ACCA Advanced Taxation (ATX) Practice Exam

What defines whether two companies are considered 'connected'?

1. Both companies share the same physical address

2. One company does business with the other

3. One company controls the other or both are controlled by the same person

4. They have the same shareholders

The correct answer is: One company controls the other or both are controlled by the same person

In the context of taxation and corporate regulations, the definition of 'connected' companies is primarily rooted in the concept of control. The correct choice states that one company controls the other, or both are controlled by the same person. This control can be exerted through ownership of shares, the ability to influence decisions, or direction of operations. When companies are connected, it often has implications for tax purposes, such as related party transactions, transfer pricing rules, and consolidated financial reporting. The definition emphasizes the relationship based on control rather than other factors such as simply sharing an address or conducting business with one another, which do not inherently imply a significant influence over corporate affairs. Having the same shareholders may indicate a potential connection, but it does not guarantee control unless it leads to the situation where one company can dictate the decisions of the other. Thus, control is the key factor that firmly establishes whether two companies are truly connected in a significant regulatory or operational context.