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?
Tax (3rd edition)
Switzerland does not provide for fiscal consolidation. However, if the fair market value of the subsidiary of a Swiss entity falls below its tax book value, a depreciation reducing ordinary profits is allowed.
Yes. Under US tax law, US corporations that are affiliated through 80 percent or more corporate ownership may elect to file a consolidated return reflecting the group’s combined income and loss, instead of each corporation filing a separate return. In this regard, US corporations filing consolidated return generally are treated as a single entity. As a result, the losses of one corporation can offset the income (and thus reduce the otherwise applicable tax) of other affiliated corporations. Some states may not follow federal consolidated return filings.
Canada’s corporate tax system does not have a concept of consolidation. Certain types of inter-company loss consolidation transactions between related Canadian corporations are accepted by the Canadian tax authorities. These loss consolidation techniques cannot be used to import foreign losses into Canada.
Under domestic law a regime of group taxation is available upon request for corporations having a share in the statutory capital and the voting right of the group member of at least 50%. The consolidation takes place only for CIT purposes (for VAT different criteria are relevant).
The income of each group member company has to be calculated separately (including filing annual corporate income tax returns to the Austrian tax authorities) and is then allocated to the head of the tax group, which is the only entity of the group subject to CIT (i.e. it receives the CIT assessment for the whole group).
Also tax losses of first-tier foreign subsidiaries in which a sufficient financial interest is held by the group can be included in the group consolidation on a pro-rata basis, if the subsidiary is a resident of a country with which Austria has concluded agreements on mutual assistance in tax matters, subject to a recapture upon using the losses in the foreign jurisdiction in subsequent years or by leaving the group.
The group has a minimum duration of three calendar years; a recapture on a stand-alone basis takes place for all group members which are not meeting the minimum adherence of three full accounting years.
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 neutralised 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.
Tax losses are transferred by the members of the group to the head (parent-company) which is the only entity liable for CIT within the tax group. Tax losses can be carried-forward without time-limitation, and offset within a ceiling (of 1 million + 50% taxable profit).
2019 Finance Law should amend the tax consolidation group regime concerning the determination of the group taxable regime:
- removal of the neutralization of the intragroup waiver of debt with a financial nature or the equivalent subsidies;
- removal of the neutralization of the non-deductible share of dividends for financial expenses (i.e. 5% on dividends) for dividends paid outside the parent subsidiary regime (the share for financial expenses would be limited to 1% in such a case),
- removal of the non-deductible share of capital gain under parent-subsidiary exemption regime de la QPFC (i.e. 12% of the capital gain) which would be reduced at 5% (from 2019 or later).
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 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. Subsidiaries resident in countries with which Cyprus has a double tax agreement or an agreement to exchange tax information may also surrender losses in the same way.
No, fiscal consolidation rules do not exist in Brazil. In view of that, each company shall pay its own corporate income taxes. Losses from one company can not be relieved across group companies.
Germany operates a fiscal consolidation regime for income and trade tax purposes, a so-called fiscal unity (Organschaft). Within a fiscal unity the profits and losses are pooled and attributed to the parent company which is liable for the taxes. The requirements for establishing a fiscal unity for income and trade tax purposes are quite complex and formalistic. Amongst others, the parent and the subsidiary have to conclude a profit- and loss-pooling agreement which basically has to be carried out for a minimum term of 5 full years. During that period the profit- and loss-pooling agreement may only be terminated for good cause.
In addition, there is a fiscal unity for VAT purposes. Any supply of goods and service within the fiscal VAT unity is treated as non-taxable for VAT purposes.
Ireland does not operate a fiscal consolidation system but rather provides for a system of group relief. An Irish resident company can surrender losses to another Irish resident group company. The surrender is achieved by making an appropriate election in the corporation tax return. It is not necessary that payment is made for the economic value of the loss but a tax free payment may indeed be made. In order for a ‘group’ to exist there must be a 75% beneficial ownership relationship (directly or indirectly) between the two companies traced through companies resident in the EU or DTA partner jurisdictions.
