Italian Supreme Court clarifies zero balance cash pooling in cross-border cases

These typically fall into two types:

1. Notional cash pooling: Group entities have separate agreements with a bank. Balances are offset notionally, without actual transfers, and no intra-group pooling entity is involved.
2. Zero balance cash pooling (ZBCP): This involves actual sweeping of funds from subsidiary accounts to a central account, aiming to maintain zero balances on peripheral accounts. Interest accrues centrally, with the master account held by a group company or third-party bank, in Italy or abroad.

Italian Supreme Court Judgment No. 998/2024

The Court recently assessed a ZBCP arrangement between an Irish parent and its wholly owned Italian subsidiary. A tax audit led the Italian Revenue Agency to reclassify the arrangement as a medium-to-long-term loan based on several findings:

• The Italian entity only transferred surplus liquidity and did not use intragroup credit lines;
• Transfers occurred periodically, not daily; and
• The subsidiary retained significant liquidity and operated independently.

The agency argued the formal ZBCP setup did not reflect its actual substance. The relationship was recharacterised as a loan from the Italian company to the parent, and notional interest income was imputed under Italy’s transfer pricing rules (Article 110(7) of the TUIR).

Supreme Court’s ruling

Though the Court ruled in favour of the taxpayer – finding the tax authority had not met its burden of proof – it supported the logic behind the recharacterisation.

The Court stressed that three conditions must be met for a ZBCP to qualify as a genuine treasury arrangement:

• Daily sweeps ensuring zero balances on subsidiary accounts;
• Reciprocal cash movements – credits and debits must circulate among participants; and
• Actual reliance on group liquidity by participants.

These conditions were absent in the case at hand. The Italian subsidiary only transferred excess liquidity and never accessed pooled funds. It also maintained independent reserves, suggesting no mutual treasury function existed. As such, the arrangement resembled a one-sided loan, not a true ZBCP.

Wider implications and precedents

This ruling aligned with a 2021 Lombardy regional tax court ruling (No. 1847/2021), which also found that unilateral movements and lack of daily settlement disqualified an arrangement from being treated as a ZBCP.

These decisions highlight the need for consistency between contractual terms and actual operations. A ZBCP agreement unsupported by regular, bilateral transactions and effective liquidity centralisation may be disregarded and reclassified based on its economic reality.

Guidance for multinational groups

Multinational enterprises (MNEs) using ZBCP structures should closely review their treasury practices, ensuring:

• Consistent, frequent fund transfers;
• Reciprocal intra-group cash movements; and
• Alignment between contracts and actual behaviour.

Without these, arrangements may face reclassification under transfer pricing rules, resulting in adjustments to intercompany interest income or expenses.

As case law around atypical treasury setups evolves, MNEs must maintain strong documentation and ensure their financial flows reflect genuine centralised management.

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Roberto M. Cagnazzo, Founding Partner, is a chartered accountant and statutory auditor with considerable experience in domestic and international taxation acquired as Head of Tax in some of Italy’s leading multinational groups, and as Professor of Comparative Tax Systems and of Tax Law at the University of Turin.