Private ruling: Losses
Published: December 2014
Ruling period: 1 January 2014 to 31 December 2014 | 1 January 2015 to 31 December 2015 | 1 January 2016 to 31 December 2016 | 1 January 2017 to 31 December 2017
Date scheme commenced: During the period 1 January 2014 to 31 December 2014.

Ruling: Q1: For the purposes of Company A applying section 166-230 of the ITAA 1997, is Foreign Company BC, being the 'top interposed entity' after the merger of Foreign Company C with Foreign Company B to form Foreign Company BC, treated as being the same 'top interposed entity' (being Foreign Company C) as before the merger? | A1: Yes.

Relevant facts and circumstances: The scheme, the subject of this ruling, is described below. Prior to the merger between Foreign Company C and Foreign Company B Foreign Company C 1. Foreign Company C was incorporated in a foreign nation, and is a non-resident for income tax purposes. 2. The shares in Foreign Company C were listed for trading on a foreign securities exchange. 3. Immediately prior to the merger of Foreign Company C and Foreign Company B, the share capital of Foreign Company C consisted of ordinary shares of the same class. Company A and tax losses 1. Company A is an Australian resident company for income tax purposes. 2. The shares in Company A are not listed on any securities exchange. 3. Company A made tax losses which it has not previously attempted to deduct. 4. Through interposed entities, Foreign Company C wholly owned Company A during the income tax years in which Company A made the tax losses (loss years) and until the Foreign Company C and Foreign Company B merger. 5. Company A is not, and has never been, a member of an Australian income tax consolidated group or MEC group. 6. Company A ceased operating in the 30 June 20XX income tax year and was dormant from that date until the 20YY income tax year when it recommenced operations. Foreign Company B 1. Foreign Company B was incorporated in a foreign nation, and is a non-resident for income tax purposes. 2. The shares in Foreign Company B were listed for trading on a foreign securities exchange. 3. Immediately before the merger of Foreign Company C and Foreign Company B, the share capital of Foreign Company B consisted of fully paid ordinary shares of the same class. Merger of Foreign Company C and Foreign Company B to form Foreign Company BC 1. The merger of Foreign Company C and Foreign Company B occurred on the Merger Completion Date under foreign law and was also governed by a merger agreement between the parties. 2. Under the merger the following occurred: a) Foreign Company B was the Absorbing Company and Foreign Company C was the Absorbed Company . b) All the assets and liabilities of Foreign Company C were transferred to Foreign Company B. c) Once Foreign Company C transferred its net assets to Foreign Company B, Foreign Company C was dissolved and ceased to exist as a separate legal entity. d) All Foreign Company C ordinary shares were exchanged for Foreign Company B ordinary shares with the result that X% of the shares in Foreign Company BC were held by the erstwhile Foreign Company C shareholders and the remaining Y% of the shares in Foreign Company BC were held by the erstwhile Foreign Company B shareholders. e) Foreign Company B was renamed Foreign Company BC. 3. The shares in Foreign Company BC are listed for trading on a foreign securities exchange. 4. After the merger between Foreign Company B and Foreign Company C, Company A became a wholly owned subsidiary (through interposed entities) of Foreign Company BC. 5. Foreign Company C transferred to Foreign Company B all of its property, rights, obligations, assets and liabilities. The contributed assets were recorded in the accounts of Foreign Company BC based on a straight transfer of the gross values, depreciation, amortisation and provisions for depreciation relating to these assets as recorded in the company financial statements of Foreign Company C. 6. The merger of Foreign Company C was made and accepted on the condition that Foreign Company B assumed, in discharge of the Absorbed Company, all of Foreign Company C's liabilities as recorded in Foreign Company C's financial statements. 7. Foreign Company BC owned the transferred assets and had enjoyment of the rights with respect to such assets as of the Merger Completion Date. As of such date, Foreign Company BC was simply and generally subrogated to all the rights, actions, obligations, and commitments of the Absorbed Company. 8. The new Foreign Company BC shares issued in consideration for the merger had immediate participation rights and thus entitled their holders to all the distributions of dividends, interim dividends or reserves decided subsequent to their issuance. They were at the time of their creation equivalent to the existing Foreign Company B shares, enjoyed the same rights and incurred the same charges, notably all tax withholdings. The new Foreign Company BC shares entitled their holders, without distinction, to the payment of the same amount in the event of any allotment or repayment throughout the corporate lifetime of Foreign Company BC or upon its liquidation. 9. Foreign Company BC became liable for any and all guarantees conferred in respect of liabilities assumed by it from Foreign Company C. Foreign Company BC was also required to honour under the same terms the surety commitments, financial backings and guarantees entered into by Foreign Company C. 10. Foreign Company BC assumed any liabilities that were not recorded and transferred under the merger agreement, as well as any liabilities that originated prior to the Merger Completion Date but only became known later. 11. As of the Merger Completion Date, Foreign Company BC had full powers to institute or defend any new or existing disputes, judicial proceedings and arbitration in place of Foreign Company C and to receive or pay all sums owing as the result of decisions or settlements. 12. As of the Merger Completion Date, Foreign Company BC assumed and paid taxes, levies, premiums, insurance contributions and other charges that affected the contributed assets and rights. 13. As of the Merger Completion Date, Foreign Company BC implemented all treaties, contracts and agreements that the Absorbed Company had with third parties with no right of recourse against the Absorbed Company. 14. Foreign Company BC accepted any passive easements that applied to the contributed real estate without right of recourse against Foreign Company C. 15. On the Merger Completion Date, the originals of the incorporation and amending documents of the Absorbed Company, as well as the accounting books, titles, certificates relating to securities, proof of ownership of equity interests and all contracts, archives, documents, and other information relating to the contributed assets and rights was handed over to Foreign Company BC. Foreign legislation The merger of Foreign Company B and Foreign Company C occurred in accordance with foreign law.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 166-230

