2.3.1 Introduction

Generic terms are used to refer to the corporate group: the firm, the company or the corporation.1 Both a corporation as such (i.e., not a group) and the corporate group are firms as defined in the theory of the firm described by Coase. Both are economic organizations that emerge when it is less costly to internalize production than to coordinate transactions in a market.2

There is no generally applicable group concept. The following definitions can, inter alia, be found in the literature:

In short, a group exists when several independent legal entities, under the guidance of a legal entity, engage in business activities and form an economic unit. The typical corporate group consists of a parent company and its direct and indirect subsidiaries, which all have their own legal identity and corresponding rights and obligations. As a result of such a parent-subsidiary organization structure, the potential liability for the parent company with respect to the operation and potential claims of its subsidiaries can be minimized.5

Some existing group definitions impose a requirement for the size of the shareholding, while others use an open standard. An open standard usually means fewer opportunities for tax avoidance. An open standard is often associated with fairness.6 An open standard could lead to much discussion about whether or not an entity is part of a group. This would have a negative impact on the administrative burden. A clear standard will enhance practicability and legal certainty. Defining a group definition requires weighing conceptual attractiveness and administrative issues. A conceptually attractive group definition generally leads to problems from an administrative point of view. A group definition that is attractive from an administrative perspective could lead to manipulation more easily.7 If a certain percentage of shares is used, it is clear in principle which entities do or do not fall within the scope of the group definition. However, the size of the shareholding as such is not necessarily a clear indication of the influence that can be exercised on business activities.8 The amount of voting rights would be a better indicator in this respect. A disadvantage of a clear standard also is that it may encourage unwanted use.9

Usually, the key defining characteristic of a corporate group is control.10 Control formally exists if there is ownership of a majority of the voting rights of the corporate shares. The fact that there is control does not necessarily mean that there is one entity from an economic perspective.11 The second element in this regard is whether there is a single integrated enterprise, i.e., an economic unity.12 This basically means that there should be economic interdependencies within the group. Both elements will be elaborated upon in the remainder of this section: in par. 2.3.2 control is described, par. 2.3.3 discusses integration. Subsequently, an interim conclusion is drawn (par. 2.3.4). This section describes groups mainly from an economic perspective. Specific tax aspects, such as the existence of permanent establishments, are hence not discussed.