5.2.1 Introduction

For purposes of national tax law, in principle the civil law is the starting point with regard to the taxation of legal entities. Independent legal entities are therefore subject to taxation separately from any shareholders. Group relationships are recognized under certain circumstances. If a group company sustains losses, a separate entity approach may give a wrong picture of the situation. It is therefore not in line with economic reality if companies within a group are regarded as independent legal entities.

A group taxation regime recognizes the interdependence of companies for tax purposes. As discussed in chapter 4, corporate groups generally aim to achieve two tax objectives: (1) offsetting profits and losses of members of the group, and (2) deferring the recognition of gains arising from asset transfers between group members.1 The national corporate income tax legislation often provides for a group taxation regime that makes it possible for corporate groups to achieve those objectives.2

Legal form neutrality is often a motivation for countries to implement a group taxation regime. To a certain extent legal form neutrality is achieved when a company that conducts its business via various permanent establishments, has the same tax burden as a company that conducts similar activities via various subsidiaries. In other words, identical economic situations should be treated equally for tax purposes.3 This would mean economic processes are distorted as little as possible. Via a group tax regime, the economic unit and the corresponding possibilities to pay taxes can be reflected better.4

Generally, in domestic group taxation regimes either transfer pricing rules are not applicable in an intra-group context, or they are applied in a ‘much more lenient fashion’.5 The reason for this is that for national tax authorities it is not relevant in the end whether one domestic entity or the other domestic entity pays the tax. Apart from that that, permanent establishments of non-resident companies in the country are generally included in the scope of application of a group taxation regime. Additionally, a benefit of the application of a group taxation regime is often that no withholding taxes are levied on intra-group dividends, interest and royalties.6

There are differences in the scope of application and the consequences of the various group taxation regimes.7 The most common group regimes are discussed starting with the regimes that most adhere to the legal reality.8 Additionally, it is discussed to what extent the application of group taxation regimes leads to conflicts with tax treaties. Subsequently, it is analysed whether the approach taken would fit within the objectives of the OECD MTC. In this respect the focus is on whether the system would provide for less double taxation, less tax avoidance opportunities, or in other words, whether it would lead to a more neutral system.