INTM503020 - Intra-group funding: group finance companies and the treasury function: Types of company

The treasury company

For the largest groups of companies, the management of group finances represents a vitally important and potentially complex activity. Although banks and other third party providers of finance will usually be involved, it is common for large groups to have very high volumes of intra-group international financial transactions as well.

Treasury management includes

  • day-to-day control of cash and bank accounts including cash pooling
  • provision of intra-group loans
  • raising third-party finance
  • investing surplus funds
  • hedging against currency and interest-rate risk

The expected return will depend on the range, complexity and risk of the activities of the company. In large groups, the treasury function is invariably carried out on a transnational, European or global basis and groups have a choice as to where they locate the function itself. This may be based on proximity to markets, availability of an extensive tax treaty network, or favourable tax treatment of the activities or income of the business. By their nature as providers of group services, treasury companies will often have, or will be looking for, agreement from the tax authority in their country of residence as to the basis on which they are taxed. Treasury activities are by their very nature mobile and can be carried out relatively remotely from the rest of the group’s business. There is no reason why the framework of the Advanced Thin Capitalisation Agreement (see INTM510000 onwards) should not be adapted for treasury companies.

The group finance company

Not every group needs a sophisticated treasury operation. Factors such as type of business or size or the degree of autonomy exercised by subsidiaries influence the functions and risks taken on by group finance companies. The main activities of group finance companies are generally the routine functions of:

  • day to day control of cash and bank accounts, including cash pooling
  • provision of intra-group loans

In smaller group finance companies these functions may not even require the services of a full-time employee.

In practice there is a range of business types. Group finance companies may be engaged in some of the more complex functions seen in treasury companies, but they may not perform all of them or they may perform them only to a limited degree. It is worth emphasising that the arm’s length price for treasury and group finance company transactions can only be determined by a full factual and functional analysis; the distinction made here between treasury and group finance companies is no more than a convenient split for the purposes of these instructions.