In this article we will discuss about Group Taxation:- 1. Meaning of Group Taxation 2. Group Taxation Systems 3. Conditions 4. Issues 5. Various Countries.
Contents:
- Meaning of Group Taxation
- Group Taxation Systems
- Conditions for Group Taxation
- Issues Relating to Group Taxation
- Group Taxation in Various Countries
1. Meaning of Group Taxation:
Group Taxation Deals with two Separate Issues:
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(i) Offset of losses against profits within the group and
(ii) Tax-free transfer of assets within the group. Many jurisdictions, particularly in the European Union, now include domestic PEs of foreign entities in their group taxation rules.
According to the 2004 IFA Report on Group Taxation, there are just over 20 countries that have enacted domestic group taxation rules for loss offsets, while the number of countries that permit intra-group asset transfers is lower.
Group taxation for cross-border entities is currently limited to four countries only, namely Austria, Denmark, France and Italy. However, it is expected that more countries will provide for global consolidation in future, particularly in the European Union with its efforts to create a Single Market.
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Group taxation systems can be beneficial for both the tax authorities as well as the taxpayers. They permit corporate groups to be regarded as a single economic unit for tax purposes and allow offset of profits and losses within the group. In this respect, they complement financial consolidation of group companies that now exists in several countries.
They also avoid the use of separate legal entities without economic substance for tax avoidance purposes. Without group taxation, corporate taxpayers are encouraged to use divisional structures or mergers (and other tax planning approaches) to pool inter- group profits and losses of widely differing economic activities for tax reasons only.
Although group taxation is growing in significance, not many countries have adopted it yet, probably for policy reasons. Since the use of group taxation is normally elective by the taxpayer, it is used only if it helps to reduce the overall group taxes.
Therefore, it is not favoured by tax authorities, who are concerned with the loss of tax revenue. Group taxation systems can also be administratively complex and encourage economic concentration and business combinations.
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2. Group Taxation Systems:
To be effective, group tax systems should be simple to administer, have low compliance costs, be flexible and allow tax-free corporate reorganization. There are four systems commonly used for group taxation.
They are:
(a) Consolidation system:
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Most countries with group taxation follow the consolidation system. Taxable income is computed separately for each member company and then either the profits and losses are pooled (combined) or consolidated to arrive at the group taxable income. The parent company files a single tax return and is liable to pay the entire tax for the group. It may then allocate the group tax on an agreed basis to the member companies.
Under the consolidation system, the group can make tax-free group reorganizations. Inter-company dividends and distributions, intra-group transactions and related tax attributes are generally eliminated, while other attributes, e.g. capital losses, foreign tax credits, etc., are determined at the group level. The basic approach is to achieve the tax result assuming the member companies were divisions of a single enterprise.
Group tax consolidation allows pooling of group results for offsetting the profits and losses within a group. While some countries permit full pooling provided the minimum percentage ownership requirements are met, others allow pro rata pooling only, while still others allow pro rata pooling based on weighted average ownership during the year. In some countries, the year-end percentage ownership is considered.
(b) Contribution system:
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The group contribution system is found in Finland, Norway, and Sweden. Each group member is a distinct and separate taxpayer, and the transaction is recorded in the financial statements. Although the system requires actual income transfer, in practice it is achieved by an inter-company loan.
The contributions are allowed not only upwards but also between two subsidiaries. They are tax deductible at the level of the contributing company and taxable income at the level of the receiving company.
Contribution itself is limited to the business income or deductibility i.e. no tax losses can be created. However, contribution payments are not limited to loss-situations. They can be used to shift income between members to pay dividends or used to allocate profits to a group company with losses.
(c) Group relief system:
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The group relief system exists in several countries that follow the UK Commonwealth tax system. Under this method, the tax legislation defines the group. Within the group, a member may elect to surrender its losses to another member of the group without transfer of profits. This transfer is only reflected in the tax accounts and in the tax declarations of the parties.
There is no entry in the financial reports. Usually (but not always), the recipient makes a “subvention” payment to compensate for the losses transferred. This payment is not taxable as income of the surrendering company.
(d) Organschaft:
“Organschaft” existed in Austria until 2004, and continues to exist in Germany today. Under this concept, subsidiaries are deemed as inner “organs” of the parent corporation. There is a legally binding profit and loss agreement for a minimum five-year period between the ultimate parent and the subsidiaries.
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This method favours integrated groups where decisions are taken by the parent company. There are actual transfers of profit or losses to the parent company and minority shareholders are compensated. The subsidiaries are treated as divisions for company law purposes.
