NeuGroup members describe cash pools designed to overcome obstacles and minimize taxes.
Several members of NeuGroup’s Life Sciences Treasury Peer Group have set up cash pools in China relatively recently, a topic they discussed at their fall meeting in 2020 and in follow-up email exchanges with NeuGroup Insights.
- The pools are generally a means to an end: getting access to the funds in a country where that can be difficult and expensive.
Two-way sweep. One member is using what she described as “a simple RMB cross-border two-way sweep under the nationwide scheme (not the Shanghai Free Trade Zone scheme).” The goal: “To get access to surplus funds that cannot otherwise be repatriated via a dividend without withholding tax implications,” the member explained.
- “We started operating the pool in mid-2020 and have built up the pooled funds over time to the equity limit that applies to the national structure (50% of aggregate equities of all onshore participating entities).
- “We took action in the fall to comply with the rule that the continuous net lending/borrowing cannot exceed one year.”
- The pools are in both Singapore and China. There is an “in-country pool for several entities [tied] to a header account which is swept to a special RMB account,” the member said.
- “Funds are then lent cross-border to an offshore header account in Singapore. The funds can then go onward from there.”
An in-house bank and hedging. Another member at the meeting described what his company is doing in China as follows:
- “We set up a cross-border pool between our entities in China and Singapore last year. The objective was to access China cash on a temporary basis. The bank is only acting as an agent; our entity in China is the lender. The entity in Singapore is the borrower in the pool and the in-house bank that funds other entities in Asia and Europe.
- “It is very challenging to get cash out of China and this pool partially solves that problem.
- “The funds are pooled in Singapore from our China entity. Singapore is USD functional and China is RMB functional. So we hedge the RMB that needs to be converted in USD when they arrive to Singapore.
- “Because the functional currency is different for the two entities (USD and RMB), hedging is necessary to avoid losses when the loans in the pool are made and prepaid.”
Context on pools. For some perspective, NeuGroup Insights reached out to Susan A. Hillman, a partner at Treasury Alliance Group and an expert on cash pooling. “The ability to ‘pool’ in China has been around for a long time through a mechanism called an ‘entrusted loan’—whereby an enterprise with excess cash (RMB) puts money on deposit with its bank and receives a rate of interest on this deposit,” she said.
- “These funds are then loaned by the same bank to an affiliate company at a higher rate. Newer cross-border arrangements are usually managed through a bank loan from an RMB account which allows excess funds to be utilized in the offshore bank account (same bank) in Singapore as a ‘loan’ to the parent,” Ms. Hillman added.
- The funds can be used “onward from there” with some restrictions on tenor and amounts, she said.
- “Trying to utilize excess funds in a restricted country without issuing a dividend and the withholding tax consequences has long been a problem and using a bank as an intermediary in the situation through a loan arrangement is common in such countries as Brazil.
- “So rather than a cash management service, like pooling in Europe, it becomes a bank financing tool subject to the tax rules of any restricted country.”