Treasury News Network

Learn & Share the latest News & Analysis in Corporate Treasury

Releasing Trapped Cash

Trapped cash is money that cannot be moved cross-border for a period due to regulatory, tax or business process constraints. These restrictions mainly apply in the emerging markets. The in-country restrictions include: limitations on the bank accounts used and on use of zero balance sweeping, the insistence on compulsory reserves for loans and deposits, and a tax on financial and banking transactions. The barriers to outbound cash movements include: banning the use of local currency offshore accounts, no cross-border pooling, controls on currency convertibility and transferability, heavy administrative and Central Bank reporting overheads, and withholding taxes on dividends, royalties, loan interest compensation, share transfer and capital repatriation. Although some of the limitations on moving cash from restricted markets have eased slightly, for example, India allows the proceeds of 10% of annual sales to be transferred abroad, trapped cash is a still major problem for many companies. 

Releasing Trapped Cash 

There are many ways to release locked cash - Inter-company netting, transfer pricing, inter-company transfers, interest optimisation, inter-company loan structures, and payment of dividends - most of which are well known to the authorities and are forbidden in many countries. Alternative techniques are being developed all the time, e.g. in Poland, some companies have used subrogation structures to give their subsidiaries' access to internal liquidity without incurring 2% stamp duty on inter-company loans. However, with all these techniques, it is essential to check that they are fully approved by the local financial authorities. 

Making the Best of It 

If the funds really are trapped, there two main options. The first is to use one of bank's interest optimisation schemes. All the global network banks offer their larger multi-country corporate clients some form of compensation for cash trapped in economies such as India, China and Brazil. Only the large network banks are able to offer any level of % off-set for funds in these highly regulated countries, as they can use these funds in other parts of their banking operations around the world and/or locally. The second option is to maximise the returns on the trapped cash by setting up cash pools in the country and then investing locally. Some banks offer money market funds for restricted currencies, which can improve the returns considerably without increasing counter-party risk.

All posts in this section