CIT Group Status? – You have until 20 November to opt in
Will corporate tax group status be the refuge for domestic related parties
escaping from tightening transfer pricing rules?
You have to choose corporate group status until 20 November!
Between 1 and 20 November of each year, companies can opt for corporate group status, which allows them to benefit from favourable loss utilisation rules, reduce certain administrative burdens and be exempt from transfer pricing obligations. The tightening transfer pricing rules that will enter into force from 2022 (e.g. provisions on the extent of transfer pricing adjustments and penalties for documentation irregularities), as well as the changes in documentation rules and the newly introduced transfer pricing reporting obligation, will also encourage domestic companies that meet the legal requirements to reconsider the option of choosing corporate CIT group status. It is also worth considering whether the benefits of CIT group status should be combined with the liquidity benefits of VAT group status.
What do we need to know about CIT group status?
The members of a corporate income taxpayer group may be domestic related parties with at least 75 percent of the voting rights. In the case of a CIT group, the group members jointly submit a corporate income tax return. The tax payable by the group is apportioned among the group members in proportion to their individual positive tax bases.
A group taxpayer shall fulfil its tax obligations through a group representative appointed from among the group members and notified to the Tax Authority.
If the registration is made within the statutory deadline (20th November), the corporate group status will be effective as of 1 January of the year following the year of registration.
The group members should submit a declaration of the individually assessed CIT base to the group representative by 15 March of each tax year, before the general tax return submission deadline applicable to the corporate group. The group representative shall provide the Tax Authority with information on its own and its group members' declarations.
Group members can continue to claim the tax benefits they have accrued before becoming a group member against their individual tax base as a group member.
It should be noted that the interest deduction limitation rules need to be applied separately at the level of each group member, which may result in a lower interest deduction limit for the group members compared to the general rules.
In the case of choosing a CIT group, it should also be considered that the group members are jointly and severally liable for the tax liability of the CIT group, as well as for the pre-membership liabilities of the group members.
What are the benefits of choosing CIT group membership?
Favourable loss carry-forward and transfer pricing rules, administrative simplifications
The main advantage of CIT group status is the application of favourable loss carry-forward rules. This means that if a group member is profitable and another is loss-making, the profitable group member can take into account the negative tax base of the loss-making group member when determining its corporate tax base by applying special rules, thereby reducing its own tax liability and that of the group as a whole.
From this year onwards, one of the strongest arguments for opting for corporate income taxpayer group status could be the exemption from the tightening transfer pricing rules. This means that intra-group transactions no longer need to be documented in transfer pricing documentation and group members can be exempted from the transfer pricing adjustment rules and from the data reporting obligation. Please note that the above exemption rules can only be applicable to corporate income tax, so transfer pricing rules concerning local business tax, innovation contribution (and VAT if applicable) should still be taken into account. It should also be noted that the exemption rules can only be applicable to intra-group companies, so the transactions with foreign companies or domestic companies with less than 75% voting rights do not benefit from the exemption rules. It is therefore recommended that domestic companies, which have a significant number of high value inter-group transactions - in which case the transfer pricing documentation preparation is a requirement -, should opt for this option.
CIT group combined with VAT group?
For liquidity benefits, it is worth combining CIT group and VAT group status.
In the case of VAT group, there is no VAT charging and deduction between group members, so there is a cash-flow advantage and the VAT deduction proportion can also be adjusted. However, it should be noted that the CIT group and VAT group systems are independent from each other. Both can be chosen separately or together, but in addition to the fact that different groups of companies are entitled to opt for certain tax group status, different rules and conditions should be applicable (e.g. CIT group can be created once a year, while VAT group can be created any time, etc.)
If your company would like to take the advantages of the CIT group status, our tax experts are at your disposal.
