06 Jul 2023
This article will delve into the details of several articles of the Ministerial Decision released in accordance with relevant provisions given in Corporate Tax Law, focusing on ownership requirements, resident person status, transaction treatment, asset valuation, relief for pre-grouping tax losses, transfer pricing documentation, business restructuring, income from intra-tax group transfers, notification requirements, and financial statement preparation in relation to forming a Tax Group under Corporate Tax. These articles provide essential guidelines for companies operating within a tax group and shed light on various aspects of corporate taxation. Understanding these provisions is crucial for businesses to comply with tax regulations and optimize their tax liabilities.
Ownership Requirements
Article 2 emphasizes that for a tax group to be formed or continue to exist, the specified conditions outlined in Clause 1 of Article 40 of the Corporate Tax Law must be met continuously throughout the relevant tax period. The share capital is defined as each subsidiary's nominal issued and paid-up share capital or membership or partnership capital.
Resident Person
Article 3 establishes that the parent company and subsidiary must be resident persons for tax purposes. They must not be considered residents in another country or foreign territory for tax purposes. Suppose a member of the tax group becomes a resident in another jurisdiction the relevant member shall be treated as leaving the Tax Group from the beginning of the Tax Period in which it became a resident for tax purposes in such other country or foreign territory.
- Documentation Requirements: This article also addresses the requirements for foreign juridical persons considered resident persons or those effectively managed and controlled in another country or territory. Such entities must maintain documentation supporting their non-resident status for tax purposes in that other jurisdiction. This documentation may include confirmation from the relevant tax authority or competent authorities in accordance with international agreements.
Transactions Prior to Forming or Joining a Tax Group
Article 4 clarifies that deductible losses recognized by a member of a tax group in respect of transactions prior to joining or forming the group shall not be eliminated until those losses are entirely reversed. If a relevant transaction is not eliminated, any income related to that transaction will be included in determining the taxable income of the tax group up to the amount of the deductible loss previously deducted prior to forming or joining a tax group.
Formation or Joining of a Tax Group
Article 5 specifies that an application to form or join a tax group must be submitted to the tax authority before the end of the tax period in which the formation or joining is requested. It also covers scenarios where a new parent company replaces a former parent company or where a parent company transfers its entire business to another member of the same tax group.
Assets, Liabilities, and Financial Positions
Article 6 outlines transactions between the parent company and each subsidiary within the tax group, including transactions between subsidiaries and valuation adjustments. Any gain or loss resulting from transactions within the tax group will also include changes in the accounting value of relevant assets and liabilities.
Relief for Pre-Grouping Tax Losses
Article 7 establishes the rules for utilizing pre-grouping tax losses within a tax group. The amount of pre-grouping tax losses that can be used to offset the taxable income of the tax group is limited to the lesser of the tax group's taxable income attributable to the subsidiary or the tax loss available under Article 37 of the Corporate Tax Law. Pre-grouping tax losses must precede the utilization of other carried-forward tax losses.
Arm’s Length Principle and Transfer Pricing Documentation Requirements
Article 8 establishes the conditions under which a member's taxable income within a tax group is calculated. These conditions include unutilized pre-grouping tax losses, foreign tax credits, corporate tax incentives, and carried forward net interest expenditure. To determine the taxable income, the tax group must adhere to the arm's length principle and disclose any relevant information regarding transactions and arrangements between group members and their related parties and connected persons. By enforcing these requirements, tax authorities can ensure that transfer pricing practices within a tax group are fair and transparent.
Determination of Ownership Interest for Transfer of Tax Loss and Qualifying Group
Provisions Article 9 clarifies the ownership requirements for transferring tax losses and qualifying group provisions. It states that the ownership interest held by members of the same tax group is determined based on the aggregation of assets and liabilities of both parent company and each subsidiary. This ensures the transfer of tax losses and qualifying group provisions complies with the defined ownership criteria. By maintaining consistency in ownership determination, tax authorities can prevent the misuse of these provisions for tax planning purposes.
Business Restructuring.
Article 10 outlines the consequences when a member transfers its entire business to another member within the same tax group. If the transferring member ceases to exist as a result of this transfer, it will continue to be considered a member of the tax group until its cessation. However, suppose the tax group consists of only two members and one member transfers its entire business to the other, resulting in its cessation. In that case, the tax group will be deemed dissolved. The article also covers situations where a member transfers its business or a part thereof to a newly established juridical person, which subsequently joins the existing tax group. Notably, these scenarios do not require an election for business restructuring relief, streamlining the process within the tax group.
Income from Intra-Tax Group Transfers and Business Restructuring Transactions
Article 11 deals with the treatment of income from intra-tax group transfers and business restructuring transactions. It states that when transfers between tax group members meet the conditions outlined in relevant articles (26 or 27) of the Corporate Tax Law, the associated income will be disregarded for corporate tax purposes. In other words, the relevant tax group members will be deemed to have applied the specified clauses (1 of Article 26 or 1 of Article 27) of the corporate tax law, as applicable. Additionally, if the conditions stipulated in Clauses 4 of Article 26 or 6 of Article 27 are met, Article 42, Clause 10 of the Corporate Tax Law will apply to the income not considered in the initial transfer. These provisions ensure that income derived from intra-tax group transfers and business restructuring is appropriately accounted for, preventing potential tax manipulation.
Notification to the Authority of a Subsidiary Leaving or Termination of a Tax Group
Article 12 mandates that a tax group must notify the relevant tax authority within 20 business days if a subsidiary leaves the group or the tax group ceases to exist due to no longer meeting the conditions outlined in Article 40 of the Corporate Tax Law or related decisions. This requirement ensures that tax authorities are informed promptly about any changes in the composition or status of a tax group, enabling them to update their records and monitor compliance effectively.
Preparing Financial Statements upon Leaving or Cessation of a Tax Group
Article 13 outlines the financial reporting requirements when a subsidiary leaves a tax group or ceases to exist. It states that the departing subsidiary and the former parent of the tax group must prepare their standalone financial statements using the same accounting basis as applied by the tax group. The values recorded by the tax group should be adopted as the opening values in the standalone financial statements. This provision ensures consistency and accuracy in accounting practices by aligning financial reporting practices.
The articles discussed in this analytical piece provide valuable insights into the principles and documentation requirements surrounding transfer pricing and tax group calculations. Adhering to these provisions is crucial for establishing fair taxation practices, preventing tax avoidance, and maintaining transparency in corporate financial reporting. By implementing these regulations effectively, tax authorities can ensure that multinational corporations and their subsidiaries are accurately taxed and that the tax system's integrity is upheld.
