Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Trading losses incurred by one member of a group of companies may be offset against trading profits of another group company by way of group relief, provided that the losses and profits were accrued in the same year of assessment and both companies were members of the same group for the whole of the tax year concerned. A subsidiary that is formed during a tax year (as opposed to an existing company that is acquired) is treated as being a member of the group for the whole tax year. Two companies are deemed to be members of a group if one is the 75% subsidiary of the other or both are 75% subsidiaries of a third company. A '75% subsidiary' means holding at least 75% of the voting shares with beneficial entitlement to at least 75% of the income and 75% of the assets on liquidation. Until the 2015 tax year group loss relief was available only for losses incurred by Cyprus tax resident companies. In order to align the loss relief provisions with the decision of the European Court of Justice in the Marks & Spencer case, the law was amended in 2015 so that a subsidiary company which is tax resident in another EU member state can surrender its taxable losses to another group member company that is tax resident in Cyprus, provided the subsidiary has exhausted all means of surrendering or carrying forward the losses in its member state of residence or to any intermediate holding company. The amount of taxable losses that may be surrendered is calculated on the basis of the Cyprus tax laws.
According to Articles 31-36 of Law 4308/2014, the “Group companies” – under conditions - have to prepare consolidated financial statements. In particular, the assets and liabilities of the above entities are entirely incorporated in the consolidated balance sheet. In addition, their revenues, profits, costs and losses are fully consolidated in the consolidated income statement apart from the joint activities, which are consolidated using the method of proportional consolidation.
Consolidation is not necessary and consolidated financials are not submitted to any tax authority. It is up to groups’ decisions either to prepare consolidated financials or not.
An optional regime for groups of companies was incorporated under the Mexican Income Tax Law that entered into force as of January 1, 2014. This regime is composed of two types of companies: an integrating company and the integrated companies.
In general terms, this optional regime enables the integrating company to determine income tax due by the group on a consolidated basis and to defer a portion thereof for up to three fiscal years.
It should be noted that in order for a legal entity to be eligible as an integrating company, the following conditions ought to be met: (i) it must be a Mexican tax resident; (ii) it must hold more than 80 per cent of the integrated companies’ voting shares (even if said shares are indirectly held by the integrating company by means of another integrated company of the group); (iii) no more than 80 per cent of the integrating company’s voting shares ought to be held by one or more companies, unless they are tax residents of a jurisdiction that has entered into a broad exchange of information agreement with Mexico.
Concerning integrated companies, in order for a corporation to be eligible as such, more than 80 per cent of its voting shares must be directly or indirectly (or both) held by an integrating company.
Additionally, the following legal entities are expressly prohibited from being considered either as integrating or integrated companies under the optional regime at hand: (a) non-profit legal entities; (b) legal entities that are considered to be part of the Mexican financial system, such as the Mexican Central Bank, financial, insurance or bonding institutions, hedge funds and stockbrokers, amongst others; (c) foreign tax residents even in cases where they have a permanent establishment in Mexico; (d) civil partnerships and cooperatives; (e) legal entities that operate under a coordinate regime set forth by articles 72 and 73 of the Mexican Income Tax Law; (f) joint ventures in terms of article 17-B of the Federal Tax Code; (g) maquila companies (a special regime of twin or manufacturing plants in Mexico); and (g) legal entities that have pending net operating losses that were generated before the relevant entity met the necessary requirements in order for it to be eligible as an integrating or integrated company.
The UK does not provide for fiscal consolidation of company groups. Each company within a corporate group must pay corporation tax on profits. However, group relief, which allows certain types of loss of one group member to be surrendered to another, is available. Any amount of trading losses, non-trading loan relationship deficits and excess capital allowances may be surrendered and do not need to be used first by the loss-making company. However, all other current-year losses (such as property business losses, qualifying charitable donations) can only be surrendered as group relief to the extent that they exceed the surrendering company’s other profits in the accounting period.
Yes. Japanese corporation tax law has consolidated taxation regime. A Japanese corporation (a consolidated parent company) and its wholly-owned direct and indirect Japanese subsidiaries form the consolidated group. Foreign corporations, whether as a consolidated parent company or a consolidated subsidiary, cannot be included in the consolidated group. To qualify as a consolidated subsidiary, all of its issued shares must (save very limited exceptions) be wholly-owned, either directly or indirectly, by the Japanese corporation as the consolidated parent company. It is not allowed to “cherry-pick” subsidiaries to be subject to the consolidated taxation regime; so long as a subsidiary has a relationship of direct or indirect 100% shareholding with the consolidated parent company, it must be included. The consolidated taxation regime is elective, i.e., it shall apply only if the Japanese tax authority has approved the consolidated return filing based upon an application by the consolidated group.
