Capital 7: Group taxation Flashcards
What approach generally prevails in corporate taxation?
The separate legal entity approach prevails, where corporations are taxed independently.
In which cases is the separate legal entity approach of taxation abandoned?
It is abandoned when corporations belong to:
- A group of companies, or
- A fiscal unity
What defines control in a group of companies or fiscal unity?
- 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.
What are the main concepts of group taxation?
- Loss compensation
- Loss compensation and deferred taxation of inter-company transactions.
What is a partnership?
- 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
What is the issue with üüartnerships in civil and tax law?
- treatment varies from country to country
- Interaction of civil and tax law varies
How can partnerships be defined under civil law?
Partnerships can be defined as:
- Legal entities, or
- Entities with no or only partial legal identity.
How does tax law interact with civil law in defining partnerships?
Tax law may either follow civil law or deviate from it
What principles are used to treat partnerships in tax law?
Partnerships can be treated according to:
- The transparency principle, or
- The corporate principle
What occurs when characteristics of transparency and corporate principles mix?
A hybrid taxation system occurs = option between corporate and transparency principle
What are the three types of partnerships in civil law?
- 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
What are the features of a partnership regarded as a legal entity?
- Own legal capacity.
- Owner of assets and liabilities
- Entitled to the claim and indebted to the claim.
- Can conclude contracts with partners.
What are the features of partnerships with no or partial legal identity?
- No legal capacity
- Partners own assets and liabilities
- Partners are entitled to and indebted to the claim
- Cannot conclude contracts with partners
What is the taxation of partnerships which are legal entities for tax purposes`?
Taxation is based on the corporate principle.
What is the taxation of partnerships which have a option between corporate and transparency principle?
Hybrid taxation occurs when there is an option between the corporate and transparency principles
What principle applies to partnerships with no or partial legal identity?
Taxation is based on the transparency principle.
What is the core distinction between the corporate and transparency principles?
- Corporate principle: Strict isolation between partnership and partners; taxed independently
- Transparency principle: No strict isolation; taxation occurs at the partner level
How is income taxed under the corporate and transparency principles?
- 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).
What happens to partnership profits under each principle?
- Corporate principle: Partnerships can retain profits (deferral possible)
- Transparency principle: Partnerships cannot retain profits.
How are partnership losses treated under each principle?
- Corporate principle: Partnership losses cannot offset partner income
- Transparency principle: Partnership losses can offset other income of partners.
How are contracts between partnerships and partners treated in tax law?
- Corporate principle: Contracts are accepted in tax law
- Transparency principle: Contracts are not accepted in tax law
How are management and financing contracts treated for under the two different principles of partnerships ?
- Under the corporate principle: Accepted for tax purpose
- Under the transparency principle: May be accepted or disregarded for tax purposes
What is the effect of accepting contractual relations on payments?
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)
What is the basic idea of the corporate principle?
Corporate principle: is to treat a partnership as a corporation and the partners as shareholders
Partnerships profit subject to CIT, and partners subject to PIT
What is the basic idea of the transparency principle?
Transparency principle: is the same as the taxation of the sole proprietor
- Profits qualify as business income and subject to PIT
What are the consequences of non-acceptance of contractual relations?
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
