(21) “mixed financial holding company” means mixed financial holding company as defined in point (15) of Article 2 of Directive /87/EC;. (28) “parent. Italy - The Relationship between the EU Parent-Subsidiary Directive (/96) and Tax Treaties under Italian Case Law: Is Double. application of the EU Parent Subsidiary Directive 90//EEC (PSD) for Italian subsidiary, cannot also be entitled to a tax credit pursuant to.
This includes relationships with the subsidiaries that conform to the principles of group decision making. In no jurisdiction is the group of controlled entities, i. The same principle applies to each of the group entities, which have their own legal personality, are subject to their own conflict of law rules and should be dealt with as any other company. Therefore, the group cannot act as a single separate entity, nor be sued in court .
Nor has it separate organs such as a group board of directors : Definitions of control Whether control exists should be the subject of separate analysis, based on numerous criteria and approaches.
Control can usually be determined beforehand, on the basis of well-defined criteria in the law. In other cases, it will only appear ex post from the factual behaviour of the parties involved, and will serve as an important element in reaching certain, especially, judicial decisions.
This critically implies the power to appoint the majority of the directors. Control allows the controlling shareholders to validly decide on the company affairs, the minority being bound by their decisions. Only exceptionally will the decisions be set aside on the basis of the fact that the controlling shareholders were considered to have abused their controlling power.
Control ex ante is defined in several bodies of law: Legal control presupposes the right to give instructions, explicitly or implicitly, whether in the board, the general assembly or otherwise, to which the controlled company is legally bound. Most of these definitions are functional, serving the specific purpose of the regulation of which they are part. In the accounting definition — here: So, while minority interests are only expressed at the level of the capital detained by the minority, all other assets and liabilities are considered part of the group.
In competition law, the group approach allows competition decisions to be declared binding on all group entities e. In this case, the main stakeholders to whom the parent may have to pay attention are the creditors including the employees, most of the time when insolvency of the subsidiary or of the parent is on the agenda.
When the parent does not hold all the shares, another party — or parties — hold a minority stake, reducing the freedom of the parent to decide about company matters. The parent company can impose its views but may not take due account of the position and interest of the other shareholders. A special case is the one in which shares of the subsidiary are listed on a regulated market. In this case financial regulation and capital market law introduces additional safeguards for the minority shareholders, enhancing the accountability of the controlling shareholder.
Financial holding companies may hold significant blocks but nevertheless do not exercise strong influence on their investees: However, there is no overall control exercised, nor is there integration in an overall group objective. National legislations adopt different attitudes towards these cases; some e.
German law applies group law as soon as the parent is able to exercise control, others exclude these cases from the control line, and e. A specific type of control is exercised through pyramids: Minority control may exist at each of the levels of the pyramid, but the final outcome results in the top controlling shareholder fully controlling the investee company. The ultimate equity in consolidated terms may be quite thin, but effective control as exercised in the ultimate or lowest level remains nevertheless decisive .
How control is exercised According to the core definition of control, it relates to the exercise of voting rights in such a way that the majority of directors of the subsidiary is designated by the party holding the controlling interest. As a consequence, the controlling shareholder decides in the general meeting to appoint the majority of directors. How far this control extends, depends very much from case to case. As the shareholders elect the supervisory board members, this type of indirect control is equivalent to direct shareholder control.
This notion should be given a broad meaning, as in practice the views of the parent are usually transmitted by many other means than formal instructions, such as group business strategies and plans, group financial plans, group management for risk, audit, human resources, marketing, etc. In fully controlled entities, control often results in a full inclusion in group action, putting a subsidiary at a level of integration, comparable to that of a branch; however there are certain other advantages  in creating a subsidiary rather than a branch.
The parent should be able to structure the group and to develop a group wide policy, requiring the subsidiary to act in the interest of the group. The interest of the shareholders and creditors of the subsidiary should however be protected if the parent imposes actions that are clearly contrary to their interest, in particular if the instructions would put the solvency of the subsidiary at risk.
