5.2.2.2 Group contribution system

Under a group contribution system one member of the group gives another member a ‘contribution’ by transferring profit (not losses) from one company to the other. Therefore, the system provides the possibility to set off losses in an intra-group context, i.e., to balance profits and losses within a group of companies. The transfer is generally considered to be a deductible cost for the contributing group entity and a taxable benefit for the receiving company. The contributions are mainly used by profit-making entities that want to reduce their tax liability.1 The receiving company’s tax position is irrelevant.2 The contribution can be recognized solely for tax purposes or may be followed for the preparation of the financial statements. The regime is normally applicable for domestic group members only.3

In comparison with the application of the separate entity approach, a group contribution system contributes to legal form neutrality, as the tax position of a group of companies is more comparable to that of single entities.4 Of the tax grouping regimes, group contribution regimes most adhere to the separation of legal entities.5 Each group entity is treated as a single taxpayer.6 There is no single group tax base.7 Intra-group transactions remain visible under a group contribution system. Additionally, the separate legal entities within the group remain the relevant taxpayers for tax filing and collection purposes.8