2.3.2.3 Level of control

The next question is: how much control is needed by a parent company over an entity to be considered a group entity? There should be effective control over the entity. Effective control in general exists if a parent company is able to influence the affiliates to reach its own objectives.1 The ultimate parent company of a group is in principle the company over which no other entity has effective control.2

A minority interest should not be included in the group, if there is no effective control in such a situation. In that case, the minority shareholder will not have the possibility to decide upon the activities of the group entities. As the interest held does not give the holder sufficient economic power to influence the underlying business affairs of its participations, there is no single economic entity.3 Any double taxation (as the shareholder reports a benefit from the minority interest held, while the concerned entity also reports profits) as a result of this choice should be dealt with by other means. This can be done for example via the participation exemption.

It would depend on the exact division of control how joint ventures would have to be treated. An entity equally owned by its two shareholders would form a taxable entity separate from its shareholders. As both shareholders would not have effective control, there would not be one economic entity.4

The term definite influence plays an important role in CJEU case law and can be seen as the CJEU variant of effective control. To determine the applicable treaty freedom, it is relevant whether a holder has the definite influence in the decision-making of another company5 and can determine its activities.6 In this regard a substantive assessment based on the facts of the situation should take place. The CJEU has not clearly defined what is sufficient ownership to conclude that definite influence exists:7 no strict ownership requirement is given. Definite influence always exists if there is a 100% holding.8 Definite influence does not necessarily require a majority interest. Rather, there should be a controlling interest.9 A 25% holding, can in certain situations be sufficient to conclude that definite influence exists.10 However, a 10% holding is in principle not sufficient to conclude that definite influence exists.11 In general, having a small ownership stake in an entity does not necessarily mean that no control over the entity exists. Effective control can result from the holding of a minority interest. This can for example be the case if a person is a substantial shareholder in a widely-held company and that shareholding gives the person the effective control over the appointment of directors.12 Though, this is not the case if there are multiple shareholders with substantial holdings.13

From the above it follows that it is difficult to quantify when there is effective control. For application of an economic group concept aimed at legal form neutrality, a quantified ownership requirement would not be logical. Whether or not there is effective control should depend on the facts and circumstances of the situation. As already indicated, the size of the shareholding is not necessarily a good indication of the influence that can be exercised over the business activities.14

If the group includes a shareholding of less than 100%, the question arises whether all the income of that group member should be included in the tax base, or solely the share that reflects the group’s ownership percentage in the entity. The former increases administrative simplicity.15 However, theoretically including a pro rata amount seems logical, as solely that percentage of profits/losses of the group member actually belongs to the group. Though, because the entities are part of the group, the profitability will normally be higher than if it were a separate entity (in accordance with the theory of the firm). This implies that a higher than pro rata amount should be allocated to the group, which would lead to a subjective system that is difficult to apply.16 Thus, it seems most logical to include 100% of the income of subsidiaries that are not fully owned. The interest should also be fully reflected on the balance sheet of the consolidated entity.

A potential problem with the definition of a group is the fact that a company could possibly fall within the scope of the group definition of two different groups. It does not seem logical for an entity to belong to more than one group, as this would not reflect economic reality.17 Applying the group concept solely when there is effective control avoids this issue.

In the case of minority shareholders exercising joint control, the existence or absence of control should be assessed on the basis of the common interests. It should be determined, based on an analysis of the facts and circumstances, whether shareholders are in fact acting together to control an entity. Such an ‘acting-in-concert’ or ‘acting together’ test looks at the facts and circumstances of a situation and thus reflects the economic reality. An advantage is that such a substantive approach may indicate more accurately than a more mechanical test whether or not there is cooperation between shareholders. However, a disadvantage is that it increases complexity and the administrative burden.18 A system based on de facto control does not require introduction of an acting together test, as the assessment of the facts and circumstances already entails such a more subjective approach.

For an economic group concept aimed at achieving legal form neutrality, no quantified ownership requirement should be used. To come to the conclusion that a group exists from an economic perspective, there should be effective control (or in the words of the CJEU: definite influence). Consequently, minority interests generally do not fall within the scope of the group definition, as there is no effective control. Looking at all the facts and circumstances to determine whether effective control exists, means that an acting together test is superfluous.