Who's the Employer?

Answers are provided by S. Derrin Watson

Wholly-owned subsidiaries of controlled groups

(Posted March 16, 2000)

Question 45: Company A is a wholly-owned US subsidiary of German Company GA. Company B is a wholly-owned US subsidiary of German Company GB. GA and GB are both wholly-owned by a single German holding company. Are A and B part of a controlled group?

Answer: Yes, for all purposes.

Actually, the answer goes somewhat further than that. A parent-subsidiary group of corporations exists when two conditions exist:

At least 80% of the stock of each corporation other than the parent must be owned by another member of the group; and
The parent, itself, must own at least 80% of the stock of at least one other group member (excluding stock held by subsidiaries).
Both of those conditions are met, and all 5 corporations are part of a single controlled group of corporations.

For ordinary income tax purposes, there is a special rule which says that foreign corporations cannot be "component members" of a controlled group. Thus, for ordinary income tax purposes, we would focus on just the two US corporations. But they should be filing their income tax returns showing that they are part of a controlled group.

For qualified plan purposes, the component member rule does not apply. That means that employees of all 5 corporations are deemed to be employed by a single employer for most all qualified plan purposes. Of course, a plan can exclude nonresident aliens without US source income, but that is your only recourse in this situation. The problems of foreign corporations are discussed in Section 9.10 of my book, Who's the Employer?.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.