TAXATION OF CROSS BORDER

MERGERS AND ACQUISITIONS

D. SATYA SIVA DARSHAN,

IV LL.B,
ILS LAW COLLEGE,
PUNE.
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 gains
short 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-Neutrality
Two 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.

 UK Co-
Income flows from Parent
 Interest from Ind Co. to UK Co. Company
 Dividend from Ind Co. to UK Co.

DDT is paid by Ind Co. Equity/

UK
debt
DDT may be considered as
underlying tax credit.
INDIA
Tax credit mechanism in case of MAT
Ind Co.
paid in India and credit claimed in [JV/WOS]
subsequent years in India.
 Investments made via IHC
Ukco
Parent
 IHC could be a resident of Mauritius or Cyprus, etc. Company
Equity/ debts UK

Treaty Benefits Mauritius Cyprus.

Capital Gains Exemption IHC

Equity/debts INDIA

INDIA
Ind Co
 Pre-Merger Post Merger

A B A B

CO1 Co2 Co2

US US

VODAFONE
ISSUE
IHC IHC
Mauritius Mauritius

Ind Ind Co.

Co. India
India
 Pre-Merger Post Merger

Co1 Co2 Co2

Off shore

India
Ind Co
Ind Co

1.Tax Exemption. Sec.47(vi)(a).

2.Section 79 Implications.
 Pre-Merger Post Merger

Parent Co
Off shore
Off shore

India

Ind Co. Ind Co.

1. Tax Neutrality
2. Planning Possible
 Pre-Merger Post Merger

Ind Co. Ind Co.

India India

Off shore Off shore

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

Merged
Tax Neutrality
 Pre-Merger Post Merger

Ind Co. Ind Co.

India

Mauritius

M Co.
Profit Repatriation Strategy
Residence and Source rule
Need 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
Taxable
under
under ITA
DTAA

Sec. 9 Provision
s of DTAA

Business Permanent
connection Establishment
Pre-Merger Post-Merger

HTIL [HONG VODAFONE[N VODAFONE[N

KONG] ETHERLANDS] ETHERLANDS]

CGP [CAYMAN CGP [CAYMAN

ISLANDS] ISLANDS]

MAURITIUS MAURITIUS
ENTITY ENTITY

67% HEL 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

Controversy
The 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 argument
Vodafone'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.