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Ruling

Subject: The Cross Border Merger and its tax consequences

Question 1

Will the income of:

(a) Company S and/or

(b) Company R

· be subject to Part X of the Income Tax Assessment Act 1936 (ITAA 1936) for any period in the year ended XX December XXXX?

Answer

Yes. The income of both entities will be subject to Part X of the ITAA 1936 for the period XX January XXXX to 30 September XXXX.

Question 2

Will any income or other amount derived by Company G that is not eligible designated concession income of any listed country be included in the notional assessable income of Company G under paragraph 385(2)(a) of the ITAA 1936 in respect of the year ended XX December XXXX?

Answer

No

This ruling applies for the following periods:

XX/XX/XXXX to XX/XX/XXXX

The scheme commences on:

Prior to XX/XX/XXXX

Relevant facts and Circumstance

Corporate structure

Company B is an Australian resident company and is the head company of the Australian tax consolidated group comprising of Company B and all of its subsidiary members (the Company B TCG).

Company C is an Australian tax resident and is a member of Company B TCG.

Company D is a wholly-owned subsidiary of Company C and is the top holding company of Company B's European Operations.

Company E is a wholly-owned subsidiary of Company D and is the intermediate holding company of Company B's European Operations.

Company F is a wholly-owned subsidiary of Company E.

Company G is a private company limited by shares and is a wholly-owned subsidiary of Company F.

Prior to XX/XX/XXXX Company R was a company incorporated in XXXXXX, and wholly owned by Company E.

Prior to XX/XX/XXXX Company S was a company incorporated in XXXXXXX, and wholly owned by Company D.

Company R and Company S merged with Company G.

Under terms of the merger, Company E and company D each received consideration for the transfer of the assets and liabilities of Company R and Company S (respectively) to Company G. The consideration was in the form of shares in Company G.

The Cross-Border Merger and its consequences

The Merger, in accordance with an EU sanctioned approval process set out in Directive XXXX/XX of X/XX/XXXX (the EU Directive), resulted in the capital of Company R and Company S being transferred to and merged with Company G; the dissolution of Company S and Company R; and the creation of a XXXXXX branch and an XXXXX branch of Company G.

Article XX of the EU Directive sets out the consequences of the merger. Article XX(X)(c) states that a consequence is that the merging companies shall cease to exist from the date referred to in Article XX.

Article XX of the EU Directive states that the law of the Member State to whose jurisdiction the resulting company is subject shall determine the date on which a merger takes effect.

Pursuant to a UK High Court Order of XX/XX/XXXX, the date of effect of these changes was XX/XX/XXXX.

Article X of the EU Directive requires the merging companies to draw up terms of the merger, and Article X(f) requires the terms to include a date from which the transactions of the merging companies will be treated, for accounting purposes, as being transactions of the resulting company.

For accounting purposes, all business done by Company S and Company R after XX/XX/XXXX was treated as if it was done by Company G.

Company S and Company R continued to carry on business in their own right until XX/XX/XXXX. Until that date, customers were dealing with Company S and Company R, not with the XXXXXX and XXXXX branches of Company G.

Since XX/XX/XXXX Company G has carried on the business of Company S and Company R as successor to Company S and Company R through its XXXXXXX and XXXXX branches.

Although steps were taken before XX/XX/XXXX to create the XXXXXXX and XXXXX branches of Company G, the branches did not commence business operations in their own right until XX/XX/XXXX.

Other details

1. Company B and Company C are members of the Company B TCG. None of the other entities described above are members of the Company B TCG as they are not Australian tax residents.

2. Company G is a resident of the UK, which is a listed country for the purpose of Part X of the ITAA 1936.

3. Company G was a controlled foreign company (CFC) for the purposes of Part X of the ITAA 1936 for the whole of the period XX January XXXX to XX December XXXX.

