2.4.5 Some observations

Some of the described group definitions impose a requirement for the size of the shareholding, while others use an open standard. As already discussed in par. 2.3, because of the better alignment with economic reality and the limitation of tax planning options, I believe an open standard is preferable. Supplementing an open standard with a possible minimum share percentage which, by definition, qualifies as a group company (for instance, as with the OECD concept closely related enterprise) can also be a feasible option with a view to efficiency, practicability and legal certainty. However, this does not lead to a system that is in line with economic reality.

The shareholding requirement varies widely in the various group definitions discussed. The inconsistent picture can be explained by the different objectives pursued by the provisions. For those schemes which essentially seek to avoid double taxation (such as the PSD), the question may arise as to whether there should be additional requirements beyond the possession of a shareholding. After all, double taxation comes into play even in the case of a very limited shareholding. By excluding the limited percentages, investment structures are excluded from the scheme. Since it is only at higher share percentages that a group is formed economically, a pure investment vehicle should not fall within the scope of a group definition.

The group definitions have different scopes which can be explained by their objectives. Some schemes use a list of legal forms to which the provision applies. Such a design provides legal certainty. However, such a list may allow for tax planning. In addition, including only certain legal forms within the scope of a group definition does not reflect economic reality. The group definitions used in the OECD MTC cover natural persons, legal entities and unincorporated legal entities. The definition includes both legal entities and unincorporated legal entities and thus has a wide scope, which limits tax planning possibilities while providing clarity. After all, all legal forms can fall within the scope of the group definition. Including natural persons in the definition – even though this is already done in the OECD MTC – does not seem logical for a group approach for tax purposes. The reason for this is that natural persons are subject to personal income taxes, instead of corporate income taxes.

The definition of a group in the aforementioned sources is not always limited to entities established in a certain country. This is, in fact, logical. After all, a group can carry out activities across national borders, which will usually be the case in practice. Entities resident outside a certain country that are part of an economic unit, in which there is connection and central management, should therefore be regarded as a group company for treaty purposes.

The schemes discussed refer to direct interests, or to direct and indirect interests. In order to prevent circumvention of the group concept, I believe that it would be desirable to refer to both direct and indirect interests. Additionally, permanent establishments generally fall within the scope of the group definition. This should also be the case for a group definition if it would be introduced in the current international tax framework.

A group taxation regime is normally elective. In contrast, the unitary business approach is mandatory. Once the requirements are met, an entity falls within the scope of the unitary business. A mandatory regime is in line with economic reality and is thus preferable from that point of view.

With a view to combatting tax planning opportunities, the question also arises whether a certain holding period should be assumed before there is a group. For instance, the CCCTB Directive requires a minimum holding period of nine months. Through such a test, the CCCTB Directive aims to prevent manipulation of tax outcomes. The PSD and IRD both offer the possibility to set a minimum holding period of two years. For treaty purposes, a minimum holding period of 365 days currently applies under art. 10 OECD MTC. In order to prevent abuse, it could be important to introduce a minimum holding period for a group definition for treaty purposes. However, if the single integrated entity is taken as the starting point, the group definition already makes sure that such abuse is not possible.

Furthermore, the CCCTB Directive provides that if a taxpayer no longer meets the thresholds, it immediately loses its group company status. Such a starting point also seems logical for a group concept for the application of tax treaties. This would mean that the assessment should be a continuous process. Such continuous assessment will prevent abuse and would follow from taking the single integrated enterprise as the starting point.1

The draft Pillar Two Directive uses financial accounting standards to define the group concept. As indicated in par. 2.3.2.2, the group definition for financial statements would be advisable from a practical perspective as the increase of the administrative burden would be limited. A disadvantage is that the already existing definition would not be tailored for tax purposes. More importantly, it would not be desirable to opt for this definition, as it would mean that the tax laws would partially depend on the decisions of a private-sector body.

The question arises whether conflicts of EU law may arise if an EU Member State applies a different definition of the group concept in a tax treaty with one EU Member State than in a tax treaty with another EU Member State. Should a most favoured nation treatment apply in this context? Such treatment would mean that a Member State has the right to be treated equally to the treatment in the most favourable State. CJEU case law shows that it seems to be possible to conclude that a most favoured nation treatment need not be applied for the purposes of tax treaties.2 The CJEU ruled that a benefit included in a tax treaty cannot be separated from the rest of the agreement. The benefit forms an integral part of a tax treaty and contributes to the overall balance of mutual relations between the two Contracting States.3 A Member State is therefore not obliged to also grant a certain benefit provided for in a tax treaty with one Member State to other Member States with which a tax treaty has been concluded that does not provide for that benefit. Having regard to the abovementioned case law, in cross-border situations within the EU different group definitions in tax treaties which result in one Member State being treated more favourably than another should not be contrary to EU law. This case law has been extended to tax treaties with third countries.4 In short, from an EU law perspective, there seems to be no problem if different group definitions are used in different tax treaties. Such an interpretation would add to complexity.