3. Conditions for Group Taxation:
All group taxation regimes have certain availability conditions.
They generally include:
(a) Shareholding requirements:
All regimes apply only to corporate income with varying minimum shareholding requirement for eligibility, to avoid minority issues. The test may involve voting power, number of shares issued and/or fair market value of such shares. De facto control is ignored.
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There may also be additional tests to determine the group unity, such as management and control or business connection (Examples: Austria, United Kingdom). While most countries allow full profit pooling or consolidation even with less than 100% ownership, some of them restrict it pro rata to the shareholding.
(b) Manner of election:
All countries with group tax systems base them on election by its members. Under “all in approach” all qualifying members must join (Examples: Czech Republic, Denmark, Japan, Spain). Others permit an “elective approach” that allows individual companies to opt out if they wish (Examples: Australia, France, Italy, Luxembourg, the Netherlands, and New Zealand).
(c) Eligibility requirements:
Several countries insist on a minimum period for group taxation varying from three (Austria) to five (Germany, France, Luxembourg) years. There may also be further requirements to enter into a formal profit and loss pooling arrangement.
4. Issues Relating to Group Taxation:
(a) Entrance and exit issues:
The tax treatment of pre-entrance losses of the parent and subsidiaries vary. They may either be simply lost, or continue in the entity but for offset only against its own future profits (Examples: Denmark, Italy, Mexico, and Netherlands). In some cases, they may be used by the group parent company, usually with some limitation.
Similarly, group losses either stay with the group parent or are allocated to the companies on exit from the group or on dissolution of the group itself. Under most group contribution systems, loss carry-forwards are retained by the company which incurred them.
Entrance and exit issues can also affect the tax basis of assets owned by the group. In Australia, the tax base of the underlying assets of a subsidiary is reset when it joins the group, and vice versa on its disposal.
The United States allows the buyer and seller to revalue by election the shares at the fair market value of the assets when acquired. The acquired company is treated as a new corporation with no attributes of the old group.
(b) Intra-group transfers of assets:
According to the 2004 IFA Report, few countries currently provide for the deferral of capital gains and losses on intra-group transfers.Moreover, even in countries where it is provided there are restrictions, the deferred gains or losses either stay with the transferor or are shifted to the transferee or allocated among the group companies involved.
They are recaptured when there is a sale of the asset to a third party, or if a member company leaves the group or fails to perform the holding requirements.
(c) International group taxation:
There are currently only four countries that provide for cross-border group taxation. Economically, it supports globalization and promotes efficient resource allocation.
From a tax perspective, it reduces transfer pricing issues within the group and provides a common tax environment for corporate groups. Allowing cross-border consolidation also permits the current use of foreign losses as well as crediting of foreign taxes.
Some of the international tax issues relate to:
(i) The entitlement to foreign tax credits,
(ii) Potential double dipping of losses (parent and subsidiary) under the group relief system,
(iii) Different tax treatment on same payment in two countries, and
(iv) The interaction with CFC rules.
There is also the issue of treaty entitlement, which raises basic questions, such as:
(a) Who is the treaty resident and which treaty applies, and
(b) Which person under the treaty is entitled to claim the treaty benefits as a resident?
In the group relief or contribution system, each group member is a taxpayer and the attributed income is based on surrender (group relief) or actual transfer (contribution). Under the consolidation system, losses and income are allocated to the group parent and taxed in its hands.
In such a situation, is the group company eligible for the treaty benefits as a treaty resident in its State or is each group member also treated as resident in its own State? Moreover, in the latter case, is it eligible for the treaty benefits as a resident on its profit allocation?
5. Group Taxation in Various
Countries:
Australia:
Australia replaced its group relief provisions with a tax consolidation regime in July 2002. An Australian parent company can make an irrevocable election to file a single tax return with all its wholly-owned resident subsidiaries, partnerships or trusts and be taxed on the consolidated results. The group taxation regime is also available to Australian- resident subsidiaries of foreign-owned groups.
Under this regime, the subsidiaries are effectively treated as divisions of the parent or “head company” and transactions between consolidated subsidiaries are disregarded for tax purposes. The group makes a single tax election under the “single entity” rule.
During the consolidation period, all tax attributes, such as losses, franking credits and foreign tax credits, are held by the parent company only, which is liable for the group taxes and tax obligations.
Moreover, under the “single history” rule, everything that previously happened to the subsidiary is deemed to have happened to the head company. If a subsidiary leaves the group, it re-inherits the pre-entrance history, as adjusted by the events during the consolidation period, to arrive at the tax base of its underlying assets on exit.
