Indirect Transfer - WIRC-ICAI

1 Tax implications of Amalgamations & Demergers-JayeshSanghviJuly 2017 Modes of M&A and Corporate RestructuringAmalgamation / MergerModes of M&A and Corporate RestructuringDe-mergerAcquisitionsAsset PurchaseShare PurchaseSlump SaleItemized SaleCapital Re-organizationBuy-backCapital ReductionConversionsLiquidation2 Key Drivers of M&AWhy M&A?Achieve economies of scaleAcquisition of a competence or capabilityFinancial / Commercial/ Business restructuringAttract overseas investmentsDiversification -Entry into new market/ sector/ productOpening up of Economy3 Key drivers for Corporate RestructuringSynergies of operations and cost efficiencySimplification of group structureSegregation of businesses and value unlockingCash neutralityRepatriation/ Upstreaming of fundsTax efficiency4 Key Tax and Regulatory considerations under M&A and Corporate RestructuringcChanging Regulatory EnvironmentIncome Tax ActIndirect TaxesCompanies Act.

2 Accounting and valuationsStamp Duty Understanding the FDI Regulations Seeking necessary approvals Complying with prescribed guidelines CCI implications and approvals Compliance with SEBI Regulations/approvals Stock exchange compliances GST applicability on business Transfer , mergers / demergers Credit of taxes paid, continuity of fiscal benefits Determination of share exchange ratio / Funding Structures Scheme of arrangements u/s 230-232 of the Companies Act, 2013 Approvals from RD/ ROC/ OL Complying with prescribed procedures, resolution, filings etc Accounting implications anddisclosures. Understanding state specific stamp duty laws Determining levies/ registration charges Adjudication proceedings etc.

3 Tax implications in the hands of the Seller, purchaser / Transferor ,Transferee Company, shareholders Helping maximize depreciation benefit Continuity of Carry forward of losses Tax neutrality of restructuring and continuity of fiscal benefitsImpact on stakeholders such as shareholders, creditors and employees also importantSEBI RegulationsFEMA and other Regulatory Authorities5 Amalgamation Income Tax Implications6 Definition: Section 2(1B) Amalgamation",inrelationtocompanies,mean sthemergerofoneormorecompanieswithanothe rcompanyorthemergeroftwoormorecompaniest oformonecompany(thecompanyorcompanieswhi chsomergebeingreferredtoastheamalgamatin gcompanyorcompaniesandthecompanywithwhic htheymergeorwhichisformedasaresultofthem erger,astheamalgamatedcompany)insuchaman nerthat ; ; (otherthansharesalreadyheldthereinimmedi atelybeforetheamalgamationby,orbyanomine efor,theamalgamatedcompanyoritssubsidiar y)becomeshareholdersoftheamalgamatedcomp anybyvirtueoftheamalgamation.

4 Otherwisethanasaresultoftheacquisitionof thepropertyofonecompanybyanothercompanyp ursuanttothepurchaseofsuchpropertybytheo thercompanyorasaresultofthedistributiono fsuchpropertytotheothercompanyafterthewi ndingupofthefirst-mentionedcompany7 Key ingredients Schemeofamalgamationbetweenthecompaniesa ndtheirshareholders NCLT approval Approvalfromshareholders,creditorsandsta tutoryauthorities RD,ROC,OL,StockExchange,SEBI,IncomeTax,e tc. Automaticliquidationoftheamalgamatingcom panywithoutdissolutionShareholdersCo ACo B MergerIssue of of all properties2 Transfer of all liabilities3 Shareholders holdingat least 3/4thin value become shareholdersIf 9 out of 10 shareholders don t become shareholders of amalgamated company?

5 ?8 TaxabilityIn the hands of TaxabilitySectionConditionsAmalgamatingc ompanyNocapital gains tax on Transfer of assets47(iv) Amalgamated company is a Indian companyShareholders of Amalgamating CompanyNocapital gains tax on Transfer of shares47(vii) Consideration in form of sharesin amalgamated company Amalgamated company is a Indian companyCost of acquisition of shares received on merger by the shareholders=Cost of shares held in the amalgamatingcompany 49(2) Transfer asreferred u/s 47(vii)Periodof holding of shares received on merger by the shareholders= period ofholding of shares held in the amalgamating company2(42A)(c) Transfer asreferred u/s 47(vii)Amalgamated Company:Cost of Assets-Stock-Capital Asset-Depreciable Assets=Same as the cost of shares / Capital assets held by amalgamating company=WDV of depreciable asset held by amalgamating company-43C-Expln7 to 43(1)-Section 49(1)Amalgamated company is a Indian companyPeriod of holding of capital assets for STCG/ LTCG= period of holding of capital assets held in the amalgamating company2(42A) 49(1) and 47(vi)9 AmalgamationOverseas AmalgamationsCo ACo BI CoConditions u/s 47(via) 25% shareholdersof Co A continue to be shareholders of Co in foreign countryShareholder AShareholder B>=25%mergerTax implications in India on Transfer of shares of ICoto Co B?

