INTM507020 – Intra-group funding: group finance companies and the treasury function

Centralising the treasury function: commercial considerations and tax issues

It is very common nowadays for groups of companies to centralise some or all of their treasury management functions. The treasury function may be centralised in a group’s holding company but it is increasingly common for it to be centralised in a special purpose subsidiary or group finance company.

It is important to distinguish between control of the treasury functions and execution of the treasury transactions because at arm’s length they are rewarded in quite different ways. A group may centralise just the treasury control function in a group finance company, or control may remain decentralised with the group finance company merely executing the treasury transactions. Complete centralisation of the treasury function would mean that both control of the strategy and execution of the transactions would be exercised in one company and in one location.

There are many legitimate commercial reasons for such centralisation:-

• improved co-ordination
• location of functions close to financial markets
• greater economies of scale
• recognition of the status of treasury personnel
• the need to measure the effectiveness of the treasury function by making it a separate cost or profit centre
• the implementation of a management strategy to enable group companies to focus exclusively on their core business
• maximisation of liquidity and minimisation of external borrowing

There are also potential tax advantages in centralising treasury functions, such as the greater likelihood of relief for exchange losses and earlier relief for interest.

When deciding where centralised treasury management functions should be exercised the tax regime of the potential jurisdictions will also be a key consideration (both generally and by virtue of any specific tax rules for finance companies), as will the existence of relevant double tax agreements (see INTM507030).