7.2.2 Defining the unitary business (‘who to tax’)

The first step is to define who to tax. As a result of the connection between legal entities, synergy gains can be achieved leading to lower transaction costs. Therefore, a group entity is not equal to an independent entity. Aligning with economic reality, which is required to create a tax system that is as neutral as possible, means taking the group as such as a taxable person.

The main question to determine whether there is a group is: is there a single entity from an economic perspective? A group exists if there is both control and economic integration. These two conditions are reflected in the term unitary business. A control test that requires de facto control is in line with economic reality and, as a result, contributes to the neutrality of the tax system. The subjective approach of the de facto control test is its strength and its weakness. Such a test requires a subjective assessment of the facts and circumstances of the situation. The group can consist of both directly and indirectly controlled entities. There should be effective control, which means the parent company is able to influence its affiliates to reach its own objectives. Minority interests should generally not be included in the group.

Solely being under common control is not sufficient to conclude that there is a single entity from an economic perspective. The second main element therefore is economic integration. This means that the activities are intertwined economically: there should be a business link. This business link leads to economies of scale. The various legal entities should pursue one overall business strategy. Additionally, a shareholding should be held as a capital asset to be part of the group from an economic perspective.

Under application of a unitary business approach corporate entities would be disregarded for tax purposes. Consolidation would take place at the level of the ultimate parent company. For this, the worldwide group should be the mandatory starting point. From a tax treaty perspective, the unitary business as such would be a person. All subsidiaries would in essence be permanent establishments of the ultimate parent company.