The art of cash repatriation

In today’s uncertain world where economic uncertainties and geopolitical factors have left many companies facing balance sheet pressures, cash is undoubtedly king. So, it’s not surprising that more and more companies are looking to repatriate cash and this is increasingly becoming an area of focus for legal and treasury functions.

Repatriation of cash, however, is not always straightforward. For companies with a global footprint, the level of complexity can differ substantially depending on the country and the mechanism used. Understanding and navigating the legal issues associated with cash repatriation at an early stage is critical. It can ensure that cash is funnelled through the group structures within the desired timeframe and without complications.

Legal mechanisms to facilitate cash repatriation

Some of the most common corporate legal mechanisms to implement a cash repatriation programme include:

• Dividend / distribution
• Capital reduction / repayment
• Share buybacks
• Cash pooling
• Loans
• IP royalties and service agreements

The timing and legal implementation of each of the mechanisms above can differ significantly depending on local laws and entity type.

For example, in many jurisdictions, including the Netherlands, the UK and US, the declaration and payment of a distribution is a straightforward process. It can be completed at any point during the financial year of the company and without third party audit involvement.

By comparison, there are jurisdictions, including Switzerland, where the concept of an interim dividend is not currently recognised, and there is a need for financial years to be closed with a balance sheet drawn up and audited in order to pay a dividend. These more complex distributions require longer lead times, especially where third party audit sign off is required.

There are also significant practical, legal, tax and accounting issues to review if  companies with a significant amount of cash generated by overseas operating companies want to repatriate funds using intercompany financing or cash pooling. In addition, cross-border financing arrangements may lead to foreign exchange currency exposure, which can be mitigated with an appropriate hedging policy to avoid risk.

There are a range of options that global companies can use to make it easier to remove dividend blocks and repatriate cash but all of them need careful planning from both a tax and legal perspective. These include:  

• Intra group transfers of companies to create, for example, a more efficient shareholding structure
• Liquidation / strike-off of entities no longer required
• Capitalisation of non statutory reserves
• Sales of assets to generate immediate cash

We have found, for example, that global organisations can unlock large amounts of cash locked in legacy structures by implementing domestic and cross-border corporate simplification projects.

Practical tips for implementing cash repatriation programmes

Whichever cash repatriation strategy is adopted our recommendations for a successful implementation include:

1. Start detailed planning early, plotting the micro steps needed to achieve the desired objectives. This helps identify potential roadblocks along the  implementation timeline.
2. Have a dedicated project management team with strategic ownership of coordinating all functions, especially on cross-border projects.
3. Closely align the responsible tax, treasury and legal teams. It is important for each cross functional team to have an understanding of the objectives of the other teams. For example, the tax function will need to know whether a particular legal mechanism produces an ‘income or capital receipt’ in the hands of the recipient. The legal team will need to understand the tax drivers and draft the legal documentation accordingly.
4. Use technology (i.e. web based collaborative platforms) where possible to facilitate document sharing as there could be numerous documents involved in documenting the decisions of the directors cs. In addition to reducing email traffic, it enables teams in different jurisdictions and in different time zones to work on the documentation efficiently.

At PwC, we have developed a tool to provide multi-jurisdictional clients with access to information about cash repatriation from entity types within certain jurisdictions. The tool highlights:

• the relevant legal mechanisms available in various jurisdictions to move cash between group companies;
• the most efficient route in each jurisdiction, implementation complexity and red flags;
• information around corporate approval requirements; creditor waiting periods; reserves requirements; solvency test requirements and/ or the need for audited accounts; and
• details around costs/ disbursements and timing of these processes.

In addition to our project management offering - which ensures that all stakeholders within the respective group and their external advisers are apprised of all recent developments - we work seamlessly with our tax and accounting teams from the outset of the project to advise on the successful implementation of any cash repatriation project.