2.4.4.2 Group taxation regimes

Introduction

A group taxation regime generally allows resident companies to pool their results. If a group company suffers losses, a separate entity approach may give an incorrect picture of the economic reality of the group. It would therefore not be in line with economic reality if companies within a group are regarded as independent legal entities.1 Moreover, tax reorganization facilities for intra-group assets transfers are sometimes available within a group taxation regime. The regimes exist in various variants such as group contribution systems (in Finland), group relief systems (in the United Kingdom) and partial (France) or full (the Netherlands) consolidation systems.2 Countries that apply a group taxation regime base such a regime upon the dependency and connection between the entities.3 The extent to which legal personality is adhered to, and subsequently the degree of consolidation, differs per regime. In order to be eligible for the application of a group taxation regime certain requirements have to be met. The specific requirements depend upon the national legislation. In this section the requirements are subdivided into control requirements, integration requirements and other requirements.

The control requirements as imposed to be able to apply a group taxation regime use legal control, economic control and de facto control (either alone or combined). The main requirement for a group of companies to be able to benefit from a group taxation regime is that there should be common control by way of shareholding.4 The applicable percentages differ widely between countries.5 Generally, the shareholding requirements need to be fulfilled regarding voting rights, share capital and/or participation rights in profits and capital repayment on winding-up.6 This thus entails both elements of legal control7 and economic control.8 Basically, the number of shares held provides a simple but unclear indication of the control that is exercised.9 There are also countries that apply a de facto control approach. Under such an approach the question is, e.g., who has the right to appoint or dismiss a majority of members of the subsidiary’s management?10

Group regimes typically require a high control threshold. This aims at ensuring that the group is effectively integrated. In other words, the group treatment should only be available for companies that indeed form a single economic entity.11 Existing group taxation systems do not test whether there is true integration: the shareholding requirement is in principle key. The motive with which an interest is held is not taken into account.12

Generally, a tax group can be formed solely if the entities have a certain legal form. It should usually be a legal form that has legal personality and is subject to general corporate income tax rates.13 In most EU Member States, corporations are the only corporate forms that are eligible for group taxation.14 Additionally, permanent establishments can often form part of a tax group.

Most of the group taxation regimes solely provide for the possibility to include domestic entities within the scope of application. Various countries that do allow cross-border group taxation have adopted a specific group taxation regime to govern cross-border situations.15 Furthermore, ‘dormant companies’, which do not carry out business activities, cannot be part of the tax group in some countries.16 Excluding dormant companies from the scope of application is logical as they do not contribute to the economic entity. Under an economic group approach they would be excluded from the group by definition, because there would be no economic interdependencies.

The application of a group taxation regime is generally elective. An example of a country that takes another approach is Denmark. In Denmark all entities that meet the requirements automatically fall within the scope of the group taxation system.17