Taxes and Cross-Border Mergers and Acquisitions: Readability on Australian tax liabilities on mergers of overseas corporations

A recent federal court ruling provides further clarity about the treatment of Australian tax liabilities following a business combination.

Take away key

  • Successor companies in a company merger are liable for the tax liabilities of the disappeared company.
  • Successor companies can object to previous assessments made against the disappearing company.
  • Foreign companies and groups of companies contemplating a merger should proactively consult with the ATO if the disappearing company has potential Australian tax liabilities.

Foreign business combinations and Australian corporation tax liability

The latest ruling in a federal court case (La Mancha Group International B.V. v Commissioner of Taxation (2020) FCA 1799) provides a roadmap to certainty about the application of Australian tax law to foreign company mergers. The court stated that as a result of business combinations, successor companies would be liable for Australian tax liabilities (including potentially controversial liabilities) of the disappeared company.

The status of the Australian corporation tax liability of disappeared companies in overseas business combinations has been an area of ​​uncertainty as business combinations are not a feature of Australian company law.

Change of control transactions in Australia are currently being carried out through the acquisition of the share capital of a target company.

Impact on potential corporate M&A transactions

This decision means that the parties to a corporate merger will be able, upon completion of a merger, to confidently conduct transactions regarding the treatment of existing and potential Australian tax liabilities and to determine whether the successor company has reason to appeal or dispute the ATO in relation to these tax liabilities.

Proactive communication with the ATO

For foreign companies or groups of companies considering a merger with an independent party, it is recommended that a proactive consultation be carried out with the ATO. This is especially important once current or potential Australian tax liabilities have been identified in the vanishing company.

When independent parties are considering a merger, the stakes in ensuring declaratory relief may be important to the success of a proposed transaction. It is therefore important to ensure that the ATO is commissioned with the proposed declaration application.

Next Steps

In the context of a planned company merger, we can help with the cooperation with the ATO and, if necessary, apply for declaratory relief. We invite you to call our team for a discussion and share our analysis by La Mancha Group International B.V. against Commissioner of Taxation (2020) read FCA 1799.

Background to the case

Two wholly owned subsidiaries of a company registered in Luxembourg wanted to merge under Dutch and Luxembourg law. Under the merger agreement, La Mancha Group International B.V. (LMGI), a company incorporated in the Netherlands, should transfer all of its assets and liabilities to La Mancha Africa S.A.R.L. (LMA), a company domiciled in Luxembourg as the successor company.

LMGI had Australian income tax liabilities for the past four income years that it objected to. Proceedings are currently underway against the objections to these assessments and it was likely that income tax liabilities existed for income years 2020 and 2021.

The prerequisite for the merger was the application for a binding decision by the court that the LMA would be subject to income tax liability that the LMGI had or would have in the future, and that the LMA would be entitled to exercise all rights of objection and appeal in the proceedings on foot or in future proceedings to be ascertained in relation to previous assessments.

How has the Court generally recognized Australian tax legislation?

The principle of universal succession underlying the merger is recognized under customary law in Australia and under the Foreign Corporations (Application of Laws) Act 1989 (Cth).

The court granted the request and an order was issued to determine the relief, with the result that the LMA could take on the role of the LMGI within the meaning of the tax laws.

The Court ruled that Australian law recognizes the application of Dutch and / or Luxembourg law even though LMGI's obligations and rights arise under and are subject to Australian law. This relates to the status of the companies so LMA inherits the liabilities and exercises LMGI's rights after the merger.

The Court ruled that the general succession application could be extended to Australian tax law so that LMGI's tax liabilities would be recognized by the Commissioner as having been assumed by the LMA. Therefore, as a "taxpayer" under Section 175A of the Income Tax Assessment Act of 1936 (Cth), LMA would be entitled to object to assessments made to LMGI or made to LMA on its behalf. The Court also ruled that the LMA would be "the person" entitled to appeal or continue on-going appeals against appeals decisions relating to objections arising from valuations under Part IVA of the Taxation Administration Act 1953 (Cth).

The Court has awarded the ATO the cost of requesting the declaration. This must be observed even if the parties agree on the type of declaration.