6 OverseasIndiaCase Study 1 -Whether 2(1B) compliant?B LtdA LtdMergerNo considerationB LtdA LtdC LtdMergerNo consideration100%100%100%11 Case Study 2 -Whether 2(1B) compliant?Co ACo B Condition of atleast75% shareholder becoming shareholder in Co B is not fulfilled Is merger compliant of Section 2(1B)?Shareholder AShareholder Bmerger51%49%Subsidiary Co12 Case Study 3 -Deemed dividend implication?Whethertransferofcapitalasse tonmergerofCompanyBintoCompanyAresultsin distributionofdividendbythesubsidiarycom panytoitsshareholderundersection2(22)(a) orsection2(22)(c)? Section2(22)(a)isattractedincaseofdistri butionentailsreleaseofanasset Section2(22)(c)isattractedincaseofliquid ationCompany ACompany B 100%CBDT Circular No.

7 5P of 1967 dated 9thOctober 1967 Merger13 Case Study 4 discharge of considerationSr. NoTransferor companyIssue of considerationby Transferee Company1 Equity Shares holderPreference shares 2 Equity Share holderEquity+ Preference Shares3 Equity Share holderPreference Share holderEquity Shares to Equity share holdersCash consideration toPreference Share holders4 Equity ShareholderEquityshares and DebenturesSection 2(1B) Compliant? Tax neutral in hands of Transferor and Shareholder?14 Case study 5 -Overseas mergerZ Ltd. Inthecaseofmergerofawhollyownedsubsidiar yintoitsholdingcompany,conditionofsectio n47(via)cannotbesatisfiedsincetheamalgam atedcoholdsallthesharesoftheamalgamating co.

8 WillexemptionunderSection47(via)beavaila bleinsuchacase?A * Hoechst GmbH, In re [2007] 289 ITR 312 (AAR)15 Case Study 6-Overseas MergerF Co 2F Co 3 Indian CoF Co 1 Derives substantial value from assets located in IndiaConsider the following scenario: F Co 1 holds 100% in Indian Co F Co 2 holds 100% in F Co 1 F Co 2 to merge into F Co 3 Transfer of shares of F Co 1 to F Co 3 upon mergerTax implications in India??16 Case Study 7 -Overseas mergerConsider the following scenario: F Co 1 holds 100% in F Co 2 F Co 2 holds 100% in F Co 3 F Co 3 holds 100% in I Co Merger of F Co 2 into F Co 1 Transfer of shares of F Co 3 to F Co 1 upon mergerF Co 1F Co 2 FCo 3 OverseasIndiaICo Transfer of Shares of F Co 3100%100%Tax implications in India?

9 ?Merger100%100%F Co 2 FCo 317 Demerger Income Tax Implications18 Definition: Section 2(19AA) Demerger",inrelationtocompanies,meansthe transferpursuanttoaSchemebyademergedcomp anyofitsoneormoreundertakingstoanyresult ingcompanyinsuchamannerthat ,beingtransferredbythedemergedcompany,im mediatelybeforethedemerger,becomesthepro pertyoftheresultingcompanybyvirtueofthed emerger; ,beingtransferredbythedemergedcompany,im mediatelybeforethedemerger,becometheliab ilitiesoftheresultingcompanybyvirtueofth edemerger; ; ,inconsiderationofthedemerger,itssharest otheshareholdersofthedemergedcompanyonap roportionatebasis[exceptwheretheresultin gcompanyitselfisashareholderofthedemerge dcompany; (otherthansharesalreadyheldthereinimmedi atelybeforethedemerger,orbyanomineefor,t heresultingcompanyor,itssubsidiary)becom eshare-holdersoftheresultingcompanyorcom paniesbyvirtueofthedemerger.]

10 ,ifany,notifiedundersub-section(5)ofsect ion72 AbytheCentralGovernmentinthisbehalf19 Key ingredients Schemeofarrangementbetweenthecompaniesan dtheirshareholders NCLT approval Approvalfromshareholders,creditorsandsta tutoryauthorities-RD,ROC,StockExchange,S EBI,IncomeTax, CompanyResulting CompanyDemergeIssue of of undertaking2 Transfer of all properties of the undertaking at BV3 Transfer of all liabilities of theundertaking at BV4 Resulting Co to issue shares to the shareholders of Demerged Co5 Shareholders holding at-least 3/4th in value become shareholders6 Transfer on going concern basisUnit AUnit B20 Undertaking Undertaking"shallincludeanypartofanunder taking,oraunitordivisionofanundertakingo rabusinessactivitytakenasawhole,butdoesn otincludeindividualassetsorliabilitiesor anycombinationthereofnotconstitutingabus inessactivityWhatisanUndertaking?