4.2.2.3 Other elements of group taxation regimes?

Introduction

Loss compensation within the group can be seen as the main feature of group taxation regimes.1 Group taxation regimes can, however, have additional consequences (e.g., fully disregarding intra-group relations). Rules that are in principle applied equally to stand-alone companies in both domestic and cross-border situations can be circumvented via a group taxation regime. If the group taxation regime extends only to domestic entities, this could lead to a more beneficial treatment of domestic situations. Below is a brief description, for illustrative purposes, of the Group Steria case in which the CJEU needed to answer the question whether the freedom of establishment requires a Member State to extend one specific element of its group taxation system to cross-border situations. Subsequently, the extent to which the fact that an entity is not a standalone entity is taken into account in the case is analysed. Furthermore, the question whether the OECD MTC takes account of tax groups is answered. To conclude, it is explained whether the model should take more account of tax groups given its objectives.

Groupe Steria

The Groupe Steria judgment2 revolved around the French group taxation regime. In this judgment the CJEU recognized the ‘per element’ approach within such group regimes. In short, this case concerns the question whether France may tax dividends received from foreign shareholdings at 5%, while dividends received from domestic shareholdings are not taxed at all as a result of the French tax consolidation regime. Groupe Steria argued that this is a restriction of the freedom of establishment.

The CJEU ultimately ruled that this is indeed an obstacle for which there is no justification. The combination of rules applicable in the case led to an advantage that was solely available in a domestic situation. In its judgment it also referred to the X Holding judgment (discussed in par. 4.2.2.2). The CJEU held that the fact that it ruled in X Holding that EU law does not require the full extension of tax consolidation regimes across borders does not mean that it is compatible with EU law not to grant other tax advantages in cross-border situations which are open to companies belonging to a tax-integrated group. For tax advantages other than the transfer of losses within the tax-integrated group a separate assessment must be made.3

From the Groupe Steria judgment it follows that each element that is available in a tax-integrated group must be assessed individually against the fundamental freedoms. Therefore, it may be possible for a taxpayer to request certain benefits, that are allowed domestically within a tax group, in a cross-border context (the ‘per element’ approach). This entails a variant of a group approach for taxpayers. A separate assessment for each advantage granted under the group taxation regime should be made in order to assess whether or not a discriminatory treatment exists. In this regard there is a difference between advantages that follow directly from a tax grouping regime (e.g., loss compensation), and advantages that follow from another rule but are only open to consolidated tax groups. As follows from the X Holding case, it is justified not to allow a parent company to offset losses with a non-resident subsidiary as part of a group taxation regime. From the Group Steria case it subsequently follows that the advantages that do not directly follow from a tax grouping regime, but are only open to consolidated tax groups, may need to be granted. All in all, the fact that a broad group approach is applied via the ‘per element’ approach, depending on the element, eliminates either juridical4 or a variant of economic5 double taxation.

A group approach for cross-border groups?

In the X Holding judgment the CJEU did not apply a group approach in cross-border situations, as it was not required to extend the Dutch fiscal unity regime to be able to include a foreign entity in a fiscal unity. In contrast to the X Holding judgment, the Groupe Steria judgment entails a variant of a group approach as for each advantage granted under a group taxation regime it should be determined whether a discriminatory treatment exists. The difference in outcome can be explained due to the difference in topic: in the Groupe Steria judgment it concerned benefits that are not a direct result of consolidation (e.g., loss compensation), but are more a side effect, which are due to the consolidation requirement reserved for domestic situations. In a later judgment, X BV and X NV, the Groupe Steria approach was confirmed.6 Providing a more advantageous treatment for domestic situations in which a group taxation regime is applied, while that combination cannot be achieved in a cross-border situation, could be in conflict with EU law. Extending the domestic benefits to cross-border situations can lead to the elimination of juridical and/or economic double taxation and is thus beneficial for taxpayers.

Tax groups & the OECD MTC

The question arises whether the OECD MTC should take more account of tax groups for application of the Convention.7 Group taxation regimes8 as such are currently not dealt with under the OECD MTC.9 In principle each member of the tax group is eligible for treaty entitlement (i.e., the tax group as a whole is not considered a person or a company for tax treaty purposes).10 The reason for this is the fact that group taxation regimes normally do not affect the treatment of their group members as taxable entities.11 It could be argued that the non-discrimination principle in tax treaties requires to extend the scope of application of a group taxation regime in certain situations.12 This could even be the case for the ‘per element’ approach.13 However, in some tax treaties the application of the ownership non-discrimination provision to group consolidation regimes is explicitly excluded.14

As described, the fact that the CJEU takes into account that an entity is not a standalone entity in the case law with regard to the ‘per element’ approach can eliminate juridical and economic double taxation and thus stimulate cross-border investments. Hence, it conceptually fits within the goals of the OECD MTC to take a similar approach. Via such a more economic perspective, in which attention is paid to the group situation of an entity, economic reality can be reflected better. Applying the OECD MTC to tax groups would require a major shift in approach. However, as tax groups are generally limited to domestic companies, by applying treaties to domestic tax groups the economic reality can never truly be reflected. This would merely be an attempt to counteract the harmful consequences of the separate entity approach. Therefore, a more comprehensive solution would be necessary. In my view a global group approach is required, meaning that the legal design of a company no longer influences the total tax burden. This point of view will further be discussed in the following chapters.