Capital 7: Group taxation

Question 1

What approach generally prevails in corporate taxation?

Answer 1

The separate legal entity approach prevails, where corporations are taxed independently.

Question 2

In which cases is the separate legal entity approach of taxation abandoned?

Answer 2

It is abandoned when corporations belong to:

• A group of companies, or
• A fiscal unity

Question 3

What defines control in a group of companies or fiscal unity?

Answer 3

• Subsidiaries are controlled by a parent company
• Control is exercised through majority shareholding, meaning the parent company holds the majority of the subsidiary’s shares.

Question 4

What are the main concepts of group taxation?

Answer 4

• Loss compensation
• Loss compensation and deferred taxation of inter-company transactions.

Question 5

What is a partnership?

Answer 5

• Association of two or more persons/partners
• Based on a partnership agreement
• Apportionment of profits and losses between the partners
• Existence depends on the existence of the partners–
• At least one partner is a general partner
• General partners exercise management and representation of partnership

Question 6

What is the issue with üüartnerships in civil and tax law?

Answer 6

• treatment varies from country to country
• Interaction of civil and tax law varies

Question 8

How can partnerships be defined under civil law?

Answer 8

Partnerships can be defined as:

• Legal entities, or
• Entities with no or only partial legal identity.

Question 9

How does tax law interact with civil law in defining partnerships?

Answer 9

Tax law may either follow civil law or deviate from it

Question 10

What principles are used to treat partnerships in tax law?

Answer 10

Partnerships can be treated according to:

• The transparency principle, or
• The corporate principle

Question 11

What occurs when characteristics of transparency and corporate principles mix?

Answer 11

A hybrid taxation system occurs.

Question 12

What are the three types of partnerships in civil law?

Answer 12

• General partnership: Each partner is a generall partner
• Limited partnership: At least one partner is a general partner, other could limit their liability
• Special shapes: possibility all partners could limit their liability

Question 13

What are the features of a partnership regarded as a legal entity?

Answer 13

• Own legal capacity.
• Owner of assets and liabilities
• Entitled to the claim and indebted to the claim.
• Can conclude contracts with partners.

Question 14

What are the features of partnerships with no or partial legal identity?

Answer 14

• No legal capacity
• Partners own assets and liabilities
• Partners are entitled to and indebted to the claim
• Cannot conclude contracts with partners

Question 15

What is the taxation of partnerships which are legal entities for tax purposes`?

Answer 15

Taxation is based on the corporate principle.

Question 16

What is the taxation of partnerships which have a option between corporate and transparency principle?

Answer 16

Hybrid taxation occurs when there is an option between the corporate and transparency principles

Question 17

What principle applies to partnerships with no or partial legal identity?

Answer 17

Taxation is based on the transparency principle.

Question 18

What is the core distinction between the corporate and transparency principles?

Answer 18

• Corporate principle: Strict isolation between partnership and partners; taxed independently
• Transparency principle: No strict isolation; taxation occurs at the partner level

Question 19

How is income taxed under the corporate and transparency principles?

Answer 19

• Corporate principle: Income is taxed in the partners’ hands when available (cash principle)
• Transparency principle: Income is taxed when realized at the partnership level (accrual principle).

Question 20

What happens to partnership profits under each principle?

Answer 20

• Corporate principle: Partnerships can retain profits (deferral possible)
• Transparency principle: Partnerships cannot retain profits.

Question 21

How are partnership losses treated under each principle?

Answer 21

• Corporate principle: Partnership losses cannot offset partner income
• Transparency principle: Partnership losses can offset other income of partners.

Question 22

How are contracts between partnerships and partners treated in tax law?

Answer 22

• Corporate principle: Contracts are accepted in tax law
• Transparency principle: Contracts are not accepted in tax law

Question 23

How are management and financing contracts treated for tax purposes?

Answer 23

• Under the corporate principle: Accepted for tax purpose
• Under the transparency principle: May be accepted or disregarded for tax purposes

Question 24

What is the effect of accepting contractual relations on payments?

Answer 24

Reduces profits at the partnership level

Payments are categorized as income at the partner level, e.g.:
* Employment income (management contract).
* Investment income (financing contract)

Question 25

What are the consequences of non-acceptance of contractual relations?

Answer 25

Payments may be treated as:
- Preferred profit or additional profit share.
- Added back to the partner’s business income.

Total business income remains unchanged, only the apportionment between partners is affected