Atheer Telecom Iraq Ltd v Orascom Telecom Iraq Corp. Ltd & Anor

A tax covenant covering liabilities arising from events or income before contractual closing may apply to an assessment issued after closing where the liability arose from the closing transaction. A contractual reference to becoming finally liable to pay tax does not necessarily require an assessment to be beyond objection or appeal. It may refer to the point at which payment is required to avoid statutory interest or penalties.

Where local tax law requires payment of an assessment before an objection can be considered, the covenant may require payment funding before the objection is resolved. Later dishonest conduct does not engage a contractual causation exception unless it caused the tax liability. An assessment’s lateness or form may be matters for objection without invalidating the liability.

Atheer acquired the entire issued share capital of Iraqna from Orascom under a share purchase agreement. Orascom and Global Telecom Holding assumed obligations under the agreement, including a tax covenant in Schedule 7.

After closing, Iraqi tax authorities issued assessments and payment demands concerning income tax and withholding tax. Atheer claimed that the liabilities were covered by the tax covenant. The defendants disputed liability on the grounds that the assessments related to post-closing events, that no final liability had arisen, that contractual exceptions applied, that notice was out of time, and that some assessments were abandoned, invalid or out of time under Iraqi law.

The central issues were whether the liabilities fell within the covenant, when payment became contractually due, and whether the defendants had established any contractual or statutory defence.

The claimant succeeded.

1. The tax liability identified in the 2011 assessment arose from what occurred at closing, rather than from a post-closing cessation or change of trade. The assessment concerned the year ending on 31 December 2007, and the evidence did not establish that the contractual exception for a post-closing cessation or change of trade was engaged.

2. Article 16 of the Income Tax Law 113 of 1982 did not convincingly explain the assessment. There had been no actual dissolution or liquidation of Iraqna. The court concluded that the assessment was, on the balance of probabilities, prompted by the Financial Authority’s view that a major sale should generate a tax receipt.

3. The words in paragraph 10.1(a) of Schedule 7 referring to the date on which Iraqna would finally be liable to pay tax did not require finality in the narrow sense that no objection, appeal or compromise remained possible. Under Article 33(3) of the Income Tax Law 113 of 1982, payment of the assessed tax was a pre-condition to consideration of an objection, subject to possible instalment arrangements. Articles 33 and 45 required payment within 21 days of notification, otherwise penalties could accrue. The contractual payment date therefore arose ten Business Days before the end of that period.

4. The scheme of Schedule 7 contemplated payment of disputed tax followed by recovery or repayment if the assessment was reduced or rejected. The fact that payment was not being pressed for did not prevent the contractual date from accruing.

5. Atheer’s later dishonest conduct did not cause the 2011 assessment and therefore did not engage the relevant contractual exceptions. The proposed late amendment concerning a failure to object in 2015 was refused as immaterial.

6. The contractual time bar was satisfied. The July 2012 letter gave notice of an intention to bring a tax covenant claim, and proceedings were issued and served within six months. Earlier letters supplied details under paragraph 8.2 of Schedule 7 but did not give notice of an intention to bring a claim under Schedule 5.

7. The defendants had not established abandonment. The apparent lateness of some demands under Iraqi law did not invalidate the assessments; it was a matter capable of being raised by objection. Nor did the form of the multi-year demands invalidate them, since Article 44 required written notification, the amount of tax and the date it became due.