Shareholdings, acquisitions, reorganisations: the question comes up quickly. Do consolidated financial statements need to be prepared?
To answer it, it helps to clarify a few key terms first, then check whether there is “control” using simple criteria.
1. Glossary
- Parent company: an entity that controls at least one other entity.
- Subsidiary: an entity controlled by the parent company.
- Group : the parent company and the entities it controls (directly or indirectly).
- Control : the ability to direct an entity’s key decisions and to benefit from those decisions (or bear the related risks).
- Consolidation scope : the parent company and the entities included in the consolidated financial statements.
- Participating-interest entity (associate / joint venture): an entity that is not controlled, but over which the group has significant influence or shares certain key decisions.
2. Consolidation: what does it mean?
Consolidation means presenting the parent company and its controlled entities as a single economic unit. The objective is to provide a group-level view of activity, profit or loss, assets and liabilities, rather than reading each legal entity on a standalone basis.
Certain non-controlled investments (associates or joint ventures) may also be taken into account within the consolidation scope, but they do not, on their own, create a legal obligation to prepare consolidated financial statements.
Key point: in Luxembourg, the obligation to consolidate is primarily linked to the existence of control as defined by law.
3. When is a company potentially concerned?
The starting point is straightforward: if an entity controls at least one other entity, consolidation becomes relevant.
In practice, this most often concerns limited liability companies and similar entities with separate legal personality, typically organised around a head entity and one or more operating companies. Where control is not obvious at first glance, it is worth confirming the analysis.
Only then should specific situations and exemptions be assessed (covered in a separate article).
4. Three practical tests to identify control
Luxembourg law typically points to the following situations:
4.1. Majority of voting rights
The parent company holds a majority of the voting rights in the entity.
4.2. Power to appoint or remove the majority of governing bodies
The parent company can appoint or remove the majority of members of the administrative or management body (and, in a two-tier system, the supervisory body), while also being a shareholder/partner.
4.3. Control through an agreement with other shareholders/partners
Through an agreement with other shareholders/partners, the parent company has control over the entity.
5. Quick check
Does one entity control at least one other entity (directly or indirectly)?
If an entity can decide on another entity’s key decisions (through voting rights, governance rights or an agreement), the answer is generally yes. In that case, consolidation becomes likely.
Where control is unclear, useful indicators are the governance framework and the underlying rights: shareholders’ agreements, centralised decision-making, shared directors/managers. In such cases, it is advisable to confirm the analysis.
6. Conclusion
Consolidation is not limited to very large groups. As soon as one entity controls another, the question arises.
In Luxembourg, a company that consolidates must prepare, have audited and publish consolidated financial statements, as well as a consolidated management report.
If there is any doubt, a short expert review can help confirm the conclusion.
This article has been co-written with MT1