A recent Federal Court decision provides further clarity on the treatment of Australian tax liabilities following the completion of a corporate merger.

Key takeouts

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

Foreign corporate mergers and Australian corporate tax liability

The recent decision in a Federal Court case (La Mancha Group International B.V. v Commissioner of Taxation [2020] FCA 1799) provides a roadmap to certainty around the operation of Australian tax law in foreign corporate mergers. The Court declared that following a corporate merger, successor companies are liable for Australian tax liabilities (including liabilities that are potentially contentious) of the disappearing company.

The status of Australian corporate tax liabilities of disappearing companies in foreign corporate mergers has been an area of uncertainty given corporate "mergers" are not a feature of Australian corporations law.

Currently, corporate change of control transactions in Australia are undertaken by way of an acquisition of the share capital of a target company.

Impact on prospective corporate M&A transactions

This decision means that the parties of a corporate merger are able to transact with certainty in relation to the treatment of existing and potential Australian tax liabilities following the completion of a merger and as to whether the successor company has grounds to object or manage a dispute with the ATO in relation to those tax liabilities.

Proactive communication with the ATO

For foreign companies or corporate groups considering a merger with an unrelated party, it is recommended they undertake proactive consultation with the ATO. This is particularly important where current or potential Australian tax liabilities have been identified in the disappearing company.

Where unrelated parties are considering a merger, the stakes involved in securing declaratory relief may be significant to the success of a proposed transaction. Therefore, it is critical to ensure that the ATO is engaged and in agreement with the any proposed declaration application.

Next steps

In the context of any proposed corporate merger, we can assist in engaging with the ATO and seeking declaratory relief as required. We invite you to call our team for a discussion, as well as to read our analysis of La Mancha Group International B.V. v Commissioner of Taxation [2020] FCA 1799 provided below.

Background to the case

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

LMGI had Australian tax liabilities pursuant to income tax assessments for the previous four income years, to which it had lodged objections. It had current proceedings appealing the objections to these assessments and was likely to have income tax liabilities for the 2020 and 2021 income years.

A condition precedent to the merger was to seek declaratory relief from the court that would be binding on the Commissioner, stating that LMA would be subject to any income tax liability that LMGI had or would have in the future and that LMA would be entitled to exercise all objection and appeal rights in the proceedings on foot or any future proceedings to be brought in respect of any previous assessments.

How did the Court apply universal succession to Australian taxation laws?

The principle of universal succession, which underpins the merger, is recognised under Australian common law and under the Foreign Corporations (Application of Laws) Act 1989 (Cth).

The Court granted the application and an order for declaratory relief was given, with the effect that LMA could stand in the shoes of LMGI for the purpose of taxation laws.

The Court decided that, although the liabilities and rights of LMGI arise under and are governed by Australian law, Australian law will recognise the operation of Dutch and/or Luxembourg law. This is in respect to the status of the entities, with the effect that LMA will inherit the liabilities and exercise the rights of LMGI post-merger.

The Court held that the application of universal succession could be extended to Australian tax law, so that the tax liabilities of LMGI would be recognised by the Commissioner as being assumed by LMA. Therefore, LMA, as the "taxpayer" under section 175A of the Income Tax Assessment Act 1936 (Cth), would be entitled to object against assessments issued to LMGI, or that were issued to LMA in its place. The Court also held that LMA would be "the person" entitled to appeal against objection decisions, in relation to objections from assessments under Part IVA of the Taxation Administration Act 1953 (Cth), or to continue ongoing appeals.

The Court awarded the ATO its costs in seeking the declaration. A matter to keep in mind even when parties are in agreement as to the nature of the declaration.