of the cash pool, including the economic reasons for the balance development of the German company,
• Adjustment of the contractual framework to clearly regulate the reclassification of long-term balance components and their remuneration within the cash pool agreement as well,
• Functional and risk analysis of the entire cash pool, both at the level of the cash pool leader and the participating companies, as a robust basis for transfer pricing arguments.

Our transfer pricing specialists at the German KPMG Centre of Excellence for Financial Transactions are happy to answer any questions you may have.