Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/2.1
2.1 Introduction
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS657767:1
- Vakgebied(en)
Europees belastingrecht / Richtlijnen EU
Vennootschapsbelasting / Fiscale eenheid
Internationaal belastingrecht / Belastingverdragen
Vennootschapsbelasting / Belastingplichtige
Voetnoten
Voetnoten
Basically, a multinational is ‘an enterprise that engages in foreign direct investment (FDI) and owns or, in some way, controls value-added activities in more than one country.’ (J.H. Dunning & S.M. Lundan, Multinational Enterprises and the Global Economy, Cheltenham: Edward Elgar 2008, par. 1.1.1). The choice of business organization lies at the heart of multinational enterprises. Entities organizing their business affairs have to decide whether to: ‘1. restrict their own activity to the “core business” and build a network of independent suppliers, distributors and financiers; 2. set up a decentralized structure of subsidiaries operating largely independently from each other under the common control of the parent company; 3. establish an integrated organization, using subsidiaries as dependent elements of the value chain; or 4. establish an integrated organization within one single company.’(W. Schön, ‘International Tax Coordination for a Second-Best World (Part III)’, World Tax Journal 2010, vol. 2, no. 3, par. 4.7.1).
A follow-up question is: why are incorporated companies regarded as taxable persons? Bird’s answer to this question is threefold: ‘because it may be desirable, because it may be necessary, because it may be convenient’ (R.M. Bird, ‘Why tax corporations?’, Bulletin for International Taxation 2002, vol. 46, no. 2). Tax authorities have timely access to corporate profits due to levying corporate income taxes. A direct allocation of profits to shareholders would not be practical, and shareholders do not have legal authority over these profits until distribution (International Fiscal Association, Cahiers de Droit Fiscal International – Group approach and separate entity approach in domestic and international tax law (vol. 106a), Rotterdam: International Fiscal Association (IFA) 2022, p. 19). Nevertheless, most economists agree that there are few arguments in favour of taxing companies. The main reasons are the economic distortions and the costs of imposing corporate taxes (J.G. Gravelle, The Economic Effects of Taxing Capital Income, Cambridge: MIT Press, 1994).
W.C.L. van der Grinten, Vertegenwoordiging en rechtspersoon (Asser-serie), Zwolle: Tjeenk Willink 1991, par. 6.
M.A.P. Bovens, ‘Hebben rechtspersonen morele plichten en fundamentele rechten?’, Ars Aequi 1998, vol. 47, no. 7/8, par. 2.
P. Blumberg, ‘The Transformation of Modern Corporation Law: The Law of Corporate Groups’, Connecticut Law Review 2005, vol. 37, no. 3, p. 606.
J. Dine & M. Koutsias, ‘The Three Shades of Tax Avoidance of Corporate Groups: Company Law, Ethics and the Multiplicity of Jurisdictions Involved’, European Business Law Review 2019, vol. 30, no. 1, p. 155.
Limited liability means that individuals behind the company are solely liable to the extent of their investment in the company. In case of bankruptcy, the liability will be limited to their contribution to the company’s assets (J. Dine & M. Koutsias, ‘The Three Shades of Tax Avoidance of Corporate Groups: Company Law, Ethics and the Multiplicity of Jurisdictions Involved’, European Business Law Review 2019, vol. 30, no. 1, p. 156).
P.H.J. Essers, ‘Chapter 6: Equal Tax Treatment of Legal Forms for Businesses in International Tax Law’, par. 6.01, in J. Monsenego & J. Bvuvberg (eds.), Taxation in a Changing Landscape: Liber Amicorum in Honour of Bertil Wiman, Alphen aan den Rijn: Kluwer Law International 2019.
To solve this problem, company law is increasingly looking at an enterprise as a whole. To determine whether an enterprise exists, the key word seems to be control. This is, in particular, about decision-making power with regard to a subsidiary. The second factor to be taken into account is whether or not there is collective conduct of an economically integrated enterprise. Other elements that may be considered in determining whether an enterprise exists are, inter alia, the following: ‘(a) a common public persona featuring a common trade name, logo, and marketing plan; (b) financial interdependence in which the parent or the group participate in financing of the subsidiaries, who do not raise their own capital independently; (c) administrative interdependence in which the subsidiary operates without its own legal, auditing, tax, public relations, safety, engineering, or research and development departments and relies on its parent personnel for such purposes; and (d) group identification of employees with group-wide, rather than company-by-company stock option, retirement, medical insurance, and related benefit plans, and group personnel assignments as executives move through various companies of the group during their careers.’(P. Blumberg, ‘The Transformation of Modern Corporation Law: The Law of Corporate Groups’, Connecticut Law Review 2005, vol. 37, no. 3, p. 610).
R.H. Coase, ‘The Nature of the Firm’, Economica 1987, vol. 4, no. 16, p. 386-405.
Of course, forming or being a group of companies can also have disadvantages. For example, a group is usually less flexible in making new strategic choices than an independent entity.
W. Hellerstein, ‘The Case for Formulary Apportionment’, International Transfer Pricing Journal 2005, vol. 12, no. 3, par. 3.2.
Different companies within a group can perform different functions. For example, one entity may be responsible for marketing, while another company is responsible for the final sale of products. Profits are in that case in principle realized at the level of the selling entity. However, these profits also partly belong to the supporting companies, such as the marketing entity. By adopting a group approach, it can be prevented that one entity reports a large profit while a group entity shows a loss. This makes it possible to reflect economic reality more accurately and neutral.
