Affiliated Companies

What are 'Affiliated Companies'

Affiliated companies are, in general, companies that are less than 50% owned by a parent company; the parents are minority shareholders. More loosely, the term "affiliated companies" is sometimes used to refer to companies that are related to each other in some way. For example, Bank of America has numerous affiliated companies, including Banc of America, US Trust, Landsafe, Balboa and Merrill Lynch.

BREAKING DOWN 'Affiliated Companies'

By way of contrast, a subsidiary is usually more than 50% owned by its parent; the parent is a majority shareholder. Affiliates are a common way for businesses to enter foreign markets while affiliates can serve to keep a minority interest in a business that it no longer wishes to be the majority owner of. For example, consumer goods company Unilever is a Dutch and British company that has an Indian subsidiary called Hindustan Unilever as well as an affiliate in the United States called Slim-Fast.

There is no single bright-line test to determine if one company is affiliated to another. In fact, the criteria for affiliation changes from country to country, state to state and even between regulatory bodies. For example, companies that the Internal Revenue Service (IRS) considers to be affiliated may not be considered affiliated by the Securities and Exchange Commission (SEC).

Tax Consequences

In nearly all jurisdictions, there are important tax consequences to being affiliated companies. In general, tax credits and deductions are limited to one affiliate in a group, or a ceiling is imposed on the tax benefits that affiliates may reap under certain programs. Determining whether companies in a group are affiliates, subsidiaries, associated or similar terms is done using a case-by-case analysis by local tax experts.

In the United States, for example, the Affordable Care Act contains provisions to the effect that certain affiliated employers with common ownership or part of a controlled group must aggregate their employees to determine their workforce size. These concepts are sometimes difficult to apply in practice and must be analyzed in detail by all concerned parties.

SEC Rules

In much the same way, securities markets around the world have rules that concern affiliates of the businesses they regulate. Here again, these are complex rules that need to be analyzed by local experts on a case-by=case basis. Examples of rules enforced by the SEC are:

• Rule 102 of Regulation M prohibits issuers, selling security holders, and their affiliated purchasers from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of a distribution until after an applicable restricted period has passed.

• Before disclosing nonpublic personal information about a consumer to a nonaffiliated third party, a broker-dealer must first give a consumer an opt-out notice and a reasonable opportunity to opt out of the disclosure

• Broker-dealers must maintain and preserve certain information regarding those affiliates, subsidiaries and holding companies whose business activities are reasonably likely to have a material impact on their own finances and operations.