Parent Subsidiary Research Articles

Parent–Subsidiary Company Geographic Distance and Corporate Innovation Performance: Inhibitive or Stimulative?

ABSTRACT The implementation of innovation-driven and regional collaborative development strategies of China has injected new vitality into corporate trans-regional operation and collaborative innovation. Accordingly, listed companies expand the distance between parent and subsidiary in space geographically. This paper discusses the effect of geographic distance between parent and subsidiary companies on corporate innovation. The results show that parent – subsidiary company geographic distance has a significant positive effect on corporate innovation performance. The results still hold following a battery of endogeneity test and robustness check. We also find that government subsidies, information acquisition, and construction of internal capital markets are the mechanisms for the effect to work. In addition, the stimulative effect of parent – subsidiary geographic distance on corporate innovation performance is more pronounced for SOEs, under better intellectual property protection, and for eastern and central China. This paper not only refines the research on corporate innovation at the spatial level for parent and subsidiary companies, but also provides a framework for corporations to implement regional collaborative development and to adhere to a belief in innovation. It can also assist the government in creating a unified national market.

Eqiom Revisited: The French Supreme Administrative Court Applies the Beneficial Owner Test under the EU Parent Subsidiary Directive

In this note, the author discusses the first French Supreme Administrative Court decision to apply the ECJ principles outlined in the Danish beneficial ownership cases in the context of the EU Parent-Subsidiary Directive (90/435).

Parent–Subsidiary Company Geographic Distance and Corporate Innovation Performance: Inhibitive or Stimulative?

Parent–Subsidiary Company Geographic Distance and Corporate Innovation Performance: Inhibitive or Stimulative?

Parent–Subsidiary Company Geographic Distance and Corporate Innovation Performance: Inhibitive or Stimulative?

Parent–Subsidiary Company Geographic Distance and Corporate Innovation Performance: Inhibitive or Stimulative?

Interpreting European Law in the Light of the BEPS Action Plan

European Law plays a major role in the implementation of the BEPS Action Plan by Member States of the European Union. How does this influence the interpretation of primary and secondary EU law? On the one hand, recent secondary legislation like the Anti-Tax-Avoidance Directives explicitly aims at a full and coherent introduction of BEPS outcome into European law. But this goal has to be aligned with the liberating forces of the Internal Market which inform the legal basis for directives under Art.115 TFEU. Going further, in some recent judgments, the European Court of Justice has shown a tendency to interpret also long-standing concepts of primary EU law (like the notion of abuse of law) and existing directives (like the Parent Subsidiary Directive or the Interest Royalty Directive) in the light of the BEPS Action Plan. This is hard to defend from a methodological point of view and out of sync with the fundamental policies adopted by the European Treaties.

Are International Tax Treaties Compatible with Controlled Foreign Corporation (CFC) Rules? A Technical and a Political History Approach for a Normative Result

It is difficult to answer the question of whether Tax Treaties Compatible with Controlled Foreign Corporation (CFC) Rules, because there is no explicit mention of CFC rules in the text of tax treaties. It is especially difficult with the OECD Model Tax Convention on Income and on Capital treats corporate entities as separate taxpayers for purposes of applying domestic tax laws and tax treaties. Indeed, there is no tax court with international jurisdiction to solve these issues-so it is important to look at the decisions from various domestic Supreme Courts. The ECJ tries not to answer issues of tax treaties between countries. The crux of this main contention seems to be that CFC rules result in attributing CFC profits to controlling shareholders in the country of corporate residency-the shareholders out of parent subsidiary, that is-even though such profits were never distributed by the subsidiary the CFC. This fundamentally contradicts the basic structure of the OECD model because there were never profits distributed cross-border and there was no application of Article 7 of the treaty or withholding taxes. Indeed, the only cognizable time when this problem could arise is when there is actual base erosion and profit shifting that would trigger use of the CFC rules by a tax administration.

Legal-System Arbitrage and Parent–Subsidiary Capital Structures

This paper develops a new theory of the capital structure of parent–subsidiary organizations based on legal-system arbitrage: the capital structure of parent–subsidiary organizations is chosen to minimize the agency costs generated by selective renegotiation of claims written on the component legal entities. We show that optimal mixes of parent-subsidiary–level financing minimize the default premia associated with the organization’s overall financing package by equating the marginal enforceability of debt contracts written at the parent and subsidiary levels. The enforceability of creditor claims depends not only on the legal regime but also on the size of the debt claims and the liquidation value of the firm’s assets. Small claims written under a weak creditor rights regime may be more enforceable than large claims written under a regime with strong creditor protection. Thus, all optimal mixes involve some borrowing at the subsidiary level even if the subsidiary legal regime features weaker creditor protection than the parent regime. However, the mix between parent and subsidiary financing tilts toward the regime that features stronger creditor protection. This paper was accepted by Itay Goldstein, finance.

