ACCA Advanced Taxation (ATX) Practice Exam

What defines an unconnected company for tax purposes?

1. A company that operates independently

2. A company with mutual ownership

3. A company in a joint venture

4. A company with centralized management

The correct answer is: A company that operates independently

An unconnected company for tax purposes is defined primarily by its independent operation from other entities. This implies that the company does not have significant relationships or ownership ties with other companies that would affect its financial or operational decisions. When a company operates independently, it functions without external control or influence, which aligns with the definition of an unconnected entity. In contrast to the chosen answer, mutual ownership, joint ventures, and centralized management suggest a level of interdependence or partnership among companies. Mutual ownership involves shared ownership interests that can lead to interconnected interests for tax considerations. A joint venture means collaboration between companies, typically leading to shared risks, profits, and possibly joint decision-making, which again ties them together in a way that disqualifies them as unconnected. Centralized management indicates a coordination of decisions across multiple entities, thereby merging their operational independence. Thus, the defining characteristic of an unconnected company is its independent operation, free from significant relationships with other entities that could impact its tax status.