Considerations to make stranded cash work for you
In tight credit markets, companies often need to take a fresh look at cash their treasury departments previously considered "trapped" in foreign jurisdictions. With changing circumstances, cash once deemed too costly or too complicated to extract from foreign operations can be essential to meeting financial obligations. And, even if the need is not immediate, better understanding of the options and issues that need to be addressed to access stranded cash often enable a company to take steps to increase their flexibility in the future.
Issues you will want to explore
Here are some options and key issues to consider with respect to cash repatriation.
Know the external limitations. Labor laws, exchange controls, pension obligations and bank loan covenants all can affect whether, and how quickly, cash can be accessed. In some jurisdictions, works council approval or the agreement of local pension fund trustees may be needed. Borrowing arrangements also need to be reviewed.
Intra-group loans: Quick, not always easy. Be sure to consider the tax implications of intra-group loans for both the borrower and the lender. For example, interest on poorly structured loans can use up tax losses that might more efficiently shelter future profits. In some jurisdictions, e.g., the US, loans may be deemed taxable distributions.
Beware cash pooling arrangements. Cash pools and cash sweeps are integral to most international treasury structures, but if insolvency is a possibility, directors need to exercise care. They can be liable if arrangements benefit the larger group but leave their company unable to meet its obligations.
Dividends: A matter of timing. Rules on dividends vary by jurisdiction and sometimes by company type. Some prohibit interim dividends; others, only at certain times. Mandatory waiting periods, auditing and financial reports can impact timing. Withholding tax and foreign tax credit implications need to be considered.
Repatriating or reducing equity. In some countries certain classes of equity can be returned to shareholders as quickly as dividends. These may be free of withholding tax as well as tax in the country of the recipient. But care must be taken to ensure that the remaining equity meets local thin capitalization requirements and business needs.
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