Answers / Corporate Treasury

A company uses physical cash pooling in Germany and notional pooling in the US. The German pool has a surplus of €10M, the US pool has a deficit of $12M. The EUR/USD spot is 1.10. The German subsidiary has a tax rate of 30%, the US 21%. The CFO wants to cover the US deficit. How would you execute this optimally considering tax and FX?

An advanced Corporate Treasury question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).

THE SHORT ANSWER

I'd use a cross-currency notional pool or an intercompany loan with a spot FX conversion. Physical pooling across borders is often tax-inefficient due to withholding taxes and thin cap rules. I'd structure an intercompany loan from Germany to the US at arm's length interest, converting EUR to USD at spot. This creates a tax-deductible interest expense in the US and taxable income in Germany, but the net tax effect is positive if the US rate is lower. Alternatively, use a notional pool with a cross-currency overlay to avoid physical transfers. I'd also consider FX hedging to lock in the rate.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Cross-currency pooling or intercompany loan
  • ✓Tax implications: withholding tax, thin cap
  • ✓Interest rate alignment and transfer pricing
  • ✓FX conversion and hedging
  • ✓Net tax benefit calculation

COMMON MISTAKES

  • ✗Suggesting physical cross-border pooling without tax analysis
  • ✗Ignoring withholding taxes
  • ✗Not considering arm's length interest

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