Negative interest rates

Negative interest rates place high demands on the treasury. Not only on the external investment side, but above all with regard to intercompany interest rates.

A return to this special situation can occur at any time.

Negative interest rates - a challenge for corporate treasury

The topic of negative interest rates accompanied us in the years 2016 to 2020, particularly in CHF and EUR, especially in Treasury. Treasurers are faced with the question of the right interest rate in light of current interest rates with terms of up to 1 year. As is well known, this applies to all loans with a term of less than one year and a single payment, loans with variable interest rates, cash pool interest rates and, of course, intercompany interest rates.

A) Until now, the at-arms-length principle has been the measure of all things, especially from a tax perspective. I.e., market interest rate + margin in intercompany business, which would be applied by an independent third party = external bank. This, combined with the company's own group financing costs as a benchmark, was previously the formula for the "correct" IC interest rate.

B) As a result, almost all agreements relating to IC loans, whether in a treasury policy, cash pool agreements or individual IC loan agreements, simply state, for example, "3-month SARON + x%". However, if you want a loan from an independent third-party bank, in the vast majority of cases a floor of 0% is taken as the starting point and not the actual negative rate. Very often at this time, this is also added by banks as an addendum to existing contracts. We are not yet aware of any legal case where a customer has challenged this concretizing rule in court. In the end, he might be proved right in court, but in fact he has certainly lost a lender. And what new bank is eager to do business with someone who has dragged an industry colleague before a judge?

Back to IC banking. So the question arises as to which is more important: the tried and tested at-arms-length principle or the legally valid loan agreement? I think it is important to decide very carefully and, above all, on a case-by-case basis. In cash pools in which Central European group companies participate, it was no major problem to set a floor of 0%. Provided that the majority of the pool participants are in debt! Otherwise the whole thing would make no business sense. If the majority of participants are creditors of the pool master, you should consider the advantage of a negative interest rate. However, local tax inspectors will certainly be on the lookout here. Because in the end, everyone wants to achieve the best result for their department. It is therefore also important for Central Europeans to assess each case individually.

It gets even trickier with loans to more exotic countries. There, the tax authorities usually do not wait long if loans with variable interest rates suddenly receive a floor without an explicit contractual agreement. Such a procedure then quickly becomes very expensive and can even have very serious consequences, including at an operational level. In cases of doubt, the pure contractual text should be considered the only sensible solution.