4. Company S and Company R were CFCs for the purposes of Part X of the ITAA 1936 as at XX January XXXX.

5. For the year ending XX December XXXX, Company G did not derive any amount that is eligible designated concession income for the purposes of Part X of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part X,

Income Tax Assessment Act 1936 subsection 316(1),

Income Tax Assessment Act 1936 subsection 319(6),

Income Tax Assessment Act 1936 section 340,

Income Tax Assessment Act 1936 section 381,

Income Tax Assessment Act 1936 section 382,

Income Tax Assessment Act 1936 subsection 385(2),

Income Tax Assessment Act 1936 paragraph 385 (2)(a),

Income Tax Assessment Act 1936 subparagraph 385(2)(a)(i),

Income Tax Assessment Act 1936 subparagraph 385(2)(a)(ii),

Income Tax Assessment Act 1936 sub-subparagraph 385(2)(a)(ii)(B)

Income Tax Assessment Act 1936 paragraph 385 (2)(b),

Income Tax Assessment Act 1936 paragraph 385 (2)(c), and

Income Tax Assessment Act 1936 paragraph 385 (2)(d),

Reasons for decision

Question 1

Summary

Yes. The income of both Company S and Company R will be subject to Part X of the ITAA 1936 for the period XX January XXXX to XX September XXXX.

Detailed reasoning

Subsection 316(1) of the ITAA 1936 explains the object of Part X of the ITAA 1936. In relation to income, Part X of the ITAA 1936 relates to amounts included in a taxpayer's attributable income in respect of the attributable income of a CFC.

Section 340 of the ITAA 1936 defines 'controlled foreign company'. It states in part 'A company is a CFC at a particular time if…'.

Part X of the ITAA 1936 relies in part on the notion of a statutory accounting period of a CFC to determine attributable income. Section 381 of the ITAA 1936 relates to the calculation of attributable income and states in part:

Where, at the end of a statutory accounting period (in this Division called the "eligible period") of a company:

(a) the company is a CFC; and

…

the attributable income of the company…is calculated…

Hence Part X of the ITAA 1936 applies where there is a company and it is a CFC at the end of a statutory accounting period (SAP).

Section 319(6) of the ITAA 1936 provides that if a company is a CFC at the beginning of a SAP and ceases to exist before the end of the SAP, then the SAP ends immediately before the company ceases to exist.

Article XX of the EU Directive sets out the consequences of the merger. Article XX(X)(c) states that a consequence is that the merging companies shall cease to exist, from the date referred to in Article XX.

Article XX of the EU Directive states that the law of the Member State to whose jurisdiction the resulting company is subject, shall determine the date on which a merger takes effect.

In this case the resulting company, Company G, is subject to UK law, and the UK has determined, in the High Court Order of XX September XXXX, that the date of effect is XX September XXXX.

The date that Company S and Company R ceased to exist is not XX January XXXX because between XX January and XX September XXXX both companies continued carrying on business in their own right. Although Article X of the EU Directive requires a date to be nominated for accounting purposes, the Directive does not treat that date as the date when the merging companies cease to exist.

Therefore, the SAP for both Company S and Company R ended on XX September XXXX immediately before the companies ceased to exist.

Accordingly, in the year ended XX December XXXX the income of Company S and Company R will be subject to Part X of the ITAA 1936 for the period XX January XXXX to XX September XXXX.

The income of Company S and Company R will not be subject to Part X of the ITAA 1936 from XX October XXXX because from that date they are no longer companies, and consequently, no longer satisfy the definition of 'controlled foreign company' in section 340 of the ITAA 1936.

Question 2

Summary

No. Any income or other amount derived by Company G which is not eligible designated concession income of any listed country is not required to be included in the notional assessable income of Company G under paragraph 385(2)(a) of the ITAA 1936 in respect of the year ended XX December XXXX.

Detailed reasoning

Subsection 385(2) of the ITAA 1936 sets out the amounts which are notional assessable income of a listed country CFC for the purpose of determining what amounts are attributable income under section 382 of the ITAA 1936.