One can think of, e.g., intra-group dividends, gains on disposal and intra-group services and supplies.
As indicated, tax laws can never be fully neutral. However, they should at least be drafted in a way which keeps distortions as minimal as possible (K. Vogel, ‘Worldwide vs. source taxation of income - A Review and Re-evaluation of Arguments (Part II)’, Intertax 1988, vol. 16, no. 10, par. 1).
Civil aspects are irrelevant to answer the question how much taxable income is earned (M.F. de Wilde, ‘Een aanzet voor een rechtvaardigere heffing van vennootschapsbelasting voor in Nederland actieve groepen’, Maandblad Belasting Beschouwingen 2011/9, par. 9).
P.H.J. Essers, ‘Rechtsvormdiscriminatie in het nationale en internationale belastingrecht’, Weekblad Fiscaal Recht 2018/109, par. 1.
This is the case, for example, with CFC legislation, whereby low-taxed profits of a controlled foreign subsidiary are taxed again at the level of the parent company. Furthermore, a group regime may apply, whereby losses of group entities are mutually deductible under certain conditions. Another example of a provision in the national legislation of many countries, which takes into account the existence of a certain link between companies, is the participation exemption. For those type of rules, the separate entity approach is ‘breached on a selective basis’ (International Fiscal Association, Cahiers de Droit Fiscal International – Group approach and separate entity approach in domestic and international tax law (vol. 106a), Rotterdam: International Fiscal Association (IFA) 2022, p. 16).
E.g., the anti-fragmentation rule.
In this research the terms group concept and group definition are used interchangeable.
For the purposes of national corporate income tax law, a company is generally considered to be an independent legal entity. Such a legal entity is therefore, in principle, taxed separately from its shareholders. Legal entities are often part of a group of companies: a multinational or transnational enterprise.1 The question arises which elements, when combined, should lead to the conclusion that entities constitute a group. Prior to this, the following question can be asked: what is the legal reasoning behind the existence of legal entities?2 Legal personality has an ecclesiastical origin.3 It enabled keeping the assets of churches and convents together.4 Over the centuries, the concept developed into an essential element of today’s economy. The existence of legal entities has allowed the creation of companies, which trade separately from natural persons. A legal person represents certain collective and individual economic interests. Legal persons have their own rights and obligations, independent of their shareholders or participants, giving them the possibility to operate independently.5 It entails the recognition of the company as to a large extent similar to a natural person.6 Depending on the legal form, there may also be a limitation of the liability of shareholders.7 As a result, corporations can enter into contracts, without influencing the liability of shareholders and other stakeholders.8
Economic developments have impaired the appropriateness of company law developed in times of significantly less economic activity.9 Group companies are not the same as stand-alone companies. A group of legal entities may achieve certain advantages over independent legal entities. For instance, the entities within a group can use the same head office, where certain services are centralised. Moreover, a group of legal entities can realize cost savings, for instance, by centralising purchasing activities to increase purchase volumes or enhance purchasing expertise, and a group’s research department can provide benefits to other group entities. Group companies therefore benefit from synergy gains, thus reducing the transaction costs within a group.10 A group’s business operations are usually highly centralised, which generally reduces business risks. The various parts of the group function as a single economic entity with the common goal of profit maximization.11
Under the separate entity approach the separate identity of each entity within a group of associated, affiliated or commonly controlled corporates is recognized for tax purposes. The profits of such a corporate entity are determined on an individual basis by applying the arm’s length principle.12 It is difficult – or even impossible – to identify the profits attributable to each member of the group as a result of the connection between them.13 The transactions and arrangements between the group entities, even though they may form an economically integrated business, are thus reflected for tax purposes. All intra-group transactions are, in principle, important for determining the taxable amount.14 Reflecting legal independence for tax purposes can influence taxpayers’ choices.15 If taxation affects legal form decisions, there is no legal form neutrality.16 The different tax consequences of the legal form of a group of companies may lead to suboptimal choices of legal form.17 More importantly, adhering to the legal form encourages the creation of tax avoidance arrangements.
As the separate entity approach leads to outcomes that are not in line with economic reality and can lead to double taxation as well as provide tax avoidance opportunities, in many cases the existence of a group relationship is taken into account when levying profit tax.18 As described in the previous chapter, also at a tax treaty level specific rules for groups of companies exist.19 Tax treaties restrict domestic legislation. Therefore, to be able to arrive at a treaty-based definition of the notion of a group, it is important to take a step back. The question should be asked at a more general level: what should be the framework conditions for a group concept20 for tax purposes? To be able to pursue the OECD MTC objectives, these framework conditions should be established with a view to stimulate cross-border activities: they should eliminate double taxation and should not provide opportunities for tax avoidance. Apart from that, they should stimulate cross-border economic activities. Thus, the group concept should contribute to the neutrality of the tax system, i.e., it should distort economic processes as little as possible. In this chapter, neutrality more specifically relates to legal form neutrality. Taxation should not influence decisions regarding the choice of legal form.
In order to ultimately arrive at a treaty-based definition of the notion of a group, the following section explains the group concept from a general perspective. Par. 2.2 focuses on the theory of the firm, an economic view towards companies in a group. Par. 2.3 discusses the group concept from an economic perspective. Par. 2.4 describes various existing tax law group concepts (the group concept as reflected in the OECD MTC and related sources, the group concept as included in European directives and draft directives in the field of direct taxation, as well as the group concept from a national point of view) to determine whether they provide insights for a to be established group concept for tax treaty purposes. The chapter ends with a brief conclusion (par. 2.5).