Ppt

D. SATYA SIVA DARSHAN,IV LL.B,

ILS LAW COLLEGE, PUNE.

TAXATION OF CROSS BORDER MERGERS AND

ACQUISITIONS

Merger - A Merger may be defined as the combination of two or more independent business corporations into a single enterprise, usually involving the absorption of one or more firms by a dominant firm.

Acquisition may be defined as an act of one enterprise of acquiring, directly or indirectly of shares, voting rights, assets or control over the management, of another enterprise

Mergers and Acquisitions

Amalgamation/Merger Acquisition

De-Merger Asset Purchase Stock

Purchase

Slump Sale Itemized Sale

Purchase of assets may be in two ways Slump Sale Itemized Sale

when the entire business is transferred as a going concern for a lump-sum consideration – slump sale.

No VAT in slump sale.Transfer taxes are levied i.e. stamp duty.

…Contd

when individual assets or liabilities of a business are transferred for separately stated consideration – Itemized sale. Capital Assets Stock-in-trade Good will

VAT applicable.Transfer taxes also applicable. Capital Gains are applicable in both the

cases. Depreciation

The sale of shares is subjected to capital gains tax in India.long term capital gainsshort term capital gains

Additionally, Securities Transaction Tax (STT) may be payable if the sale transaction for equity shares is through a recognized stock exchange in India.

In case the transaction is liable to STT, long term capital gains arising on transfer of equity shares are exempt from tax.

Transfer taxes.Tax losses.

As per sec2(1B)“amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that—

1. all the property now belongs to the amalgamated company;2. all the liabilities also get transferred;3. shareholders not less than 3/4th get shares in the

amalgamated.,otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company ;]

Most popular and tax-efficient means of corporate consolidation in India is amalgamation.

Transfer of Capital Asset is subject to Capital gains tax.

Tax-NeutralityTwo conditions to achieve Tax-Neutrality

Amalgamated Company is an Indian Company Consideration in form of shares.

Carry-Forward and Set-Off of Accumulated Losses and Unabsorbed Depreciation.

1. INBOUND DEAL STRUCTURES .

2. OUTBOUND DEAL STRUCTURES.

Income flows from Interest from Ind Co. to UK Co. Dividend from Ind Co. to UK Co.

DDT is paid by Ind Co.DDT may be considered as

underlying tax credit. Tax credit mechanism in case of MAT

paid in India and credit claimed in subsequent years in India.

UK Co-Parent

Company

Ind Co.[JV/WOS]

UK

INDIA

Equity/debt

Investments made via IHC

IHC could be a resident of Mauritius or Cyprus, etc.Equity/

debts UK Treaty BenefitsMauritius Cyprus.

Capital Gains Exemption

Equity/debts INDIA

INDIA

Ukco Parent

Company

IHC

Ind Co

Pre-Merger Post Merger

A B

CO1 Co2

IHC

Ind Co.

A B

Co2

IHC

Ind Co.

US US

Mauritius

Mauritius

IndiaIndia

VODAFONE ISSUE

Pre-Merger Post Merger

Co1 Co2

Ind Co

Co2

Ind Co

Off shore

India

1.Tax Exemption. Sec.47(vi)(a).2.Section 79 Implications.

Pre-Merger Post Merger

Parent Co

Ind Co. Ind Co.

Off shoreOff shore

1. Tax Neutrality2. Planning Possible

India

Pre-Merger Post Merger

Ind Co. Ind Co.

Sub Co.1 Sub Co.2 Sub Co.2

Off shore Off shore

India India

MergedTax Neutrality

Pre-Merger Post Merger

Ind Co.

M Co.

Ind Co.

India

Mauritius

Profit Repatriation Strategy

Residence and Source ruleNeed for DTAA.

Exemption Tax Credit

U/sec. 90 of the Income Tax act, 1961.Treaty Prevails over Domestic Law.Concept of Permanent Establishment.If no DTAA, then relief U/sec. 91 of the IT

Act, 1961.

Income of a non-

resident

Taxable under ITA

Taxable under DTAA

Sec. 9Provisio

ns of DTAA

Business connectio

n

Permanent Establishme

nt

Pre-Merger Post-Merger

HTIL [HONG KONG]

CGP [CAYMAN ISLANDS]

MAURITIUS ENTITY

67% HEL

VODAFONE[NETHERLAN

DS]

CGP [CAYMAN ISLANDS]

VODAFONE[NETHERLAN

DS]

MAURITIUS ENTITY

67% HEL

….Contd

Hutchison International, a non-resident seller and parent company based in Hong Kong sold its stake in the foreign investment company CGP investments Holdings Ltd, registered in the Cayman Islands, which in turn held shares of Hutchison Essar (the Indian company) to Vodafone, a Dutch non-resident buyer. The deal consummated for a total value of $11.2 billion, which comprised a majority stake in Hutchison Essar India

In the light of this, the Revenue issued show-cause to Vodafone asking for an explanation as to why Vodafone Essar (which was formerly Hutchison Essar) should not be treated as an agent (representative assessee) of Hutchison International and asked Vodafone Essar to pay $1.7 billion as capital gains tax.

…..Contd

ControversyThe whole controversy in the case of Vodafone is about the taxability of transfer of share capital of the Indian entity.Generally the transfer of shares of a non-resident company to another non-resident is not subject to tax in India.But the revenue department is of the view that this transfer represents transfer of beneficial interest of the shares of the Indian company and, hence, it will be subject to tax.

…Contd

Vodafone’s argumentVodafone's argument is that there is no sale

of shares of the Indian company and what it had acquired is a company incorporated in Cayman Islands which in turn holds the Indian entity. Hence the transaction is not subject to tax in India.

….Contd

On substance-over-form.A genuine transaction within the framework

will not be impeached.The jurisdiction of a state to tax non-

residents is based on the existence of a nexus connecting the person sought to be taxed with the jurisdiction which seeks to tax.

The Income tax may extend in respect of foreign income if a sufficient territorial nexus has been proved.