The problem with everyone converting separately
Groups grow in layers. A parent company sets up a sales office abroad, then a subsidiary to employ staff, then a holding company for tax or regulatory reasons, then a joint venture. Each entity opens a bank account locally and starts paying its own bills. Within a few years, currency is being bought in five places by five people, none of whom can see what the others are doing.
The costs of that pattern are rarely visible on a single trade. They show up across the group. One entity converts euros to US dollars while another, the same week, converts US dollars to euros, and both pay a spread. Small entities convert small amounts at retail bank rates. Nobody knows the group's total exposure to any currency. Intercompany balances drift and take weeks to reconcile at year end. When the auditors ask how a particular rate was agreed, the answer depends on who was on duty that day.
The remedy is not complicated. It is a set of decisions about who converts, how money moves between entities, who approves what, and where the records live.
Three operating models
Most groups end up with one of three models, or a blend.
Centralised. One entity, often the parent or a dedicated treasury company, carries out all conversions for the group. Subsidiaries tell the centre what they need and when, and receive funds in their local currency. The centre sees every flow, can net them and deals in larger tickets.
Decentralised with a group policy. Each entity converts for itself, but under written group rules covering approved providers, approval limits, timing and reporting. Local teams keep control of their own payments, and the group still sees what is happening through regular reports.
Hybrid. The centre handles large and regular flows, such as payroll funding and intercompany settlements, while local entities handle small and urgent local payments within set limits.
The right model depends on the size of the finance team, the number of entities, the time zones involved and how independent the subsidiaries need to be. A family-owned group with four companies and one finance director usually centralises by default. A group with experienced finance teams in each country may prefer a policy-led approach.
Intercompany funding
Money moving between group companies is still money moving between separate legal persons. Each transfer needs a legal basis, an accounting treatment and, in many cases, a tax analysis. The main routes are:
- Payment for services or goods. One entity invoices another for services, management, licences or products. The payment settles the invoice. This is common for development centres and shared service companies.
- Intercompany loans. One entity lends to another under a written agreement, with interest and repayment terms that can stand up to transfer pricing review.
- Equity. A parent subscribes for shares or makes a capital contribution, typically to fund a new or growing subsidiary.
- Dividends and distributions. A subsidiary pays profits up to its parent, subject to local company law and any withholding taxes.
The currency of each arrangement should be stated in the document. A loan agreement denominated in euros, repaid in euros, leaves the currency risk with whichever party does not have euro income. A service agreement priced in the provider's local currency moves the risk to the paying entity. These choices have accounting and tax effects, so they should be made deliberately with advice, and not left to whoever drafts the first invoice.
Which entity buys the currency
When the parent funds a subsidiary in another currency, someone has to convert. If the parent converts, it sends local currency and the subsidiary receives exactly what it needs. If the subsidiary converts, it receives the parent's currency and handles the conversion itself.
From a control point of view, converting at the centre is usually simpler: one team, one provider relationship, one set of approvals. From a documentation point of view, the conversion must still be booked by the right legal entity. If the parent buys zloty and sends them to its Polish subsidiary, the trade belongs to the parent. If the Polish subsidiary is meant to bear the conversion cost, the documents should say so, and the trade should be booked in the subsidiary's name.
That second point matters to your provider as well. A regulated payment provider needs to know which onboarded entity is its client on each trade, and expects funds to come from that entity's own account. Funding a trade booked for one company from another company's bank account creates questions that take time to answer.
Netting intercompany flows
Groups with flows running in both directions between entities can reduce the number of conversions by netting. Instead of the Canadian parent paying its Hong Kong subsidiary for sourcing services while the subsidiary pays the parent for goods, the two amounts are offset and only the difference is settled.
Netting can be bilateral, between two entities, or multilateral, across several entities through a central treasury. A monthly netting cycle works well for most mid-sized groups:
- Each entity submits its intercompany payables and receivables by a set date.
- The centre agrees balances with each entity and resolves differences.
- Amounts are converted to a common currency at an agreed rate source and netted.
- Each entity pays or receives a single net amount, and the centre makes the necessary conversions.
Netting needs agreement on rate sources and cut-off dates, and it needs legal and tax review, because some countries restrict or regulate intercompany offsetting. Where it is permitted, it cuts conversion volumes and settlement work considerably.
Onboarding several entities
Every entity that will trade or send payments needs to be onboarded by your provider in its own right. Expect the provider to ask, for each company, for its incorporation documents, register of directors and shareholders, proof of address, details of the people authorised to act and an explanation of its business and expected activity.
For groups, the provider will also want to understand the structure as a whole: a group chart showing ownership percentages from each operating company up to the ultimate beneficial owners, and the purpose of each entity. Holding companies in jurisdictions such as the British Virgin Islands, the Cayman Islands or Cyprus are common in international groups and are entirely workable, but the provider will want to see why each entity exists and how it is run.
Prepare a single group pack: an up-to-date structure chart, a one-page description of each entity, certified corporate documents and identification for directors and beneficial owners. Keeping it current makes onboarding new entities, and periodic reviews of existing ones, much quicker.
Platform access and permissions
A group using one provider for several entities needs a platform that keeps those entities separate while letting authorised people see across them. Look for:
- Multi-entity access. One login can switch between entities, with each entity's trades, balances, beneficiaries and statements kept apart.
- Per-entity roles. A user might be able to create payments for the Polish subsidiary, approve them for the Canadian parent and only view the Hong Kong company.
- Dual authorisation. Every trade and payment needs a creator and a separate approver, with thresholds that can differ by entity.
- Beneficiary controls. New payees and changes to bank details need separate approval.
- Audit trail. Every action is logged with the user, the entity and a timestamp, and can be exported.
Review user access every quarter. People change roles, leave the group or move between entities, and stale permissions are one of the commonest control failures auditors find.
An approvals matrix
Write down who can do what, for each entity, and give a copy to your provider. An example of a simple matrix for a hypothetical three-entity group follows.
| Action | Parent (Canada) | Subsidiary (Poland) | Subsidiary (Hong Kong) |
|---|---|---|---|
| Request quotes and create trades | Group treasurer, finance manager | Group treasurer | Group treasurer, local finance lead |
| Approve trades up to a set limit | Finance director | Finance director | Finance director |
| Approve trades above the limit | Finance director and CEO | Finance director and CEO | Finance director and CEO |
| Add or change beneficiaries | Finance manager, approved by finance director | Local finance lead, approved by group treasurer | Local finance lead, approved by group treasurer |
| View only | External accountant | Local payroll provider | External accountant |
The detail will differ for every group. What matters is that no single person can both create and release a payment, and that limits reflect the size of each entity.
Documentation and reporting
Each entity needs its own complete records: trade confirmations, payment advices, intercompany invoices or agreements, and evidence of approval. File them by entity first, then by month and trade reference, so that each company's auditors can see their own trail without wading through the rest of the group.
At group level, a monthly report showing conversions by entity, currency pair, amount, rate and benchmark gives management a clear view of what the group is paying and where. Pair it with an intercompany balance report agreed by both sides of each balance. Reconciling intercompany positions monthly avoids the year-end scramble in which nobody can remember why the Hong Kong company thinks it is owed a different amount from the one the parent has recorded.
Board minutes matter too. Larger intercompany loans, capital injections and changes to treasury policy should be approved and minuted by the board of each affected entity.
General information
This article is general information about organising foreign exchange across a group of companies. It is not investment, tax or legal advice. Intercompany arrangements have tax and accounting consequences, so take advice from qualified professionals. CCYFX Online supports multi-entity access, dual authorisation and an audit trail for business groups. See the platform page for details.
