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 (2nd Edition)
Tax consolidation is used precisely to obtain a unique tax result for a whole group of entities.
In the Basque Country and in Navarra there are special statutory regimes which imply some differences in the Corporate Income Tax compared to the national regime. This could generate some judicial problems regarding the application of consolidation.
Consolidation is the correct process to manage that losses obtained by the entities of the group are taken into account in the final unique result.
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 merger.
Under Australia’s income tax consolidation regime, a wholly-owned corporate group of Australian resident entities (companies, partnerships and trusts) can elect to be treated as if it were a single entity for the purpose of calculating its income tax liability or tax loss. The head company and subsidiary members of the consolidated group must not be prescribed dual residents. If an Australian-owned group chooses to consolidate, then the decision is irrevocable and all of the head company's eligible wholly-owned subsidiaries must become members.
Where a foreign-owned group of Australian resident subsidiaries does not have a single resident head company, the Australian group can elect to form a multiple entry consolidated group (an MEC group).
Very broadly, the subsidiary members of a consolidated group are treated as if they were divisions of the head company, rather than separate taxpayers. As a result, the tax attributes of the group, including losses, are recognised by and “belong to” the head company of the group and can be applied to reduce the taxable income of the group.
The head company of the tax consolidated group is primarily liable for the tax liabilities of the whole group. If the head company defaults in discharging the liabilities, then the subsidiary members of the group are jointly and severally liable unless there is a valid tax sharing agreement in place which effectively caps the liability of each subsidiary member.
The income tax consolidation regime only applies to income tax and does not impact on the member’s liability for other Federal taxes (although for completeness there are other consolidation regimes which can operate in respect of other taxes, such as the Goods and Services Tax).
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).
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.
Belgium does not have a fiscal consolidation regime. Neither are there any rules on what can constitute a group for tax purposes.
The Belgian government has announced in its July Agreement that it is examining the possibility of introducing a consolidation regime.
This is not applicable in Bulgaria.
The United States 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 be 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 of the tax code, regulated investment companies, real estate investment trusts and S corporations.
Ukraine does not provide for fiscal consolidation of company groups. Each company must pay profit tax on its profits and individually bear the risk of losses.
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.
There is not tax consolidation allowed in Ecuador. Each entity of a business group is taxed separately.
However, for information purposes, the local tax administration is allowed to group several entities into an economic group. An economic group is defined as a sum of parties (entities and individuals), local and foreign, where one or more own directly or indirectly 40% or more of the participation of the other. The tax administration can also take into consideration, for this purpose, common direction/administration and commercial relations between them.
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.
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 available.
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.
A fiscal consolidation regime has been introduced since 2004. Only companies tax resident of Italy may be included in the fiscal unity. 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.
Taxation under the special tax regime for groups of companies is available, to companies with head office and effective management in Portugal. The group taxation regime may apply, provided one of the companies directly or indirectly holds 75% or more of the statutory capital of the others and more than 50% of the voting rights.
The application of this tax regime depends on the fulfillment of the following requirements:
- Companies must be tax residents in Portugal (even if held through an EU or EEA group company);
- Companies must be subject to the normal regime of taxation at the highest corporate tax rate;
- Companies must maintain a minimum holding participation of 75%;
- All companies must be held by the parent company for more than one year (excluding newly incorporated companies);
- Companies cannot be inactive for more than one year;
- Companies cannot be dissolved or insolvent;
- Companies cannot have tax losses in the three years prior to the regime application, unless the companies have been held by the parent company for more than two years;
- Companies cannot have a tax period different from that of the parent company.
Additionally, the parent company:
- Should not be controlled by any other Portuguese-resident company that fulfils the requirements to be the parent company;
- Should not have renounced to the application of this regime in the three previous years.
The application of this tax regime normally allows the group to offset losses incurred by one company against profits of another company. Tax losses obtained prior to the beginning of the tax grouping can be carried forward and offset only up to the particular company's taxable income.
It is possible to apply the group taxation regime if the dominant company has its registered head office or place of effective management in an EU or EEA country (in the latter case, provided there is administrative cooperation on tax matters similar to the one in place with the European Union).
For income tax purposes, fiscal consolidation is not recognized in Kenya. Every taxable person is required to file a separate tax return. Tax losses cannot be relieved across a corporate group and are only accessible to the person who has incurred the tax loss.
Under the VAT Act, the Cabinet Secretary may enact regulations on registration of a group of companies as one registered entity for VAT purposes. We however note that no regulations have been enacted yet to bring this provision into effect.
A “tax capital group” (TCG) can be formed in Poland for the purpose of consolidating Corporate Income Tax only by (at least three) limited liability or joint-stock companies based in Poland and under relatively strict conditions (e.g. the minimum term of the agreement - three years; the minimum share of income in the revenue of the tax group cannot be lower than 3% in each year; or the average share capital of each company cannot be lower than PLN 1,000,000). Taxable income for the group is calculated by combining the incomes and losses of all the companies forming the group.
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 has a so-called fiscal unity regime for corporate income tax purposes. Pursuant to this regime a parent company and its subsidiary, upon joined request, will be considered one entity for Dutch corporate income tax purposes and file one tax return in the name of the parent company. Losses incurred by a member of the fiscal unity can be offset against taxable profits of other companies within the fiscal unity (vertical and horizontal). In order to form a fiscal unity for Dutch corporate income tax purposes, the following main conditions must be met:
- the parent company owns (directly or indirectly) at least 95% of the nominal paid-up share capital of a subsidiary, including statutory voting rights and profit entitlement;
- the fiscal years of the parent company and the subsidiary coincide;
- the profit of the parent company and the subsidiary is determined according to the same tax principles;
- the parent company is a NV, a BV, a Coop or a similar company incorporated in an EU member state and tax resident in the Netherlands;
- the subsidiary of a fiscal unity is a NV, a BV or a similar company incorporated in an EU member state and tax resident in the Netherlands.
As of January 1, 2014 an optional regime for groups of companies was incorporated to the Income Tax Law. 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 with which Mexico has concluded a tax information exchange agreement.
On the other hand, more than 80 per cent of the voting shares of a corporation must be directly or indirectly (or both) held by an integrating company for the first to be eligible as an integrated 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 in articles 72 and 73 of the 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.
In Norway, group companies are taxed as independent taxable entities. However, Norway has rules that permit group contributions, i.e. transfer of taxable income. The rules are applicable to Norwegian corporations that belong to the same group, provided that the parent company holds more than 90 % of the shares and the voting rights of the subsidiary. Under certain conditions, the rules also apply to Norwegian branches of foreign companies that are resident within the EEA. Group contributions are deductible for the contributor and taxable for the recipient. Group contribution with tax effect may not be given or received with respect to income subject to the Norwegian petroleum taxation regime.
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.
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.