Taxation of Concerns

Taxation of concerns refers to multinational as well as medium- or small sized trade organizations, which are organized by cross-border groups of corporations. Inherent to the frameworks of group corporations is the international and complex litigious environment, which requires a tailored approach as the complexity is caused by various divergent anti-abuse regulations, Controlled Foreign Corporation (rules), corporate tax laws, bilateral tax treaties, unilateral policies and jurisprudence. As a result, the custom-made method of action for an organization entails compliance with these rules and regulations and a sensible and anticipating attitude to the build of the corporate group framework, as the prevention of an overkill of crossing legislation is vital.

Cross-border group corporations will be faced with the stipulations following from the vast amount of regulation governing the taxation of concerns, when they execute their day-to-day business operations, such as the granting of a group loan and the subsequent question of entitlement to interest deduction or the distribution of profits to an associated firm. The intrinsic complex situations arise when limitations are applicable to different participations or when there is a concurrence between diverse so-called contaminated acts in law. Nevertheless, group corporations’ information needs are directed at the conditions under which they are permitted to structure their business organization and subsequent business decisions, without disqualifying for the right to E.g. interest deduction.

The graphic examples below could clarify the complexity facing group corporations, when they for instance decide to undertake an internal re-organization or an external acquisition.

Note: the graphics left are mere general examples to illustrate the complexity facing group corporations; without prior (legal and/or fiscal-economic) expert consultation, it is not intended to be applied in one’s personal or business situation in any way, shape or form. Please review our Legal notice; Van Clamsfield International Ltd. does not accept any liability for the consequences of any acts or omissions based on the information content of this website.

The above graphics show the complexity of the concurrence of multiple acts in law, yet which are typical in everyday business operations of group corporations. Both Graphics show a framework, whereby three nations and thus three taxation jurisdictions are involved, namely the USA, the Netherlands and the Isle of Man. The graphics look alike, but do not represent a similar situation. In graphic A, Inc. M represents the mother corporation of the entire group. In graphic B, Inc. M. represents the mother corporation of its subsidiaries BV S1 and Ltd. X and after acquisition, its granddaughter enterprise, BV S-GD. In Graphic B, BV E is an external party, whereas in Graphic A, BV S2 represents the subsidiary of Inc M.

The concurrence of the acts in law of both Graphics A and B is found in the fact that consecutively: BV S1, located in the Netherlands, distributes its profits to Inc M, located in the U.S. Then Inc M formally deposits capital to Ltd. X, located in the Isle of Man. Consequently, BV S1 borrows money from Ltd. X to pay the purchase price for respectively the internal re-organization (graphic A) and the external acquisition (graphic B). The difference is that in Graphic A that the purchase price is paid to a subsidiary of Inc M within the group organization of the enterprises, whereas in Graphic B it shows that the purchase price is paid to a third party outside the group.

The difference between a sale from within the group (internal re-organization) and an acquisition from an outside party (external acquisition) resonates in the fiscal treatment of the entire group. The divergent acts in law, add complexity, to the determination of which benefits (deductions and tax exemption) and which limitations will apply in what taxation jurisdiction. Van Clamsfield International Ltd. can provide robust answers and solutions to frameworks as displayed in graphics A and B. Naturally these graphics are mere examples. In reality, a range of possibilities and applications of corporate frameworks exists. The actual framework for a group of corporations needs to be tailor-made, as all acts in law have a different fiscal outcome if they are executed for another purpose or within another jurisdiction. Therefore, it is of vital importance to assess the business environments and business considerations that are founded within the group, prior to the completion of the business framework and subsequent acts in law.

“Intelligence without ambition is a bird without wings.”

Salvador Dali (11/05/1904 – 23/01/1989), Spanish Artist

Van Clamsfield International Ltd. renders advisory services concerning the below-mentioned applications with respect to fiscal frameworks of concerns:

1. Associated enterprises and methods of the undercapitalization measure: calculation on behalf of enterprises, which can opt for application of the concern test in addition to the fixed test;
2. Information on conditions and requirements concerning the anti-profit drainage measure, the tax exemption for participations, the deduction of interest in group framework financing situations, qualification of low-taxable investment funds;
3. Determination of liquidation value; fiscal aspects of liquidation losses and liquidation payments;
4. Formal requirements for application of the legally documented group interest box regime, calculation of group interest balance and corporate taxation liability;
5. Fiscal-economic assessment of devaluated legal claims in group (in)corporations: fiscal consequences of the corporate taxation burden with respect to the sale of legal claims, or the issuance of new company shares to fulfill the deposit obligation, or the formation of a fiscal unity or valuation changes in shares;
6. Guidance on the requirements to the formation of a fiscal unity: fiscal consequences with regard to mutual claims and debts, decrease in value after termination of fiscal unity, the sale of an enterprise associated with the fiscal unity, fictitious profit split within fiscal unity, transfer of a component of capital within fiscal unity, settlement of losses for both the holding firm and the subsidiary after termination of the fiscal unity;
7. Insight into the all-round fiscal consequences of reorganizations: corporate take-over (stock merger, corporate merger and judicial merger) and judicial corporate split-up (demerger, spin-off).

The most recent development in the taxation of group concerns is that the European Union (EU) intends to introduce one EU system for computing a qualifying group of companies’ taxable income, also known as the common consolidated corporate tax base (CCCTB). The presented plans of harmonized corporate taxation rest on the same foundations promulgated in Dutch corporate tax law. Therefore, frameworks that make use of group organizations located in the Netherlands will also be applicable to a potential European route in the future. Van Clamsfield International Ltd.’ primary objective in this regard, is to assist group companies in the improvement of the optimal utilization of their fiscal establishment climate.