There are several techniques to achieve that cash of the different entities are pooled so that debit and credit positions are compensated, reducing overall debt, while a larger cash pool may result in obtaining better market conditions.
The subsidiary that is pooling its liquidity runs a risk on the entity where the pool is located. If that entity is likely to become insolvent — e.
As a preventive measure, collateral — e. Guarantees or common liability are also used, but they may extend the risks to unaffected participants. Notional cash pooling without transfer of funds is a mere valuation technique and does not raise these questions: Each of the different group entities should determine its own risks in the process, each contributor avoiding being endangered by the insolvency of other participants.
Guarantees, and especially collateral, protect participants against the consequences of the insolvency of one of them. Participants in the arrangements should retain the possibility to limit or exclude their risks whether by terminating the arrangement or by requiring additional collateral.
Integrating the group interest The law of company groups tries to find ways to integrate the interest of each individual company into the total group interest. The analysis should start from the legal idea of the juridical person, i. This is expressed in legal terms by referring to the individual legal personality of the different group companies, which also means that each entity or subsidiary has to be managed in its own interest, and is not subordinate to the interest of another company.
Subsidiaries should be managed in their own interest, taking due regard to the different stakeholders, the latter often having conflicting interests creditors, employees, clients, etc.
The EU Parent-Subsidiary Directive
At the same time, the subsidiary is controlled by a parent which, being the ultimate decision maker and economic beneficiary, can determine the decisions or actions the subsidiary will develop. Some legal traditions consider that the interest of the company essentially consists of the continuation of the company and its business over a longer period of time, while in others the interest of the whole group has to be taken into account .
It depends on the group for many aspects of its functioning, such as the use of the group name, its financing structure, its product range, etc. As a consequence, certain advantages which find their source in the group affiliation will benefit the subsidiary: The subsidiary is the entity where the different interests collide.
Firstly the shareholders, in this case mainly the parent company, or as the case may be, the minority shareholders, are the residual claimants.
These may be in conflict with the creditors, the employees and others stakeholders, who have the right to be paid before the shareholders. The parent as a shareholder decides about the ultimate future of the company, its dissolution or its sale to a third party. Creditors cannot object that the orderly liquidation results in a loss for them, or that the subsidiary is sold to a notoriously incompetent, or even insolvent party, provided the parent has not acted in breach of the applicable regulations such as the provisions on wrongful trading .
In some legislations, liquidation may be governed by additional safeguards e.How to set up an Holding company in Europe
In some jurisdictions such binding instructions may affect the liability of the instructing parent. Once these steps have been undertaken, the negative group influence can be measured and either compensated as is the case in German inspired legal systems, or at least kept within certain boundaries . The legal order will intervene when the prejudice to the subsidiary is excessive.
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To what extent do companies that are part of a group have to compensate for the benefits or charges that are imposed on each other? In most cases it will be the parent benefitting from the subsidiary which owes the duty to compensate.
In exceptional cases, it may also be the other way round. Whether account will have to be taken of the benefits an entity draws from group membership and the extent to which such benefit is counterbalanced by the charges imposed by group membership, depends on national legislation, case law, tax regulations, market regulation, tradition, and other factors.
Three techniques for achieving this objective can be identified: A first model as to whether and how a subsidiary will have to be compensated for burdens imposed by other group entities is laid down in German company law, composed of Aktiengesellschaften. In groups where control is exercised on a de facto basis, an annual compensatory payment will be due to the subsidiary with minority shareholders in this case based on annual assessment of the actual benefits and charges, however complicated the determination of these may be .
In fact, this approach amounts to identifying the effects of the group influence, and eliminating its negative effects by imposing a compensatory payment. In the rather exceptional contractual groups Vertragskonzernethe parent is given the contractual right to give binding instructions to the subsidiary for matters that serve the interests of the group.
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The shareholders of the subsidiary can choose between receiving a compensatory payment Ausgleich or requesting that their shares be taken over by the parent Abfindung while the creditors are protected by the liability of the directors of the parent to the subsidiary, a claim which under certain circumstances they may pursue themselves. The German model is followed, with some adaptation, in several other jurisdictions.