In order to comply with the European Court of Justice ruling in the Marks & Spencer case, in certain circumstances an Irish company may also claim relief for losses sustained in a direct subsidiary resident in the EU.
Consolidated tax returns are generally not allowed under Israeli law; an exception applies, however, in the case of an Israeli-resident “industrial” company or a company that is a holding company of industrial companies. An industrial company is a company that receives at least 90% of its revenues from an industrial facility engaged in manufacturing activities including software and other high-tech companies’ activities. An industrial company, or an industrial holding company, may file a consolidated tax return on behalf of itself and its industrial company subsidiaries, provided that all the industrial companies included in the consolidated group are part of a single assembly line or manufacturing process.
Malaysian laws allows for group relief for a group of companies. Subject to the statutory requirements, a surrendering company may surrender not more than 70 per cent of its adjusted loss in the basis period of a year of assessment to one or more related claimant companies if both are tax residents in the basis year for that year of assessment and incorporated in Malaysia.
The Mexican Income Tax Law provides for an integration regime applicable to companies that belong to the same group. In general terms, in order to apply this regime, the “integrating” company must hold (directly or indirectly) at least 80% of the shares with voting rights of the “integrated” companies and all of the companies of the consolidated group have to be Mexican residents.
If this tax regime is applied, the integrating company will determine any taxes due by the consolidated group, having the possibility of deferring a portion of such taxes for a three-year period. However, it should be noted that this regime is not widely employed.
If a Norwegian resident company holds more than 90 % of the capital and votes of other resident companies, the companies will constitute a tax group. A company resident within the EEA can be the parent company in a Norwegian tax group.
Each company in a tax group is as a general rule treated as a separate entity for tax purposes, and there is no direct fiscal consolidation. Group companies can however make group contributions, which are tax deductible for the transferor and taxable income for the receiving company.
Group companies can also make intragroup transfers of assets without achieving immediate realisation of latent gains, i.e. the taxation is deferred.
The PE of a company resident in either the EEA or in a state with which Norway has a tax treaty may also qualify for the group consolidation benefits described above.
Group consolidations for tax purposes is not applicable in Panama.
There is no fiscal consolidation for tax purposes under Philippine tax laws. Likewise, there is no group contribution system for tax purposes. Corporations are treated separately for tax purposes. However, for tax investigation purposes, the Tax Authority considers the grouping of several companies under one controlling interest( usually set at 30%) to determine proper allocation of cost and expenses. Group contribution can be allowed across affiliated companies subject to proper documentation and it is usually cleared with the Tax Authority for a ruling to avoid an issue with tax examiners.
Portuguese companies which operate within an economic group may choose to be taxed under the group taxation regime (“RETGS”), as long as the following conditions are met:
- the parent company holds, directly or indirectly, including through a company resident for tax purposes in another member State of the European Union country or within the European Economic Area (in this case, only when an administrative cooperation agreement applies), at least 75% of the share capital of the controlled companies, and more than 50% of the voting rights;
- all group companies are tax resident in Portugal and subject to the CIT general regime;
- the parent company has held the relevant shareholding for more than 1 year (or from the date of its incorporation), is not controlled by any other company resident in Portugal which would qualify as dominant for the purpose of this regime, and it did not renounce to the application of the regime within the three previous years.
This regime is also available when the parent company is tax resident in another member State of the EU or of the EEA (if an administrative cooperation agreement applies) and holds the Portuguese subsidiary through a PE in Portugal, although it is then required that one of the Portuguese tax resident controlled companies be appointed as the responsible for the fulfilment of all the obligations under this regime (save from its PE in Portugal, the parent non-resident company will not be part of the Portuguese tax group).
For the determination of the group’s taxable profit, the tax losses of a controlled company may be offset against individual profits of other controlled companies.
A fiscal consolidation regime has been introduced since 2004. The regime is available to:
- Italian resident companies controlled by an Italian resident parent company;
- Italian resident companies controlled by a non resident parent company with an Italian permanent establishment, provided that the parent company is tax resident of a jurisdiction with an agreement for the exchange of information with Italy;
- Italian resident companies controlled by a parent company tax resident of an EU or EEA member State;
- Italian non-resident companies with an Italian permanent establishment can be included in the fiscal in the consolidation perimeter as controlling company (if resident in a State that signed a tax treaty with Italy) or as controlled company (if resident in a EU/EEA State).