If the head company fails to satisfy a group income tax liability when it becomes due and payable, each subsidiary member becomes jointly and severally liable with the head company, for the amount due.
This rule may not apply if it is prohibited from entering into arrangements that would subject it to joint and several liability, or the group liability is covered by a valid Tax Sharing Agreement (TSA) that allocates the liability between the members of the group on a reasonable basis. Each member of the consolidated group remains separately liable for its tax-related liabilities outside the consolidation regime, such as pre-consolidation tax liabilities.
There are special rules governing the treatment of losses and the cost base of assets. Australia has chosen the “asset-based model” for tax consolidation. It spreads the acquisition cost (and liabilities) of a joining entity among its assets, and resets them to their underlying asset value for tax purposes (subject to exceptions).
The use of pre-consolidation losses is governed by a set of additional tests, such as continuity of ownership and business tests. Losses brought into the group stay with the group even if the subsidiary subsequently leaves the group.
Austria:
As from 2005, the previous joint tax return under “Organschaft” has been replaced by a flexible “group taxation” regime.
The significant features of the new regime include:
(a) The group parent must be an Austrian company or permanent establishment of a qualifying company in the European Economic Area. Both domestic and foreign entities may qualify as group members, provided they are subject to corporate taxation.
(b) The parent company must hold directly or indirectly more than 50% of the shares and voting rights of the group company for the entire tax year. There is no requirement for organization or economic integration.
Group taxation is also permitted for joint ventures, provided all its members qualify as group parents. They must cumulatively own at least 55% of the subsidiary’s shares, of which at least 40% must be held by one parent company.
(c) If the conditions for group taxation are met, the entire taxable profits and losses of domestic subsidiaries are attributed to the group parent, even if the parent does not own all the shares. The inter-group profits are not eliminated. Losses suffered by the group parent prior to the formation of the group can be offset against profits of other group members, but not vice versa.
(d) A group can include both domestic and foreign enterprises. In case of foreign group members, only losses (not profits) pro rata to the shareholding are included for offset against domestic profits. There are recapture rules for claw-back against future profits and in case foreign group companies leave the group.
(e) The group members must obtain prior approval and make a binding election for a minimum of three years.
The tax consolidation rules provide for simpler pooling of profits within a group and with the ability to offset losses of foreign group members. There is no requirement to include all the subsidiaries within the tax groups.
Barbados:
Resident companies may elect to surrender the current (not past) eligible trading losses within a group. Eligible trading losses exclude depreciation allowances, and any inter- group expenses that are claimed as expenses but not included in the taxable income of the receiving company in the same fiscal year.
The group companies must be at least 75% (direct or indirect) beneficially owned by a resident parent other than as portfolio investments, and must be a member of the group throughout the tax year.
In addition, the parent company must be beneficially entitled to at least 75% of the profits and assets when a subsidiary is wound up. An election must be made within two years. This group relief is not available for offshore companies and entities that are granted special tax concessions.
Cyprus:
A loss-making company can surrender its losses to a profit-making company in the same tax year in Cyprus. Both companies must be tax resident in Cyprus and be members of the same group throughout the tax year. A company is a member of the group if it is either at least 75% owned by the other company or both companies are at least 75% subsidiaries of the same parent company.
Denmark:
As from December 2004, Danish resident subsidiaries of foreign companies must be consolidated with their permanent establishments and immovable properties in Denmark for tax purposes.
Denmark also allows a one-time election for worldwide tax consolidation of a Danish parent company with all its qualifying group entities. A qualifying group exists if an entity has majority voting control or has direct or indirect power to appoint or dismiss most of its top management or the power to control its operational or financial management. The election is valid for a period of ten years.
The tax group files a joint tax return in Danish currency on its combined income, as computed under domestic Danish law. The nonresident subsidiaries within the tax group are treated like foreign permanent establishments of the Danish parent company.
Dividends paid by the nonresident subsidiaries are disregarded. The parent company can claim a tax credit for the foreign corporate income taxes paid by the subsidiaries, but no credit is available for foreign dividend withholding taxes on dividends paid by the jointly taxed subsidiaries.
Finland:
The profits are transferred from a profit-making company to a loss-making company within the same group through contributions. The group contribution is normally made between a parent company and its subsidiary or between two fellow-subsidiaries.
However, it can also be made to shift the profits between two Finnish subsidiaries of the same parent company. To qualify, both the paying and receiving companies must be resident and carrying on business in Finland.
They must be owned at least 90% (direct or indirect) by the parent company from the beginning of its tax year. They must have the same accounting year end. The contribution should be recorded in the books of account of both companies.