These instructions may not relate to intragroup transfers of assets.
- Spanish High Court denies 0% dividend withholding tax under EU parent subsidiary directive
The parent is jointly liable for all subsidiaries located in Portugal, but not for the subsidiaries outside the country .
In a second group of jurisdictions, approaches have been developed where the existence of the group interest is accepted but without imposing either an annual calculation of benefits and charges or an express indemnification duty.
Here the group definition serves to define the limits of acceptable group influence, sanctioning the transgression of these limits in terms of liability or even of validity of acts. This is the Rozenblum approach followed in the case law of certain Member States whereby the overall balance of benefits and charges is a requirement in such a way that the charges should not exceed the financial capacity of the company that supports them nor be without a remuneration, thereby running the risk of destroying the balance of the reciprocal benefits and charges between the companies concerned.
This also means that the group imposed charges should lead to the financial capacity of the company supporting the charges, in other words lead to its insolvency . It has been applied in the Belgian case law and in several other jurisdictions that, not necessarily in the same terms, have expressed the same concept of allowing group decision making, under the proviso that the existence of the subsidiary should not be jeopardized The approach has received wide support from several European study groups and recently from the Commission  as a key element in a possible future European harmonisation of the law on groups of companies.
Moreover, the basic concepts can be considered as having overarching value. A comparable although somewhat different approach is followed in Italian company law. However, there will be no liability if the damage does not exist, taking into account the entire reciprocal activity of the controlling and the controlled companies, or if the damage is eliminated as a consequence of additional action undertaken with a view to compensating for it.
The decisions on these matters must be motivated in an analytical way and state the reasons and the interests that have influenced the decision. Financing transactions are especially mentioned .
Access to EU parent subsidiary directive
According to a third approach, followed in certain jurisdictions the existence of the group interest is accepted but does not give rise to specific consequences, at least in terms of liability. The subsidiary of a group is treated as any other independent company and the remedies applicable to the parent-subsidiary relationship are the same as applicable to any other company .
This means that the group issue is regarded as an example of a more general corporate law problem, for example, that of excessive conduct on the part of a controlling shareholder whether the controlling shareholder is another company or not or of unfair treatment of creditors as the company approaches insolvency whether the company is part of a group or has a controlling shareholder or not.
At the same time the rights and duties of the directors have been defined in a more precise way. This is the approach followed in the United Kingdom: This provision is not specific to the group context but applies to all company affairs. It only protects the shareholders, not the other stakeholders. These regulations aim at identifying conflicted transactions, subjecting these to an independent assessment procedure and insuring adequate disclosure and approval by non-conflicted directors or shareholders.
They are applicable to all companies, including those with only one shareholder . Several jurisdictions have adopted detailed rules for dealing with related party transactions or more generally with conflicts of interest. Most of the time these relate to the conflict of a director and his company, but often they can be extended to the wider group setting.
Unless this procedure is followed the contract is voidable. The procedure consists of submitting the agreement to the prior authorisation of the board, the conflicted member not being entitled to vote.
In case of approval, the board should indicate and motivate how the agreement is beneficial to the company. The auditors should establish a special report for the AGM.
The agreement is then submitted to the AGM, the conflicted member being excluded from the vote.
Agreements approved in previous years should be reassessed annually by the board in view of a new audit report. A similar approach has been introduced in Belgian law in and is specifically applicable to group relations in listed groups . The provision aims at submitting certain related party transactions to an enhanced regime of decision making and disclosure. The provision addresses the relations between group companies in general, especially protecting the interests of the listed subsidiary .
In the case of intragroup transactions — however not including transactions with a controlling shareholder, other than a group entity — a detailed procedure will apply requiring the assessment by a committee of three independent directors, assisted by an independent financial expert, the auditor giving assurance as to the underlying data.
These parties will analyse the proposed transaction both as to its fairness, comparing the benefits and charges for the company, and whether the transaction is likely to inflict manifestly abusive damage to the company taking into account its policies.
