2.4.3.7 Interim conclusion: the group concept in European directives and draft directives

The group definitions discussed in the various directives and draft directives can be summarized as follows:

The various directives and draft directives do not have an unambiguous group definition. Most directives do not provide for a group definition, or only an implicit one. The picture is fragmented and the various group definitions seem to have been chosen specifically with a view to the particular scheme. The question is whether this has always been interpreted logically.

For dividends (10%), a broader group concept is used than for interest and royalties (25%). This can be explained by the different treatment of dividends versus interest and royalties on a national level. Dividends are not deductible when determining taxable profit, whereas interest and royalties are deductible when determining that profit in most countries. As dividend payments are more likely to be subject to double taxation, it seems appropriate to apply a lower share percentage in the PSD than in the IRD. In this context, it appears logical that the PSD applies to more legal forms than the IRD.

The question is whether it is logical to require a minimum share percentage of 10% for dividends – from the perspective of the objective of avoiding double taxation. The minimum share percentage of 10% means that investment structures fall outside the scope of the scheme. The EC did not consider it relevant in this context that a group formation in the internal market (i.e., a non-investment structure) can also occur with a share percentage of less than 10%. However, an advantage of the clear share percentage is that it leads to an easily enforceable definition.

As the previous explanation shows, the ATAD contains various – implicit – group definitions. There is no clear rationale for the choice of the different percentages. To provide more background, the underlying BEPS reports for the aforementioned ATAD provisions have also been explained.

For the group exception, the earnings stripping rule refers to the group concept for the preparation of commercial financial statements. For the group definition of the earnings stripping rule, reliability is considered important. In this context, a practical and workable definition has been chosen. An existing group concept has been followed, i.e., the group definition used for the consolidated financial statements. It would seem that following this group definition is appropriate, given the background of the group exemption. As a result, it is easy to determine whether or not the financing ratio of the taxpayer exceeds the group financing ratio.

The CFC rule assumes a 50% share percentage. A relatively high percentage of ownership is used for the CFC rules. This seems logical from the purpose of the scheme: only if a parent company exercises control over the income of a low-taxed company, this income is attributed to the parent company. Since this is a relatively heavy ‘penalty’, a broad application of the scheme would lead to unreasonable results. Whether or not control exists should be tested on a continuous basis, with a view to combat tax avoidance. Additionally, all persons that can exercise control should be included in the scope of application

For hybrid mismatches, a group concept based on 25% of the shares is introduced as the main rule. This means that a broad group concept is applied. This was rightly chosen in view of the objective of the hybrid mismatch rules, which is to prevent tax avoidance.

The only draft directive that pays extensive attention to the group concept is the CCCTB Directive. This is pre-eminently a draft Directive in which the group concept is important. The group definition in the CCCTB Directive consists of various elements. There must be control and ownership. In addition, the thresholds set must be met throughout the year. Finally, there is a minimum requirement of nine consecutive months to establish whether a company is a group entity. Whether there is economic integration is not tested. Therefore, the group definition does not reflect economic reality.

The group definition of the draft Pillar Two Directive fully relies on the group definition as used under the applicable accounting framework. If the applicable accounting method is IFRS, this would mean a workable definition is used. However, the flexibility would be limited, and tax laws would partially depend on the decisions of a private-sector body.

Almost all discussed group definitions include permanent establishments. This is logical, as a permanent establishment means that the business of an enterprise is wholly or partly carried on via a fixed place of business. A group definition – if it would be introduced within the current existing system – should thus also take account of permanent establishments within the group.