Subparagraph 385(2)(a)(i) of the ITAA 1936

Subparagraph 385(2)(a)(i) of the ITAA 1936 relates to amounts that are eligible designated concession income.

Subparagraph 385(2)(a)(i) of the ITAA 1936 provides that if a CFC does not pass the active income test its notional assessable income includes amounts that are both adjusted tainted income and eligible designated concession income in relation to the listed country of which the CFC is a resident, or any other listed country.

This means that if an amount that is not eligible designated concession income of any listed country it will not be included in the notional assessable income of Company G under paragraph 385(2)(a)(i) of the ITAA 1936.

Subparagraph 385(2)(a)(ii) of the ITAA 1936

Subparagraph 385(2)(a)(ii) of the ITAA 1936 relates to amounts which are not eligible designated concession income of any listed country. Such amounts are included in the notional assessable income of a CFC if the requirements set out in paragraph 385(2)(a)(ii) are satisfied.

One requirement is that the tax law of the listed country does not treat them as derived from sources in that country (sub-subparagraph 385(2)(a)(ii)(B) of the ITAA 1936).

Company G could have income which the UK does not treat as having a UK source. In particular, after XX October XXXX Company G will derive income from XXXXXXX and XXXXXX through its branches in those countries, and it is likely that all or part of this income will not have a UK source for the purpose of UK tax law.

However, subparagraph 385(2)(a)(ii) of the ITAA 1936 only applies to 'income or other amounts, of a kind specified in the regulations'. As yet there are no regulations.

The phrase 'income or other amounts, of a kind specified in the regulations' was inserted in subparagraph 385(2)(a)(ii) of the ITAA 1936 by the New International Tax Arrangements Act 2004. The House of Representatives Explanatory Memorandum to that Act explains the operation of paragraph 385(2)(a)(ii) of the ITAA 1936 prior to the amendment, and the purpose of the amendment, as follows:

3.9 If a CFC is resident in a broad-exemption listed country, a greater range of otherwise notional assessable income is exempt from attribution. One category of notional assessable income that remains subject to attribution relates to foreign source amounts that are not eligible designated concession income and pass certain tests, whether derived directly or through a partnership (subparagraphs 385(2)(a)(ii) and (d)(ii)).

Limiting the inclusion of foreign source amounts in attributable income

3.10 While these foreign source amounts can potentially give rise to attributable income in a wide range of circumstances, in practice this is unlikely to occur. For example, even where a CFC resident in a broad-exemption listed country derives a relevant foreign source amount, it is not attributable if subject to certain foreign taxes. However, taxpayers can still incur compliance costs to confirm that there is no such attributable income. The amendments remove the need for taxpayers to consider such amounts, except those, if any, specified in regulations.

3.11 The ability to identify in regulations income amounts that should still be attributable is a revenue safeguard (e.g. in the case where a broad-exemption listed country changes its tax system in a way that opens up tax avoidance opportunities for Australian taxpayers). In most cases, though, income of concern is likely to be attributable under other provisions (e.g. as eligible designated concession income under subparagraphs 385(2)(a)(i) and (d)(i)).

However, as no relevant regulations have been enacted, subparagraph 385(2)(a)(ii) of the ITAA 1936 will not operate to include amounts in the notional assessable income of Company G.

In particular, income derived through the XXXXXXX and XXXXX branches from XX October XXXX will not be included in the notional assessable income of Company G under subparagraph 385(2)(a)(ii) of the ITAA 1936.

Consequently, amounts derived by Company G which are not eligible designated concession income of any listed country are not required to be included in the notional assessable income of Company G under subsection 385(2) of the ITAA 1936 in respect of the year ended XX December XXXX.

However, this exclusion does not apply to the income of Company S and Company R prior to XX October XXXX because Company S and Company R did not become part of Company G until XX October XXXX.

Additionally, this Ruling does not consider the application of paragraphs (b) to (d) of subsection 385(2) of the ITAA 1936. It is possible that those provisions could apply to include amounts in the notional assessable income of Company G.

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