France:
France offers both worldwide and domestic consolidation under its tax laws.
(a) Worldwide consolidation:
(i) Benefice mondial:
A resident company may include in its French tax return the profits and losses of its foreign branches, offices and agencies (not subsidiaries).
(ii) Benefice consolide:
A resident company, which owns or controls 50% or more (direct or indirect) of the voting rights of the operations (e.g., branches, partnerships or companies) in France and abroad, may file a tax return based on its worldwide profits and losses.
Both forms of tax consolidation require the prior approval from the Ministry of Finance. It is given only in exceptional circumstances to French companies and the election is irrevocable for five years. Double taxation is avoided by granting a credit for the taxes paid abroad.
(b) Domestic consolidation:
Under integration fiscale, 95% directly or indirectly owned and controlled French subsidiaries of a French parent company may elect to file a consolidated tax return. Moreover, the French parent company may be fully owned by a foreign company.
Not all-qualifying subsidiaries have to be included, but they must be held from the beginning of the financial year and have the same year-end. Intra-group payments are exempt from the French withholding tax. The tax election is binding for five years, subject to renewal.
Germany:
A German parent company, or a permanent establishment of a nonresident company in Germany, may elect to pool the profits and losses of its controlled German resident subsidiary company (“Organschaft”) with itself as the controlling entity, provided all the following conditions are met:
i. The subsidiary must be incorporated and have its place of management in Germany (the controlling entity may be a resident individual, a partnership or a company either incorporated or with its place of management in Germany);
ii. The resident parent and the subsidiary must be financially integrated from the beginning of the financial year of the subsidiary; and
iii. The “pooling” arrangement must be concluded under a profit-and-loss absorption agreement (Gewinnabfuehrungsvertrag) and entered in the commercial register.
The controlling parent entity may be a corporation, a sole trader, a partnership with business activities or a company subject to unlimited taxation, or a registered branch of a nonresident company.
The losses of the subsidiary company before the pooling of profits are not deductible during the period of the Organschaft. The election is binding for five years. The tax consolidation covers income tax and trade tax. Parent companies with dual residence cannot use their losses twice.
Iceland:
Two or more resident Icelandic companies may elect to be part of a group tax consolidation if there is at least 90% ownership (direct or indirect) of one of them in the other and the two companies have the same accounting year.
The 90% ownership condition must be fulfilled for the whole year or from incorporation of a company if one of the companies was incorporated in the year. Group consolidation cannot be extended to a nonresident subsidiary of a resident parent company.
India:
India does not currently provide for group taxation. However, transfers of accumulated losses and unused depreciation allowances are permitted for qualifying corporate mergers and demergers. Moreover, capital gains deferral on asset transfers from parent to wholly- owned subsidiary and vice versa is allowed provided the transferee company is an Indian resident company.
Ireland:
Under the group relief provisions, the tax losses may be surrendered to the profit-making companies within the group. Moreover, assets may be transferred without the payment of capital gains, provided the company that acquires the asset does not leave the group within ten years after the transaction.
Group relief is given to resident companies provided they are at least 75% owned by a common resident parent (“75% group”). The parent company must also be entitled to 75% of the distributable profits and assets on liquidation.
Similar relief provisions apply to members in a consortium company. To qualify, at least 75% of the ordinary share capital must be owned by five or fewer companies, each owning at least 5% of the consortium company.
If the resident companies are at least 51% owned by a resident parent company (“51% group”), there is no requirement to withhold the tax on dividend, interest or royalties payments within a 51% group.
All the members of the “75% group” or consortium do not have to be resident in Ireland. The group relief is now given if all the companies in the tax group or consortium are resident within the European Union or in countries with Irish treaties in the European Economic Area.
However, the relief is restricted to losses incurred by businesses subject to Irish corporation tax. Capital gains relief is also extended to asset transfers to or from an EU or qualifying EEA resident company who have a branch in Ireland.
Israel:
The industrial companies in the same line of production may file a consolidated tax return. The holding company has to notify the tax authorities of its intention to do so within the tax year. To qualify, it must have made investments in at least 80% of the fixed assets of its industrial subsidiaries and must control at least 50% (or two-thirds in certain cases) of the various rights in them.
For a diversified group, a holding company may file a consolidated return with subsidiaries having the largest financial investment in the same line of production. Group returns may also be filed if the holding company has at least two-thirds voting power over its industrial subsidiaries.
Italy:
Italy introduced its tax consolidation rules in 2004. Corporate tax consolidation can be either domestic or worldwide.