Under the consolidated taxation regime, taxable income of a member of the consolidated group will be offset against losses of another member. It must be noted, however, that, upon entering into the consolidated taxation regime, all the assets (including goodwill or enterprise value) of all the consolidated subsidiaries shall in principle be marked to market to crystalize all unrealized built-in gains and losses pertaining to those assets, and such consolidated subsidiaries will report taxable income (or losses) accordingly. Also, net operating loss carryforwards of all the consolidated subsidiaries shall in principle be disregarded in their entirety upon entering into the consolidated taxation regime. While there are several exceptions to these rules, they often become an obstacle for election of the consolidated taxation regime if no such exception is available. On the other hand, there is no mark-to-market requirement for the consolidated parent company and the net operating loss carryforwards of the consolidated parent company will survive the consolidation election.
The consolidated taxation regime is currently for national corporation tax only. There is no consolidated taxation regime for local taxes (inhabitants tax and enterprise tax).
Along with the consolidated taxation regime, under Japanese corporation tax law, there is another different but similar taxation regime, referred to as a “group-based taxation regime.” The group-based taxation regime applies to transactions among Japanese corporations (not including foreign corporations) having the relationship of direct or indirect 100% share ownership, or substantially the same as the relationship for the consolidated taxation regime. If a member of the group sells certain assets owned by it to another member of the group, gains and losses arising from the sale will be deferred at the seller, until the purchaser further disposes of such assets out of the group or other realization event occurs. If a member of the group makes donation to another member of the group, the donation is not deductible at the donor, and is not taxed as gift (or receipt of economic benefit with no consideration) at the donee. However, no set-off of profits and losses among the group is available under this regime. It is important to note that the group-based taxation regime applies mandatorily, regardless of elections by the taxpayers, unlike the consolidated taxation regime.
The U.S. allows for related companies to file consolidated returns. For these purposes, companies are related if they have a common parent owning stock in at least one of the controlled corporations and are connected through stock ownership of at least 80% of the voting power and 80% of the value of the stock of the controlled corporation.
Certain entities are generally not eligible to part of a consolidated group including foreign companies, tax-exempt companies, certain insurance companies, companies electing to take the possession tax credit under Section 936, regulated investment companies, real estate investment trusts and S corporations.
There is no tax consolidation in Hong Kong and no group contribution system. Each entity of a group is required to deal individually with its own tax affairs.
Yes, groups of corporates can choose to be taxed on a consolidated basis, provided that certain participation requirements (as a general rule, a direct or indirect participation of 75%) are met.
Under the tax consolidation regime, tax losses can be offset by the group against the overall profit, with certain limitations in the case of losses obtained prior to the formation of the group.
The requirements for an Austrian tax group are the following:
- the group parent must be either an Austrian corporation or an Austrian registered branch of an EU resident corporation. Several companies may jointly act as a group parent, provided that at least one company holds at least 40% and the other companies hold at least 15% in the prospective group member;
- Austrian or foreign companies which are in a legal form comparable to an Austrian corporation may participate as group members. Foreign companies can only be a member of the group if they are directly held by the Austrian group parent or if they are a member of an Austrian group;
- to qualify as a tax group, the group parent has to hold a direct or indirect participation of more than 50% in the share capital as well as a majority of the voting rights of the Austrian or the foreign subsidiary ("financial integration"). The requirement of financial integration must be met during the entire business year of the participating subsidiary;
- the group parent and the group members must file a written application for group taxation with the revenue office. The application is binding for at least three years; and
- group taxation is optional. The option can be exercised separately by each company that is a potential group member.
Under the tax group rules, all taxable profits and losses of the Austrian group members are attributed to the group parent.
The tax group regime allows direct foreign subsidiaries of Austrian tax group members to be included in an Austrian tax group. As a result, tax losses of non-Austrian group members can be used temporarily in Austria but are subject to recapture and taxation in later years if: (i) they are available to be used or actually used in the foreign jurisdiction; (ii) the foreign subsidiary ceases to be a tax group member or to exist at all; or (iii) the foreign subsidiary’s business is scaled down significantly.
From 1 January 2015, this regime is restricted insofar as the total amount of foreign tax losses that can be used in a given year is limited to 75% of the taxable income of Austrian tax group members (including the Austrian head of the group). Foreign losses that cannot be used in a particular year become part of the tax loss carry forwards of the head of the group. Also from 1 January 2015, income generated by the recapture of previously utilized foreign losses can be fully offset against tax losses carried forward (previously such income was subject to the general 75% limitation on utilizing tax loss carry forwards).
Since 1 March 2014, foreign tax group members may only be subsidiaries resident in EU countries or countries with broad mutual assistance in tax matters. The membership of existing group members resident in non qualifying countries was automatically terminated as at 31 December 2014. As a result, any foreign losses of such subsidiaries previously utilized by the Austrian head of the tax group which had not yet been subject to recapture and taxation as at that date were subject to recapture and taxation as at 1 January 2015. To mitigate the impact of this provision, income generated through this tax pick-up is spread over three years and 100% utilization of any tax loss carry forwards is possible.
