Can a subsidiary belong to more than one group of companies? Can a company be a subsidiary of two parent entities? We will try to answer these questions in this article.

When analysing the Accounting Act (hereinafter: “the Act”) in the context of groups of companies and the parent entities’ obligation to draw up consolidated statements, a number of issues may require clarification. First and foremost, one should start by reviewing the definitions of a subsidiary, parent entity and group of companies.

Pursuant to Article 3 sec. 1 item 44 of the Act, a group of companies is defined as a parent entity together with its subsidiaries.

Pursuant to Article 3 sec. 1 item 37 of the Act, a parent entity is a commercial company or a state-owned enterprise that controls a subsidiary and, in particular:

1. a) holds, directly or indirectly, the majority of the total number of votes in the subsidiary’s decision-making body, also on the basis of agreements with other entities or persons entitled to vote and exercising their voting rights in accordance with the will of the parent entity, or
2. b) is a shareholder of a subsidiary and is entitled to govern the financial and operating policies of that subsidiary, independently or by persons or entities designated by it on the basis of an agreement concluded with other persons or entities entitled to vote, possessing, on the basis of the articles of association or the company deed, together with the parent entity, the majority of the total number of votes in the decision making body, or
3. c) is a shareholder of a subsidiary and is entitled to appoint and dismiss the majority of members of the management, supervisory or administrative bodies of that subsidiary, or

(d) is a shareholder of a subsidiary whose more than half of the members of the management, supervisory or administrative bodies in the preceding financial year, during the current financial year and until the preparation of the financial statements for the current financial year are persons appointed to perform such functions as a result of the parent entity’s exercise of its voting rights in the bodies of that subsidiary, unless another entity or person has the rights referred to in items (a), (c) or (e) in relation to that subsidiary, or

1. e) is a shareholder of a subsidiary and is entitled to govern the financial and operating policies of that subsidiary, based on an agreement concluded with that subsidiary, or on the articles of association or the company deed of that subsidiary.

On the other hand, a subsidiary is a commercial company or an entity established and operating under foreign commercial law and controlled by the parent entity (Article 3 sec. 1 item 39 of the Act).

In addition, control over another entity is understood as the ability to govern the financial and operating policies of another entity in order to gain economic benefits from its activities.

In view of the above, it can be seen that the legislator does not exclude a subsidiary’s affiliation to more than one groups of companies, and thus, more than one parent entity. For example, in a limited joint-stock partnership, the parent entity could be either the general partner or the shareholder – depending on the wording of the articles of association. Therefore, there can be two parent entities to choose from.

For this reason, the analysis of which company is the parent entity for the subsidiary should be based primarily on reviewing the provisions of the articles of association or the company deed, and the Code of Commercial Companies. If, after the aforementioned analysis, there are still doubts as to the choice of the parent entity, further steps should be taken. In case of doubt, one should consider how the actual state of interdependence in a group of companies is created – perhaps in practice one company governs the financial and operational policies of another entity. Or, maybe a given entity actually has powers that are not directly indicated in the company deed, the articles of association, or in the Code of Commercial Companies. An inquiry about such facts should ultimately dispel any doubts.