(a) Domestic consolidation:
Domestic consolidation is given on joint election by the resident parent company and one or more of its domestic subsidiaries, in which it has more than 50% shares or voting rights.
A nonresident company may elect for domestic consolidation provided it is resident in a treaty country and controls the Italian subsidiaries through its permanent establishment in Italy. The tax group companies must have the same fiscal period. The election is irrevocable for a minimum period of three years and can be made for selected domestic subsidiaries.
Under the domestic consolidation, corporate tax is levied on the entire combined taxable income, with certain adjustments, at the controlling company level. The taxable income of the subsidiaries is fully attributed to the parent company, regardless of the level of shareholding. Inter-group dividends are eliminated.
Any consideration paid within the tax group for the tax advantages arising from the consolidation is tax-free. Roll-over relief is provided on group sales or contributions on transfer of assets. The relief is granted upon joint election by seller and purchaser. Such an election can be made on a case-by- case basis.
The right to carry forward tax losses and tax credits is granted to the parent company. However, tax losses arising in fiscal years prior to the tax consolidation election can only be carried forward by the company to whom such losses belong. Claw-back clauses apply in some circumstances, e.g. if the control ceases during the three-year election period.
(b) Worldwide Consolidation:
Worldwide consolidation is applicable under a tax ruling upon election. Nonresident subsidiaries can be corporate entities or a body of persons. In case of foreign participations held through Italian subsidiaries, they must all elect for tax consolidation. The parent company must have more than 50% controlling interest in its resident and nonresident subsidiaries through voting or dividend rights at its year-end.
Unlike domestic consolidation, the taxable income of the subsidiaries is combined pro rata to the profit participation or ownership at the end of their tax year. Foreign tax credits relating to the taxes paid abroad are deductible. Pre-consolidation losses are ignored. Inter- group dividends are excluded and capital gains or losses on asset transfers are apportioned.
The election is irrevocable for five years, and subject to renewal. The election must be made for all subsidiaries (resident and nonresident). The parent company and its subsidiaries must be audited by qualified accounting firms.
No worldwide election can be made by a parent company that has already elected for domestic tax consolidation. The tax authorities may specify additional conditions when granting the tax ruling.
Japan:
Japan introduced tax consolidation for corporate income taxes in 2002. A Japanese parent company may elect to file a single consolidated tax return with all its directly or indirectly 100%-owned domestic subsidiaries. The parent company and the subsidiaries must have the same tax year-ends. Both the election and subsequent termination of the election require prior tax approval.
The parent company files a single tax return and pays the national corporate tax. The total liability is then allocated among the group members. Consolidated tax losses can be carried forward for five years.
Tax losses of the parent company during five years prior to the tax consolidation can be carried forward; however, pre-consolidation losses of subsidiaries may be lost. On termination, the unused tax losses are reallocated to the group companies.The group pays ordinary corporation tax.
However, each company pays its own enterprise tax and inhabitant tax. On joining the group, the assets are revalued at fair market value and a valuation profit or loss is recognized, unless they have been wholly-owned subsidiaries for a substantial time period.
Latvia:
Latvia provides for group loss relief among resident companies. A group consists of a principal company and all its subsidiaries. While the principal company may be resident either in Latvia or in a treaty or an EU country, the subsidiaries must be resident either in Latvia or a qualifying EU member state.
To qualify, the principal company must own, directly or indirectly, at least 90% of the share capital or voting rights in the subsidiary company.
Losses may be transferred between group companies provided:
(a) Both companies are resident in Latvia and not resident in any other state,
(b) Both companies have common year-ends and are members of the group for the entire fiscal period; and
(c) Neither company is exempt from or enjoys a reduced tax rate. Losses may be transferred only to the extent they do not exceed the taxable net income of that company.
Luxembourg:
Tax consolidation (“integration fiscale”) is permitted between a resident parent and its direct or indirect subsidiaries (at least 95% owned but can be 75% or more in certain cases) resident in Luxembourg. Subsidiaries owned through transparent entities listed in the Luxembourg tax law are regarded as direct shareholdings.
All the group companies must be taxable in Luxembourg. They must also have common tax year-ends, and be owned from the beginning of the first year for which group taxation is elected. As from 2002, there is no requirement for economic and organizational integration.
The minority shareholders must agree to the tax consolidation by at least three-fourths of their combined shareholdings. Besides resident companies, the tax consolidation is allowed for Luxembourg-based permanent establishments of nonresident companies.
A permanent establishment of a nonresident company can qualify as a parent company of a group. The election for tax consolidation is binding for a minimum of five years.