Drawing the Boundary between Joint and Unilateral Conduct: Parent–Subsidiary Relationships and Joint Ventures

Competition law systems typically draw a fundamental and basic distinction between concerted and independent action. In particular, the former is viewed more skeptically and considered to be more ‘inherently fraught with antitrust risk’ than unilateral conduct. The question of which set of rules applies in a given antitrust case (those governing agreements or those governing unilateral conduct) is frequently straightforward and uncontroversial. In some situations, however, it may be more difficult. For example, it may not be easy to determine whether an apparently unilateral act of a firm actually forms part of a contractual arrangement with another firm or firms.Further agreements concluded between members of the same corporate group and acts of joint ventures (‘JV’s) may be difficult to characterise. Although firms within the same corporate group may constitute separate legal entities, agreements or arrangements between them may more closely resemble the internal workings of a firm than the collusive activities the antitrust laws are designed to prevent. Conversely, a separate JV company may display concerted as well as unilateral characteristics. Even though these lines between firms, cartels and joint ventures are indistinct, they are nonetheless crucially important as the determination will profoundly affect the antitrust analysis applied. A challenge for an antitrust system is therefore to draw a clear line between concerted conduct falling within the scope of rules designed to prohibit anticompetitive agreements and unilateral conduct falling outside it. Nonetheless, different jurisdictions adopt different approaches to the issue, creating complexity for firms. Section B commences by introducing the single economic entity or economic unit doctrines which have been developed in the US and EU respectively and their relevance for determining whether the conduct of a parent and its subsidiaries should be treated as joint or unilateral for the purposes of the competition law rules. Section C then considers whether, and if so when that doctrine might have relevance to the characterisation of the conduct of a JV. Section D concludes that the the exact boundaries of the ‘single entity’ principles developed in the US and EU are not clear and create uncertainty for firms in circumstances where the characterisation may result in significantly different exposure to antitrust liability. It consequently makes some proposals for evolution of the law.

The Reasonableness Test of the Principal Purpose Test Rule in OECD BEPS Action 6 (Tax Treaty Abuse) versus the EU Principle of Legal Certainty and the EU Abuse of Law Case Law

The OECD BEPS Action 6 report contains a principal purpose test rule (PPT rule) for the purpose of combating abuse of tax treaties. This PPT rule is also included in the OECD Multilateral Instrument.The PPT rule is (amongst others) applicable when ‘it is reasonable to conclude’ that a benefit (granted by a tax treaty) was one of the principal purposes of any arrangement/transaction. This requirement contains two elements: the reasonableness test and the principal purpose test.In literature it is observed that (i) the reasonableness test of the PPT rule could be contrary to the European Union’s principle of legal certainty; (ii) that the OECD PPT rule gives the tax authorities too much discretion and, therefore, is not in line with EU law and (iii) there is doubt whether the OECD PPT rule contains a genuine economic activity test and therefore is in contravention of the abuse of law case law of the CJEU.In this contribution, I defend that none of the above-mentioned reasons the OECD PPT rule is contrary to EU law. The only potential problem I see is that the OECD PPT rule is broader (no artificiality required) compared to the GAARs in Anti-Tax Avoidance Directive and the Parent–Subsidiary Directive.

Slovak Income Tax Legislation in Terms of EU Secondary Law Transposition

Abstract The article deals with the integration process of implementation of European Union secondary law into the Slovak tax legislation. In particular, the article analyses whether provisions of (i) EU Parent Subsidiary Directive, (ii) EU Interest and Royalty Directive and (iii) EU Merger Directive are implemented into the Slovak Income Tax Act. Following our research, it should be noted that in general, the Slovak tax legislation has adopted the EU secondary law, in particular, the Parent Subsidiary and Interest and Royalty Directives have been implemented. It should be noted that the profit distributions are not subject to tax in Slovakia. It follows that interest and royalty are not subject to tax and is applicable to EU associated companies. Following the Slovak implementation of EU Merger Directive, merger transactions are generally treated as not giving rise to a capital gain. As a result, according to the Slovak Income Tax Act the income received by shareholders from acquiring new shares and income from exchange of the shares on merger transaction is not subject to income tax.

Diversification, Organization, and Value of the Firm

Because corporate diversification coevolves with organizational structure, a discount for diversification, which is widely documented in the literature, can be caused by organizational structure rather than by the industrial scope of the firm. I examine this possibility based on a large sample of Japanese firms for which the legal (parent–subsidiary) structure of the organization is easily observable. I identify a significant discount for diversified firms with and without control over the organizational structure. I also find that firms with a legally segmented structure (e.g., holding companies) are deeply discounted. My results suggest that diversification and organization are both important determinants of firm value.

