ACCA Advanced Taxation (ATX) Practice Exam

Which type of company can be considered an associated company for tax purposes?

1. Non-trading holding companies

2. Only trading companies

3. Both trading and non-trading companies

4. Any limited companies

The correct answer is: Only trading companies

For tax purposes, the concept of an associated company primarily revolves around the nature of the company’s activities and its engagement in trade. A trading company is one that carries out a business with the intent to make a profit from its trading activities. This association is particularly relevant in contexts such as determining eligibility for certain tax reliefs, limits on reliefs, and calculating various tax liabilities. When considering the concept of associated companies, it is essential to recognize that only those companies that are actively trading are deemed as potential associates for tax relief purposes. This distinction provides clarity on how different company structures may interact with tax legislation. Non-trading holding companies, for example, may own shares of other companies but do not actively trade in goods or services; thus, they do not typically fall under the category of associated companies for the purposes of certain tax benefits and regulations. While limited companies indeed encompass various types, including both trading and non-trading entities, the correct emphasis for establishing an associated company remains focused on those that are trading. This perspective reinforces the idea that tax considerations specifically prioritize trading activities when determining the association between companies. In summary, the correct choice reflects the essential qualification that associated companies for tax purposes are those engaged in trading activities, which is crucial for