Group of companies

What it means

A group of companies, or concern, is a set of legally separate companies under unified management. Most often it is a parent company and its subsidiaries, over which the parent has decisive influence through shares, voting rights or a contract. The Commercial Code regulates it with rules protecting subsidiaries, their creditors and minority shareholders.

Each company in the group remains a separate legal entity: it keeps its own books, has its own tax obligations and is liable for its own debts. The controlling entity must not use its influence to harm a subsidiary, for example by forcing it into unfavourable deals for the benefit of another group company without compensation.

The concept overlaps with holding and group. A holding emphasises the ownership structure with a controlling company at the top, a concern the unified management. In accounting and tax the terms consolidated group and related parties are used.

How it works in practice

Transactions between group companies, such as head office services, licences, loans or cash pooling, must be priced at market rates under transfer pricing rules. We prepare the documentation for them and, for larger groups, framework agreements that clearly describe prices and how they are calculated.

If the parent meets the criteria, it must prepare consolidated financial statements showing the group as a single unit. Intra-group receivables, payables, income and expenses are eliminated on consolidation so the group is not inflated by trading with itself.

From a management perspective a group allows shared services, joint purchasing or optimised financing. Each benefit must, however, have a business reason and be documented, because the tax authorities and the creditors of individual companies check whether profits and risks are being shifted to the detriment of any of them.

What to watch out for

The most common mistake is running the group as if it were one company: moving money between companies without agreements, paying one company’s costs from another’s account or transferring staff without an agreement. In an audit this leads to additional tax, and in a crisis to directors’ liability.

The second risk is harming a subsidiary for the benefit of the group. If an insolvent subsidiary previously paid the parent unfavourable prices, its creditors can seek compensation from the controlling entity. The arm’s length principle therefore protects not only for tax but also against creditors.