Turkey does not allow fiscal consolidation of company groups. Each company within a corporate group must file tax returns and pay taxes individually.
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, certain principal assets 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. The 2017 tax reform has made clear that self-created goodwill or enterprise value of the to-be-consolidated subsidiaries does not need to be marked to market (thus giving rise to no mark-to-market gains). 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 Netherlands provides for a tax consolidation regime, known as a ‘fiscal unity’, pursuant to which corporate income tax (CIT) is levied from Dutch group entities on an integrated basis. One of the main advantages of the fiscal unity is horizontal loss compensation (i.e. within one financial year) between the companies included in the fiscal unity. Income generated by profitable companies will be offset by incurred losses from other companies within the fiscal unity, thus reducing the overall taxable profit. Furthermore, a single CIT return is filed on behalf of the entire group, which provides for an administrative relief.
A parent company must own at least 95% of the shares of a subsidiary (of each class of shares and the shares must represent 95% of the voting and equity interests) in order to form a fiscal unity. Various other detailed requirements must be met to form a fiscal unity (e.g. the same book years, the same legal form, etc.).
Application of the fiscal unity is optional and requires a prior request. The parent company and respective subsidiaries file a joint written application with the Dutch tax authorities. The application and formation can take place throughout the entire financial year and formation of the fiscal unity can have retroactive effect up to three months prior to filing the application, to the extent that the afore-mentioned requirements were met at that point in time.
The fiscal unity regime does not have a minimum or maximum term. However, in case of a formation of a fiscal unity and a termination that both take place in the course of the same financial year, the fiscal unity will be disregarded. Upon request, a fiscal unity can be terminated at any future given time during the financial year. If one or more of the enumerated eligibility criteria is not satisfied, the fiscal unity will immediately terminate.
The fiscal unity constitutes a true consolidation for CIT purposes. Consequently, CIT is levied on all companies on their consolidated taxable profit as if they were a single taxpayer. The fiscal unity has one fiscal balance sheet and one profit and loss account. Each member of the fiscal unity is in principle jointly and individually liable for the CIT liability of the entire fiscal unity. However, CIT assessments for this fiscal unity are only imposed on the parent company.
Transactions within the fiscal unity are disregarded for CIT purposes. This requires that remunerations with respect to obligations between the fiscal unity companies, such as interest or rent, are eliminated from the fiscal result. Assets can be transferred exempt from CIT within the fiscal unity, although they will become ‘tainted’ so that a tax liability may arise upon termination.
It is expected that the fiscal unity regime will slightly change with retroactive effect to 1 January 2018.
On 22 February 2018 the Court of Justice EU (CJEU) confirmed the application of the “per-element approach” and ruled that the Dutch fiscal unity regime infringes the freedom of establishment, as foreign entities cannot make use of this regime. The application of the per-element approach should imply that also foreign entities can make use of specific benefits of the tax consolidation regime.
However, the Dutch government does not like such explanation of the fiscal unity regime. Hence it announced that several articles in the Dutch CIT act need to be applied as if the Dutch fiscal unity regime does not exist. As a result, some benefits of the current Dutch fiscal unity regime will no longer be available in domestic situations. In that respect the Dutch Ministry of Finance proposed a tax bill to change the Dutch fiscal unity regime in the Dutch CIT act by implementing so-called ‘emergency repair measures’ (Repair Measures). The Repair Measures are aimed to have retroactive effect to 1 January 2018
The Romanian tax legislation does not allow any tax consolidation for groups of companies for the purpose of corporate income tax (except in case of several Romanian permanent establishments of a non-resident company). A tax loss can be transferred from one entity to another only in the case of a legal merger.
Losses can be carried forward indefinitely but there is no such relief. Although it is possible to have consolidated accounts for a group, there is no group relief available in Gibraltar for tax purposes. Entitles would be taxed individually in accordance with the profits of that entity.
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.