Analyst firm parent–subsidiary relationship and conflict of interest: evidence from IPO recommendations

AbstractWe uncover a new source for the conflict of interest in analyst coverage existed before the Regulation FD period by examining whether recommendations within the parent–subsidiary (PS) relationship are more optimistic and whether they have better investment value than non‐PS recommendations. We find evidence consistent with the conflict of interest: PS analysts on average issue more optimistic recommendations, but their recommendations have worse or no better investment value in the calendar‐time portfolio analysis. Analyst firm PS relationship is another source for the conflict of interest in analyst coverage that has not been identified before.

Resource dependency and parent–subsidiary capability transfers

In this paper, we treat the multinational firm as an internal market in which various business units compete for scarce resources. By using the resource dependence theory to examine the parent–subsidiary relationship, we view this relationship as more of a political coalition than a hierarchy. We studied the pattern of capability transfers from the headquarters to the subsidiary to highlight this relationship. Using Taiwan-based multinational firms as the sample, our results show that the pattern is more reminiscent of a power game than an effort to maximize global efficiency. In essence, a triangular power play between the headquarters, subsidiary, and local networks determines the extent to which firm-specific capabilities are to be transferred abroad. It is almost certain that capabilities will never be completely transferred. A subsidiary can leverage local market potential to prompt more capability transfers from the headquarters, but any inclinations for the subsidiary to differentiate itself from the parent will discourage such transfers.

Gibraltar: companies limited by guarantee--an alternative to the foundation

In this article, the author describes the Company Limited by Guarantee (CLG) as foreseen by the Gibraltar law and some of its similarities and differences with respect to foundations. The author discusses in detail the main features of a CLG, pointing out its use as a foundation under Gibraltar law and also familiarizes the reader with hybrid trust–CLG structuring possibilities and the use of a CLG under the EU Parent–Subsidiary participation exception.

EC Tax Scene: AG Sharpston Opines Belgian DRD Incompatible with EC Parent–Subsidiary Directive

EC Tax Scene: AG Sharpston Opines Belgian DRD Incompatible with EC Parent–Subsidiary Directive

EC Tax Scene: ECJ AG Mengozzi Opines on Compliance of Old German Imputation System with EC Parent–Subsidiary Directive

EC Tax Scene: ECJ AG Mengozzi Opines on Compliance of Old German Imputation System with EC Parent–Subsidiary Directive

The Parent Subsidiary Directive

This paper is intended as a chapter in a book on EU taxation. The target audience is business school students who have a few, general notions of accounting, tax and law. It explains the parent subsidiary directive and the EU's efforts to avoid the problems associated with international double taxation of dividends between parents and subsidiaries operating within the EU, in order to reduce the cost of doing business. It uses simple fictitious numerical examples as well as actual legal cases to clarify the accounting, taxation and legal notions. It is understood that this paper may not be very comprehensible to those who have not read another paper on double taxation which covers both international double taxation and double taxation of dividends, if they do not already have notions of these. This other paper is also being placed on the SSRN site under the heading: Double Taxation Avoidance: International and Dividends [http://ssrn.com/abstract=940927].

The different translations of the term ’company’ in the Merger Directive and the Parent Subsidiary Directive: a Babylonian confusion of tongues?

The different translations of the term ’company’ in the Merger Directive and the Parent Subsidiary Directive: a Babylonian confusion of tongues?

Does a Parent–Subsidiary Structure Enhance Financing Flexibility?

ABSTRACTI examine whether firms exploit a publicly traded parent–subsidiary structure to issue equity of the overvalued firm regardless of which firm needs funds, and whether this conveys opposite information about firm values. Using 90 subsidiary and 37 parent seasoned equity offering (SEO) announcements during 1981–2002, I document negative returns to issuers but insignificant returns to nonissuers in both samples, and insignificant changes in combined firm value and parent's nonsubsidiary equity value in subsidiary SEOs. Firms issue equity to meet their own financing needs. My evidence contrasts with previous studies and suggests that parent–subsidiary structures do not enhance financing flexibility.

J.M. Cougnon, The EEC Merger and Parent Subsidiary Directives of 23 July 1990 in Practice, Bruylant, Brussels 1992, 257 pp., BF. 2, 123.

J.M. Cougnon, The EEC Merger and Parent Subsidiary Directives of 23 July 1990 in Practice, Bruylant, Brussels 1992, 257 pp., BF. 2, 123.