Reasons for decision: Summary: In applying section 166-230 of the ITAA 1997 to Foreign Company C, at and after the Merger Completion Date, the consequences of the merger between Foreign Company C and Foreign Company B under foreign law foreign law must be considered. This is because the merger was implemented under foreign law. When considering the application of the ITAA 1997 to a corporate structure that has been effected by this merger, the Foreign Corporations (Application of Laws) Act 1989 (Cth) (FC Act) requires the relevant foreign law to be applied. Section 7 of the FC Act states: (1) The section applies in relation to the determination of a question arising under Australian law (including a question arising in a proceeding in an Australian court) where it is necessary to determine the question by reference to a system of law other than Australian law. (2) Any question relating to whether a body or person has been validly incorporated in a place outside Australia is to be determined by reference to the law applied by the people in that place. (3) Any question relating to: (a) the status of a foreign corporation (including its identity as a legal entity and its legal capacity and powers); or (b) the membership of a foreign corporation; or (c) the shareholders of a foreign corporation having a share capital; or (d) the officers of a foreign corporation; or (e) the rights and liabilities of the members or officers of a foreign corporation, or the shareholders of a foreign corporation having a share capital, in relation to the corporation; or (f) the existence, nature or extent of any other interest in a foreign corporation; or (g) the internal management and proceedings of a foreign corporation; or (h) the validity of a foreign corporation's dealings otherwise than with outsiders; is to be determined by reference to the law applied by the people in the place in which the foreign corporation was incorporated. Section 3 of the FC Act clarifies that 'incorporate' includes form. Foreign Company C and Foreign Company B merged to form a new company, Foreign Company BC, under foreign law. In Gold and Resource Developments NL v. Australian Stock Exchange Ltd and Another (1998) 30 ACSR 105; (1999) 17 ACLC 306, Wheeler J stated at ACSR 105; ACLC 306 that: where foreign law creates a transaction or procedure which has no Australian counterpart, it is necessary to look to the foreign law for the meaning and effect of that transaction or procedure. Once that is understood, the procedure or transaction is then to be tested against [the Australian legal definition]. The effect of the foreign law is that, on and after the Merger Completion Date, Foreign Company BC is substituted for Foreign Company C in respect of a lawful claim, demand, or right, so that Foreign Company BC succeeds to or acquires the rights, remedies, or securities of Foreign Company C in relation to the claim. In other words, Foreign Company BC stands in the shoes of Foreign Company C from that time onwards. Therefore, in substance, Foreign Company BC is substituted for, and stands in the place of, Foreign Company C. This means that after the merger Foreign Company BC is treated as the same entity that, before the merger, owned, through interposed entities, all of the shares in Company A. Therefore, in applying section 166-230 of the ITAA 1997 at each test time after the merger, Foreign Company BC is taken to be the same entity as Foreign Company C, and thus is the same 'top interposed entity' as before the merger to whom voting stakes, dividend stakes and capital stakes in Company A are attributed, as a person (other than a company), under subsection 166-230(2) of the ITAA 1997. It should be noted that this Ruling does not consider the CGT consequences of the transfer of the Australian assets (if any) of Foreign Company C to Foreign Company BC under the merger pursuant to foreign law. Specifically, CGT event A1 in section 104-10 of the ITAA 1997 is not precluded from happening as a result of this Ruling.