Malaysia:
Malaysian tax law provides for group relief provisions that allow 50% of the current- year adjusted losses to be transferred by a group company to a profitable group company. A group comprises the Malaysian parent company and all its Malaysian subsidiaries.
Two companies are group members if one is owned 70% by the other or both are owned 70% by a third Malaysian company. For group relief, both companies must have the same accounting period and a paid-up capital of at least RM 2.5 million.
Malta:
A company may surrender its losses to another company within a 51 % group.
Two companies are members of a 51 % group if:
(i) They are tax resident in Malta,
(ii) Not tax resident in any other country, and
(iii) The majority (more than 50%) beneficial ownership and voting rights are controlled, directly or indirectly, by a resident parent company. To qualify for group relief, the companies must have accounting periods that begin and end on the same dates. Each company submits its own tax return.
Mauritius:
Unrelieved losses of a wholly-owned subsidiary, which is a tax-incentive company, may be surrendered under group relief provisions to offset the profits of the parent company in the same tax year.
Mexico:
A Mexican resident company may elect to file a consolidated tax return with its resident subsidiaries. Once approved, the election is binding for a minimum of five tax years. The holding company may also file a consolidated return to pay the Asset Tax (currently 1.25% rate) due from the group companies.The tax consolidation is subject to several restrictions.
For example:
i. The holding company must directly or indirectly own more than 50% of the voting shares in the controlled subsidiaries, and the controlled subsidiaries must approve the tax consolidation.
ii. Not more than 50% of the voting shares of the holding company may be held by other companies. As an exception, this rule does not apply to foreign corporate shareholdings if the shareholders reside in a country that has a broad exchange of tax information agreement with Mexico.
iii. The amount of the income deferred due to the tax consolidation must be disclosed in the tax audit report annually.
The profits and losses are consolidated on a proportional basis, based on the average percentage equity owned directly or indirectly by the controlling company during the year. The holding company calculates the consolidated tax liability and files the consolidated tax return and makes the payment to the tax authorities.
Each subsidiary pays the tax liability relating to the minority interest directly to the Mexican tax authorities. Tax consolidation allows offset of losses against profits in the group as a single taxpayer. It also allows tax-free flow of dividends within the group without payment of taxes on distributed profits by the subsidiary.
Netherlands:
A resident parent company may elect to file a consolidated tax return with its subsidiaries under the “fiscal unity” rules (fiscaleeenheid) in the Netherlands. The parent company must own directly, or in certain circumstances, indirectly at least 95% of the issued share capital of its subsidiaries throughout the consolidation period (“group”).
A fiscal unity permits the group companies to pool their profits and losses and to transfer tax-free assets and liabilities and dividend distributions within the group. Intra- group dividends are not subject to withholding tax.
There is no requirement that all qualifying subsidiaries should be included, or that there should be full economic integration within the group companies. The group tax consolidation is allowed for companies that are either incorporated or effectively managed and controlled from the Netherlands.
It can, therefore, include foreign incorporated subsidiaries, which are tax resident in the Netherlands. In addition, Dutch permanent establishments of nonresident companies based in a treaty country are included. A subsidiary may be included in the fiscal unity from the date of acquisition.
A fiscal unity can be formed or terminated at any time during the year (with at maximum three months’ retroactive effect). The Ministry of Finance should approve the fiscal unity, but once granted it can be terminated at any time, if requested by any of the group members. The termination may be for part of the group.
Any losses generated during the consolidated period and carried forward remain with the parent company, unless the parent and the deconsolidating subsidiary specifically request a transfer of the losses to the subsidiary. In the case of branches, their profits and losses are transferred to the related deconsolidated subsidiary.
New Zealand:
The qualifying corporate groups in New Zealand may elect to offset losses either directly by filing a joint tax return (“group consolidation”) or indirectly by subvention payments or loss offset election (“group relief’).
Resident companies with 100% common ownership based on voting control may elect to file a single consolidated or joint tax return. For group relief, the group of companies must be at least two-thirds under the same voting control for the qualifying period.
The qualifying period is calculated from the year in which the losses arise until the end of the year when losses are offset. Part-year grouping is permitted in certain circumstances. If the group losses are offset against other group companies by subvention payments, they are treated as taxable income of the receiving company and the paying company may claim a tax deduction.
The group relief provisions also allow the inclusion of overseas subsidiaries; however, the loss companies wishing to subvent or offset must be tax resident in New Zealand or must carry on a business through a “fixed establishment” (e.g. a branch) in New Zealand.