It is not submitted to the general meeting for approval. Additionally, adopted decisions violating this provision may be declared null and void, at least in cases where the other party knew or should have known that the provision was breached.
The rule only applies to transactions or decisions involving a listed company conferring a financial advantage between that company and a group company — including a parent or other group company — with a controlling influence on the company. This states the general obligations to disclose, the duty to abstain, approval by the supervisory board, and disclosure in the annual report.
Other transactions are subject to the general regime for related party transactions. The United Kingdom has an extensive set of rules on conflicted transactions, developed by the courts over the past two centuries and now codified in ss. However, the historical focus of these rules has been on transactions between the director and the company.
By contrast, in the case of an intra-group dealing, the other party to the transaction will typically not be a director of the subsidiary but a shareholder in the subsidiary — the parent company or another group company in the case of an indirect subsidiary. In the UK, therefore, the main protection for minority shareholders in the Companies Act is contained in the unfair prejudice provisions which apply to those who have control of the company, whether as directors or as shareholders.
The Listing Rules  require shareholder approval of related party transactions other than those in the ordinary course of business with the related party excluded from voting. Finally, it should be noted that the creditor protection provisions of the Insolvency Act especially the wrongful trading provisions also extend to shadow directors, but in this case there is no exclusion of controlling companies from the definition of shadow director.
It also indicates the way the transaction has to be disclosed . An exemption applies for wholly-owned subsidiaries of large or medium sized companies and groups, and there is a simplified regime for small companies.
Under German law there are no specific corporate law provisions dealing with related party transactions but only specifically for loans to members or service contracts for members of the management or the supervisory boards.
A more general obligation is dealt with in the corporate governance code e. Within the context of company groups, the protections are based on the law addressing de facto groups, where a report on intragroup dealings has to be drawn up by the management of the subsidiary, verified by its auditors and the burdens resulting from them must be compensated . The report is not published but submitted to the general meeting . Spain has recently modified its company law with respect to the regulation of conflicts of interest of shareholders, making it clear that conflicted shareholders should refrain from voting on a certain number of topics mentioned in the law.
In Spain, where the simultaneous listing of parent and subsidiaries has been the object of much controversy in the last decade, the Corporate Governance Code of included the recommendation that, in such cases, the parent company and the subsidiary should define publicly and precisely their respective activities and their potential business relationships and those of the subsidiary and other enterprises in the groupforeseeing mechanisms to resolve conflicts of interest between them .
Italian law tries to prevent conflicts of interest through a strategy of disclosure and board deliberation requirements. Moreover, the board of auditors in the traditional Italian governance model must supervise compliance with the relevant criteria and report to the AGM. Consob Regulation foresees two types of information flows: Moreover, each listed company must adopt detailed procedures to ensure the transparency and fairness of related party transactions. In Sweden, the Companies Act contains no rules regarding related party transactions.
Nor are there any such rules in the Corporate Governance Code. This is an area where the Swedish legislator has chosen a general approach and there are no ongoing or forthcoming national legislative reforms in this field. Under the Polish law separate rules on related party transactions apply to directors and shareholders. Such doctrine can be summarized as follows: As regards the application of such safe harbors, the AN made several clarifications of great practical relevance, namely: The burden of proof on the fulfillment of the requisites of the safe harbors falls on taxpayers.
Thus, the Courts should encourage the most favorable interpretation to permit any proof or evidence to avoid, even in a presumptive way, the existence of fraud. The evidence must be logically related to the terms expressed in the safe harbors established by the law: The AN applied this doctrine to the case, rejecting the application of safe harbors, as the taxpayer did not provide any evidence on its fulfillment.
Rather, the court verified that: UKCo lacked economic substance i. UKCo did not develop active economic functions; the economic purpose for the establishment of UKCo was not justified; the beneficial owner of the dividends distributed by SpanishCo was the individual resident in Dubai.
The insistence of the AN in the artificiality of the structure, together with the weighted use of the rules of burden of proof, place this pronouncement in a position that is quite aligned with the European Court of Justice doctrine on tax anti-abuse provisions.