Yes, Germany allows the pooling of income and losses among members of a fiscal unity (Organschaft) . The prerequisites for establishing an Organschaft are quite complex and formalistic. It is inter alia required that the controlled subsidiary and the controlling parent enter into profit and loss pooling agreement with a minimum term of five years that is actually performed for so long it is in place. During the minimum term the profit and loss pooling agreement may only be terminated for good cause.
If an Organschaft is in place, the (positive or negative) taxable income of the controlled entity is attributed to the controlling parent company and taxed at the level of the parent. Therefore, a liability to pay income taxes typically only arises at the level of the controlling parent. The controlled subsidiary is, however, secondarily liable for those taxes of the controlling parent, for which the Organschaft between the two entities is relevant from a tax perspective.
Belgium does not allow fiscal consolidation for the purpose of corporate income tax (‘CIT’). Furthermore, there are no general provisions in Belgian tax law regarding group taxation or group consolidation. Companies are taxed on a stand-alone basis.
Yes, Italian tax legislation provides for the tax consolidation regime. Italian companies and Italian branches of a foreign company belonging to the same group can opt for the tax consolidation. Furthermore, option for such regime is now available also to Italian sister companies having a common foreign parent ("consolidato tra sorelle").
Whether a "group" exists will depend on whether the "control requirement" is satisfied (as defined in Article 2359 of the Italian Civil Code). The "control" must have existed since the beginning of each financial year in relation to which the controlling company or the subsidiary has opted for the consolidation.
The option for the tax consolidation allows the determination, at the controlling company’s level, of a “consolidated” taxable income equal to the sum of all the Italian taxable income (or tax losses) of the companies included in the tax consolidation.
In determining the aggregate taxable income, regardless of the level of interest held in the subsidiaries, the parent company must aggregate the total net income of each subsidiary which has opted for the tax consolidation. The distribution of dividends among companies included in the tax consolidation is subject to the ordinary regime (95% tax exempt if the requirements for the participation exemption are met), while the compensation granted to those companies which transfer tax benefits to the consolidation (eg losses, deductible interest expenses etc.) is fully tax exempt. Tax losses incurred before the exercise of the option for the tax consolidation can only be used by the company that incurred those losses.
There is no consolidated groups of corporates for tax purposes except that the domestic tax law allows for group relief for companies. Group relief is available to all locally incorporated resident companies subject to the terms and conditions as provided under Section 44A of the Income Tax Act 1967 effective from the year of assessment 2006. The provision of group relief allows a company in a group to surrender (referred to as surrendering company) not more than 70% of its adjusted loss in the basis period for a year of assessment to one or more related companies (referred to as claimant company) within the same group.
Ireland does not employ a fiscal consolidation regime. Instead, there are rules permitting the surrender of losses between companies that are grouped or are members of consortiums. In addition, transfers of assets can occur at their capital gains tax basis between members of a capital gains tax group. Groups can be traced through any corporate entity resident in the EU or an EEA country with which Ireland has entered into a double tax treaty.
Ireland also recognises groups of companies for the purposes of VAT and stamp duty.
The FTC provides for a tax consolidation regime that allows consolidation of profits and losses of individual group companies. The head of the group is solely liable for the payment of income tax on the aggregated taxable income on behalf of the whole group. Intragroup transactions are neutralized within the tax consolidated group.
To set up a tax group, a French company must not be 95% or more owned, directly or indirectly, by another French company and must own, directly or indirectly, at least 95% of one or more French affiliates that would join the tax group.
A 'head company' (including a corporate limited partnership) and its wholly owned subsidiaries can be consolidated for tax purposes and treated as a single entity. Under that arrangement, dealings between the group members are disregarded from a tax perspective and the head company is responsible for satisfying all the group liabilities to tax that accrue throughout the income year.
The election is an irrevocable all-or-nothing choice (ie the group must include all wholly owned subsidiaries). The head company must be an Australian resident for tax purposes. Residential requirements for subsidiary members of the group will vary depending on the type of entity (company, trust or partnership).
As discussed above, the head company is responsible for the group's tax liabilities. Contribution is generally a matter for the entity's internal management. However, if the head company defaults on its tax obligations, the subsidiary members are jointly and severally liable for the entire group liability unless there is an effective tax sharing agreement in place. A tax sharing agreement effectively caps the amount of tax a subsidiary will be responsible for satisfying. Such agreements will only be effective if the entirety of the liability outstanding is allocated and the allocation is reasonable. Commercial practice is to allocate the tax liability according to each member's contribution to the tax liability.
A separate grouping regime is available for GST purposes. This is a more flexible regime, allowing grouping of 90% owned entities and allowing the decision of whether or not entities should be grouped to be made on an entity by entity basis. This means that GST groups are often different to the consolidated income tax groups.
No, Switzerland does not provide for fiscal consolidation. However, if the fair market value of a subsidiary of a Swiss entity falls below its tax book value a depreciation reducing ordinary profits is available.