Binding advance ruling disallowing reorganisation of aquaculture business subject to the resource rent tax regime

The tax ruling could have a significant negative impact for aquaculture businesses who have already implemented a similar reorganisation in 2023 or 2024, are currently in a reorganisation process or is planning to do so to optimise their corporate structure to the new resource rent tax regime.

As the planned reorganisation entailed that the aquaculture licences and operating assets would be demerged into two separate legal entities, the Directorate of Taxes found that the reorganisation could not be considered as an overall realisation covered by the exemption in the Tax Act Section 9-3 (7). A tax exemption would thus have to derive from the general rules on tax-exempt reorganisations pursuant to Chapter 11 of the Tax Act.

As a starting point, the Directorate of Taxes states that the general rules in Chapter 11 of the Tax Act regarding tax exemption for reorganisations also applies to reorganisations of aquaculture businesses subject to the resource rent tax regime, and that the requirement for tax continuity also comprises the tax positions under the resource rent tax regime in Chapter 19 of the Tax Act.

The transferor company was subject to the resource rent tax regime prior to the reorganisation but would no longer be so following the reorganisation, as the company's aquaculture licences would be transferred to one of the two acquiring entities in the drop-down demerger. Neither would the operating assets be subject to the resource rent tax regime following the reorganisation, as this acquiring entity would not hold aquaculture licences. Among the operating assets that would be transferred to one of the acquiring entities, were operating assets acquired in 2023 where the transferor company had obtained deductions for the cost price in its resource rent income basis, and where gains from a later realisation were to be recognised as income in the year of realisation under the resource rent tax regime. The latter was decisive in the Directorate of Taxes' conclusion in the ruling, as further described below.

A fundamental requirement for a tax-free reorganisation under Chapter 11 is that the reorganisation is carried out with tax continuity, i.e. that the acquiring entities continue all tax positions of the transferred assets, rights and obligations unchanged. As the transferor company had received deductions for the costs price of operating assets in its resource rent income basis and the operating assets would no longer be covered by the resource rent tax regime following the reorganisation, the Directorate of Taxes argued that the planned reorganisation would result in a latent tax liability ceasing to exist if it was carried out without taxation. Without the transfer resulting in tax on withdrawal or realisation, the transfer would be considered a breach of the requirement for tax continuity. The Directorate of Taxes argued that the main consideration behind tax continuity is deferred taxation, and not the cease of taxation. In the opinion of the Directorate of Taxes, the taxpayer would obtain a better tax position following the reorganisation compared to the situation if the reorganisation had not taken place, as gains from a later realisation of the deducted operating assets would not be fully recognised as income in the year of realisation in accordance with the resource rent tax regime. If the reorganisation was accepted as a tax-exempt reorganisation, it would be considered a lack of symmetry between deductible costs and taxable income.

As a result, the Directorate of Taxes concluded that the requirement for tax continuity was not met and concluded that the planned reorganisation could not be carried out as a tax-exempt reorganisation under the rules in Chapter 11 of the Tax Act. The planned reorganisation would thus constitute a taxable realisation of the transferred assets, including of the aquaculture licences.

The Directorate of Taxes' conclusion in this matter is likely to be challenged in the time to come, as several companies subject to the resource rent tax regime have already or are planning to implement similar reorganisations. In our view, the legal basis for the Directorate of Taxes' conclusion on the tax continuity is uncertain. In our opinion, it would have been more appropriate if it had been specified that the special regulation in the Tax Act Section 19-5 (1) letter c on taxation when operating assets are withdrawn from the resource rent tax regime, would also apply when such withdrawal of operating assets takes place as part of a demerger.