Norway:
The parent company owning more than 90% (direct or indirect) of the voting shares in resident subsidiaries may form a group for tax purposes. The intra-group contributions may offset the profits of one resident company against the losses in another resident company within a qualifying tax group.
There is no minimum period of ownership provided the requirement is met at the end of the accounting period and they all have common year-ends. It is not necessary that all qualifying subsidiaries are included. Moreover, the parent company does not have to be Norwegian.
Each company is taxed separately under the group contribution system. The payment and receipt of the contribution must be shown in their respective statutory accounts. However, there is no requirement to make actual cash payment.
The assets may also be transferred within the group tax-free, if the transactions are made at their market value. The transferee’s cost for tax purposes is the transferor’s written down value.
Pakistan:
A subsidiary company may surrender its tax losses under group relief provisions to its holding company for set-off against its business income in that year and the following two tax years.
The holding company must be a public listed company and hold at least 75% of the share capital of the subsidiary for five years of its operation. Moreover, the subsidiary should own and manage an industrial undertaking. Any unused losses of the subsidiary can be carried forward for four years.
Poland:
Tax consolidation is permitted under a fiscal unity agreement entered into by a resident group of qualifying companies in Poland. The group reports its combined taxable profit in a joint tax return and makes a single tax payment for all the group companies.
To qualify as a “tax capital group” and retain the status, the companies from the group must satisfy all the following conditions:
i. All the companies must be Polish tax residents. The average share capital of each company within the group should be at least PLN 1 million.
ii. The parent company must directly own 95% of the shares in the subsidiaries. The subsidiary may not own shares of other companies in the group.
iii. The taxable income of the group in each tax year must be at least 3% of the gross taxable revenues of the group companies.
iv. The group companies must not benefit from any income tax exemptions, and should not have tax arrears.
The tax group agreement is binding for at least three years. Consolidation losses cannot be carried forward after the group terminates. Pre-consolidation losses are not carried forward. Intra-group dividends are exempt from withholding tax. In practice, the group consolidation election is not used often, primarily due to the profitability requirement.
Portugal:
Tax consolidation is permitted between a resident parent company and its 90% or more owned (directly or indirectly) resident subsidiaries that are fully taxable in Portugal and under voting control of the parent company.
They must all be Portuguese entities with effective management in Portugal. All qualifying subsidiaries have to be included. There is a minimum one-year period of ownership requirement with common year-ends.
Pre- consolidation tax losses cannot be set off against consolidated taxable profits. Claw-back provisions apply when the company leaves the tax-consolidated group. The Ministry of Finance grants the permission for a period of five years, subject to renewal.
The profits and losses of the group companies during the consolidation period may be netted for tax purposes. Besides the pooling of profits and losses of group companies, intra-group payments of dividends, interest and royalties are exempt from withholding taxes. Moreover, there is no capital gains tax levied on intra-group transfers during the period of consolidation.
Singapore:
Singapore introduced a group relief system in 2003.
To qualify for group relief:
(i) All the companies must be part of a qualifying group and
(ii) Have the same accounting year- end. A group comprises a Singapore-incorporated company and its qualifying Singapore- incorporated subsidiaries.
A company is a qualifying subsidiary if at least 75% of its ordinary share capital is owned, directly or indirectly by the Singapore parent company. Shareholdings by foreign incorporated companies are ignored. Transfers of excess current year’s losses, capital allowances (other than investment allowances) and donations are permitted under the group relief provisions.
Slovenia:
A consolidated tax return is allowed for wholly-owned resident companies on election. To qualify, the group companies must have the same tax year-end and conclude an entrepreneurial contract to transfer all their profits and losses to the controlling company for at least three years.
Inter-company dividends are exempt under the participation exemption. Pre-consolidation losses are ignored (and lost). Transfer pricing rules still apply to transactions between group companies. Tax incentives that cannot be claimed by group companies may not be taken into account to determine the group income.
The approval is binding for a minimum of three years. During the period, the companies must also file their own tax returns besides the consolidated return within four months of the tax year-end.
Update:
Group taxation was abolished in 2007.
Spain:
A Spanish group may elect to file a single consolidated tax return. The group comprises the resident parent company and all its resident subsidiaries that are at least 75% owned, directly or indirectly by the parent company.
As from year 2002, Spanish permanent establishments of nonresident entities in Spain can be the parent company of a tax group. The permanent establishment must not be controlled by a Spanish resident. Moreover, it must be resident in a treaty country with an exchange of information clause.
