A corporate group is a collection of related companies treated as a single entity for legal, accounting, or tax purposes. The group consists of a parent company and subsidiaries, with each company retaining its legal status as a separate entity. The treatment of the group as an entity is authorized by law for financial reporting, tax, or legal liability purposes. Different countries have different laws governing corporate groups, with some allowing for separate legal liability and others treating the group as one entity.
A corporate group is a number of related companies that are treated as a single entity for legal, accounting or tax purposes. The group consists of a parent company and several subsidiaries wholly or majority owned by the parent company. Most jurisdictions define a corporate group in the same way, but the functional result of the grouping of separately incorporated companies differs depending on the controlling law in a particular country.
Companies tend to set up subsidiaries to draw the line between the operations of one company over another. The parent company still owns the subsidiary, but because the subsidiary is set up separately, it has more independence than a division of the parent company. It has its own management, operations and financial systems. In countries where corporate law recognizes merged entities as separate entities for liability purposes, the parent company and subsidiary are fully protected from the other party’s legal obligations.
A grouping of parent companies and subsidiaries have a natural relationship to each other because the parent company owns the subsidiaries. The treatment of the group as an entity is authorized by a part of the law in the country where the companies are domiciled. This processing may be authorized by law for financial reporting, tax or legal liability purposes. It is important to note that treating separately incorporated entities as a single entity undermines the rationale for incorporating subsidiaries in the first place, so care should be taken to understand the functional implications of consolidating companies in different jurisdictions.
In the United States, the federal tax code permits related companies in a corporate group to file a consolidated tax return. Consolidation makes the parent company responsible for including the financial reports of the subsidiaries in an overall presentation that represents how related transactions affect the financial position of the entire group. The group is treated as one entity for tax and financial reporting purposes, but each company retains its legal status as a separate entity in all other ways.
Germany and some other European countries consider a corporate group as an entity for both economic and legal matters. Unlike in the United States, corporate law does not allow members of a group to maintain separate legal liability if their finances are maintained collectively. A corporate group in these countries is referred to as a ‘concern’ and the corporate law governing the treatment of the group is referred to as the ‘law of concern’.
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