3. Secondary establishment Flashcards
What are the three general types of secondary establishment?
- New business / PE (permanent establishment)
- Subsidiary
- Partnership
What is a Permanent Establishment?
A new business that we set up, for example production, retailing or support. The PE is a part of the original company (complete integration), the company is thus taxed as a whole. Profits and losses of the company’s businesses are thus automatically set off against each other, and costs related to the establishment are deductible against all taxable income.
How is a PE taxed when it is national/domestic compared to when it is international?
When national, the PE is taxed through the original company. All business profits are summed up.
When the PE is international, it is still taxed on the full worldwide income in the original company’s home state. The profits of the PE is however also taxed for in the source state.
When using the credit method, profits and losses can thus be set off against each other, and there are no consequences for moving assets between the establishments. In reality, there is thus only residual taxation in the home state after deductions for given credit.
With the exemption method, the home state only taxes a company for its domestic income. The foreign PE is thus only taxed in the source state. This means that there are tax consequences for moving assets, and profits and losses can not be set off against each other.
What is a subsidiary?
A new company. A subsidiary is generally a different tax subject/payer than the parent company, since they are different legal entities. The parent company and the subsidiary are thus taxed separately, and have limited responsibility towards each others’ creditors (limited risk for parent company).
What is group consolidation and when it is allowed in Sweden?
Untaxed profits and losses within the company group can be set off against each other, even if the individual companies are different tax subjects. When both companies are within the same state, they are seen as one fiscal unit and hence taxed together.
In Sweden, group consolidation is allowed as long as the parent company owns at least 90% of the subsidiary.
What are the benefits of group consolidation and what is an alternative solution when it is not allowed?
Group consolidation creates an opportunity to move losses between companies to set off profits. This allows for neutrality between single companies and groups (PEs and subsidiaries) within the same country.
When group consolidation is not allowed, the group runs the risk of being taxed for more profits than what has been generated on a group level. This can however be mitigated OVER TIME where loss carry forward allows companies to deduct losses from future profits. Most states allow for unlimited carry forward of losses.
What is a participation exemption for subsidiaries and when it is allowed?
With a subsidiary, there is risk for chain taxation where profits are both taxed in the subsidiary (as income) and in the parent company (as dividends). A participation exemption is a grant for not taxing dividends (applies for taxed income).
It creates neutrality between single companies and groups. The parent-subsidiary directive (EU) allows for a participation exemption as long as the parent company holds at least 10% of the shares in the subsidiary.
What is a Partnership?
They normally have at least two owners, and it can be two companies within the same group. Partnerships are their own legal entities, but are generally not tax subjects. Instead the parent companies are taxed for their share of profits, and they can deduct any shares of losses.
Sometimes the parent companies can be protected against the partnership’s creditors, but it is not always the case. Profits and losses are calculated at partnership level but are taxed on owner level (depending on each owner’s share).
How is a foreign subsidiary taxed?
Since a subsidiary is a different tax subject than the parent company, we do not consider any foreign income. The parent company and the subsidiary are taxed for their worldwide incomes in their respective home states. Generally, we can not deduct a foreign subsidiary’s losses against a parent company’s profits (when only dealing with subsidiaries).
What are tax opportunities when we have both a subsidiary/company and a PE in the same state?
There is a possibility for group consolidation between the PE and the company that are in the same state (for the tax in that state). If the PE is foreign, it is also a part of the home states tax base.
