A corporate group is a number of related corporations that are treated as one entity for legal, accounting, or tax purposes. The group consists of a parent corporation and multiple subsidiaries that are wholly or majority-owned by the parent. Most jurisdictions define a corporate group in the same way, but the functional result of grouping separately incorporated companies together differs depending upon the controlling law in a particular country.
Corporations tend to set up subsidiaries to establish a line of demarcation between the operations of one corporation in relation to the other. The parent corporation still owns the subsidiary, but because the subsidiary is separately incorporated, it has more independence than a division of the parent. It has its own management, operations, and financial systems. In countries where the corporate law recognizes incorporated entities as separate individuals for liability purposes, the parent and subsidiary are completely protected against the legal obligations of the other.
A grouping of parent and subsidiary corporations has a natural relationship to each other because the parent owns the subsidiaries. The treatment of the group as one entity is authorized by some part of the law in the country where the corporations are domiciled. This treatment can be authorized under the law for financial reporting, tax, or legal liability purposes. It is important to note that considering separately incorporated entities as a single entity undermines the reasons for incorporating the subsidiaries in the first place, so care must be taken to understand the functional implications of consolidating corporations in different jurisdictions.
In the US, the federal tax code allows related companies in a corporate group to file a consolidated tax return. Consolidation makes the parent corporation responsible for including the financial reports of the subsidiaries into one overall presentation that represents the way interrelated transactions effect the financial position of the entire group. The group is treated as one entity for financial reporting and tax purposes, but each company retains its legal status as a separate entity in every other way.
Germany and some other European countries treat a corporate group as one entity for both economic and legal matters. Unlike in the US, the corporate law does not allow the members of a group to maintain separate legal liability if their finances are collectively maintained. A corporate group in these countries is called a “concern,” and the corporate law governing treatment of the group is referred to as the “law of the concern.”