All qualifying subsidiaries must be included. They must be fully taxable and not be subject to fiscal transparency (e.g. CFC) rules. Tax-exempt companies, companies taxed at a different rate than the parent company and companies in specified legal situations (e.g. bankruptcy) do not qualify as a group company. Another company resident in Spain must not control the controlling company.
The group files a single consolidated tax return. No withholding tax is imposed on the dividends, interest and royalties paid among resident group companies. The fixed assets may be transferred tax-free within the group. The consolidated group status applies indefinitely until it decides otherwise.
On the expiry of the period, the unabsorbed losses may be prorated and carried forward by former group member companies. The losses prior to consolidation can be offset only against the profits of the same company.
Sweden:
Swedish law allows for shifting of income within a group of companies through contributions. Thus, a loss in one company can be set off against the profit in a qualifying company within the group.
To qualify:
(a) Both the paying and the receiving company must be tax resident in Sweden or in the European Economic Area;
(b) The parent company should hold more than 90% of the shares of the subsidiary for the entire fiscal year;
(c) Both companies must report the contribution during the same year; and
(d) Both companies must be Swedish limited liability companies. Profit-shifting among related resident companies through inter-company pricing is generally permitted.
Trinidad and Tobago:
The group relief provisions allow a company within a group to surrender its current trading losses to another member of the group. Both companies must be resident and be members of the same group throughout their tax year. A group company includes the parent company and its wholly-owned subsidiaries.
The group relief is only granted after the company has used all its depreciation allowances and loss carry-forwards. Moreover, the claiming company cannot reduce its tax liability by more than 25% through the tax losses of the surrendering company.
United Kingdom:
Under the group relief provisions, the current trading losses of a group company may be partly or fully surrendered to another group company for offset against its profits (including capital gains) for the same tax year by election within two years.
Apart from trading losses, excess management expenses, charges on income and certain unused depreciation allowances may also be surrendered. They may also transfer assets tax-free within a chargeable gains group.
The group comprises the parent company and all its subsidiaries that are owned 75% or more, directly or indirectly, by the parent company (unless the shares are held as inventory). Group relief is granted if the companies are subject to UK corporation tax.
From 2006, a UK resident parent company can claim group relief for losses of a nonresident subsidiary or permanent establishment in EEA countries where all scope for claiming non-UK relief is exhausted.
Similar group relief is also granted to a qualifying consortium of a UK resident company. A 51% owned resident subsidiary (more than 50%) may also elect to pay interest or royalties without withholding tax to a resident parent company.
United States:
An affiliated group may elect to file a joint or consolidated federal tax return, where the profits and losses are pooled. An affiliated group is a US parent corporation and all of its US subsidiaries, of which it owns, directly or indirectly, at least 80% of both the voting stock and value of all classes of shares (excluding certain non-voting preferred shares).
Each group company is jointly and severally liable for the total tax liability of the entire group. Group companies that are dual tax residents cannot use their tax losses twice under the dual consolidation loss rules and must make an election.
The United States applies special provisions to certain subsidiaries in Canada and Mexico. They may elect to be treated for tax purposes as domestic corporations in certain circumstances.
European Union Projects:
Currently, companies doing cross-border business within the European Union have to deal with up to 27 different tax systems of Member States. As a result, they are confronted with a wide range of tax issues that constitute obstacles to a Single Market.
The European Commission is working on a project to introduce a system of Common Consolidated Corporate Tax Base (CCCTB) to overcome some of the problems and to achieve greater EU-wide tax harmonization.
Under the CCCTB, a company would determine its taxable income from business activities within the EU under a single set of rules. The resulting consolidated tax base would then be distributed among the Member States under an agreed profit-sharing mechanism. Different options are under consideration.
They include formula apportionment (e.g. assets, payroll or sales) or methods based on value addition. The current proposals mention that the Member States shall retain full sovereignty over their tax revenues and also set their own national tax rates. Moreover, the Commission has clarified that it does not intend to make any proposal on harmonizing tax rates.
The European Commission announced its progress on this project in May 2007.
According to the Commission, it will help to:
(a) Reduce compliance costs and burdens of companies operating across the internal market;
(b) Resolve existing transfer pricing problems;
(c) Allow cross-border offsetting of profits and losses;
(d) Help to avoid double taxation; and
(e) increase transparency in tax competition.
The European Commission is also working on a pilot project for small and medium- sized enterprises within the Member States. Under this “Home State Taxation” scheme the taxable profits of the group are calculated according to the laws of the Member State in which the fiscal residence of the group parent company (e.g. head office) is located.
The Member States would not have to agree on a common tax base; they will only have to accept the tax base of each participating Member State. However, they will have to agree on a profit allocation formula.