CROSS BORDER MERGER& ACQUISITION

CROSS BORDER ACQUISITIONS MERGER/AMALGAMATION

• Strictly for educational purpose only.

Cross Border Acquisitions

• Discusses the regulatory environment and key laws related to cross-border mergers involving Indian companies.

Governing Laws for Cross Border Mergers in India

• Several laws regulate cross-border mergers, including:

  • Companies Act, 2013

  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

  • Foreign Exchange Management (Cross Border Merger) Regulations, 2018

  • Competition Act, 2002

  • Insolvency and Bankruptcy Code, 2016

  • Income Tax Act, 1961

  • The Department of Industrial Policy and Promotion (DIPP)

  • Transfer of Property Act, 1882

  • Indian Stamp Act, 1899

  • Foreign Exchange Management Act, 1999 (FEMA)

  • IFRS 3 Business Combinations

Inbound Merger

• Definition: Mergers where a foreign company merges into an Indian company, which may involve

  • Shareholders: Can include either foreign or Indian shareholders, or both.

  • The result is that the new entity is recognized as an Indian company.

Case Example of Inbound Merger

• Scenario: A group of shareholders owns an Indian Company (IC) that itself owns a foreign company (FC) with no operations, just cash.

• Motive: The foreign company’s aim is to repatriate cash back into the Indian company.

Options for Foreign Company (FC)

• Dividend Payout:

  • FC may choose to pay out a dividend to IC, which will trigger Section 115BBD of the Income Tax Act, 1961.

  • This section allows for a concessional tax rate of 15% on dividends received by an Indian company from a foreign company where the Indian company holds 26% or more equity.

• Merger:

  • If FC merges with IC, the merger is treated as tax-neutral under the Income Tax Act.

  • Section 56(2)(x): No deemed gift provisions apply since IC is a parent company and holds shares in FC.

  • Properties and liabilities of FC automatically transfer to IC, making it a straightforward amalgamation.

Deemed Dividend and Income under ITA

• Deemed Dividend:

  • According to Section 2(22)(a), distributions of assets counted as deemed dividends will not apply in the case of a merger since profits embedded are not distributed as cash.

• Deemed Income:

  • Under Section 2(24)(iv), no income will be taxed as deemed income upon receipt of shares without any consideration due to the merger's nature (exempt under specific provisions).

Outbound Merger

• Definition: An Indian company merges with a foreign company to form a new foreign entity.

Case Example of Outbound Merger

• Scenario: A group of Indian shareholders own a manufacturing company (MC) in India, which merges with a foreign company (FC).

• Compliance: The Indian entity shall be treated as a branch office as per FEMA regulations post-merger.

Tax Implications in an Outbound Merger

• Assets transferred from MC to FC will incur tax obligations for FC.

• Legal Precedent: In Commissioner of Income-Tax v. Mrs Grace Collis (2001), the Supreme Court ruled that the extinction of shares is treated as a transfer under the Income Tax Act, attracting capital gains tax.

• Lack of Provisions: Currently, no tax neutrality provisions exist for outbound mergers.

General Anti-Avoidance Rule (GAAR)

• Definition: GAAR allows tax authorities to declare arrangements that aim for tax benefits as impermissible, denying tax benefits under domestic laws or treaties.

• Effective Date: GAAR provisions became effective from April 1, 2017.

• Definition of IAA: An arrangement primarily intended to secure a tax benefit could be considered an Impermissible Avoidance Arrangement (IAA).

• Threshold: GAAR applies if the collective tax benefit exceeds INR 30 million in the financial year.

• Exemptions: Exempted when a court adequately considers tax implications or if any ruling given by tax authorities is binding.