CROSS BORDER RESTRUCTURINGTAX AND LEGAL ISSUES

CASE STUDY

11TH October 2013BELA MAOCOUNTRY TAX LEADSHELL INDIA MARKETS PRIVATE LIMITED

2

General points for consideration

Under Indian law

Tax implications in India

Tax neutral merger? Impact on tax attributes? GAAR Transfer pricing

Stamp duty implications?

Key regulatory implications

Companies Act, 1956 Companies Act, 2013 Competition Act, 2002 SEBI FEMA

Cross Border Restructuring - Tax and Legal Issues

Under foreign law

Capital gains tax

Deemed dividends implications

Any restrictions under foreign law impacting the merger

3

Merger of foreign companies – Base case

F Co

Hold Co

X Co

F Co 1

India

Outside India

Issue of shares

Merger

Facts

Hold Co a foreign entity holds investment in an Indian company X Co

Hold Co merges with F Co 1, which issues shares as consideration to F Co, the ultimate holding company

Hold Co does not derive substantial value from X Co

Implications

Hold Co exempt under Section 47 subject to conditions

F Co No exemption under Section 47 Extinguishment of Hold Co shares results in

transfer However, no tax implications since Hold Co does

not derive substantial value from X Co For F Co 1, costs of shares of X Co would be same as

Hold Co – Section 49Cross Border Restructuring - Tax and Legal Issues

4

Merger of foreign companies – Base case (contd…)

F Co

Hold Co

X Co

F Co 1

India

Outside India

Issue of shares

Merger

Implications (contd …)

Would there be GAAR considerations if Hold Co is merging into a jurisdiction with whom India has a more favourable treaty?

Would X Co share transfer be outside TP purview if exempt under Section 47? Is this on the same footing as an exempt share transfer under a treaty?

Could F Co 1 issue of shares be subject to TP regulations(AEs can be 2 NRs)? Would this be considered A transaction having a bearing on the assets

of the enterprises Capital financing Business restructuring?

Cross Border Restructuring - Tax and Legal Issues

5

Merger of foreign companies – Cash Consideration

F Co

Hold Co

X Co

F Co 1

India

Outside India

Cash

Merger

Facts

Hold Co a foreign entity holds investment in an Indian company X Co

Hold Co merges with F Co 1, which issues shares as consideration to F Co, the ultimate holding company

Hold Co does not derive substantial value from X Co

Implications

Hold Co does not derive substantial value from X Co Hold Co not exempt under Section 47 – can there be

tax? No consideration received by Hold Co F Co - no tax implications since Hold Co does not derive

substantial value from X Co F Co 1 - Section 49 not applicable. Possibility of cost

step up?

Cross Border Restructuring - Tax and Legal Issues

6

Merger of foreign companies – Cash Consideration (contd…)

F Co

Hold Co

X Co

F Co 1

India

Outside India

Cash

Merger

Implications (contd …)

Would there be GAAR considerations if Hold Co is merging into a jurisdiction with whom India has a more favourable treaty?

Cross Border Restructuring - Tax and Legal Issues

7

Merger of foreign holding company into Indian subsidiary

F Co

Hold Co

X Co

Outside India

India

Facts

Hold Co merges into X Co Resultantly, F Co has immediate holding in X Co

Implications

Exemption to Hold Co available under Section 47 subject to conditions

Tax / company law implications in resident country of Hold Co to be analysed

FEMA / company law implications in India to be analysed Would X Co share transfer be outside TP purview if

exempt under Section 47? Is this on the same footing as an exempt share transfer under a treaty?

Would there be GAAR implications if F Co is from a more favourable treaty country?

TP implications? ‘Business restructuring’ between AEs?

Cross Border Restructuring - Tax and Legal Issues

8

Merger of Indian subsidiary into Hold Co

F Co

Hold Co

X Co

Outside India

India

Facts

X Co merges into Hold Co F Co continues to be holding company of Hold Co

Implications

Outbound mergers have been prescribed in the Companies Act, 2013

Corresponding tax implications have not been prescribed Tax / company law implications in resident country of

Hold Co to be analysed TP implications? ‘Business restructuring’ between AEs?

Cross Border Restructuring - Tax and Legal Issues

9

Merger of Hold Co with ultimate Hold Co

F Co

Hold Co

X Co

Outside India

India

Facts

Hold Co merges into F Co Resultantly, F Co has immediate holding in X Co

Implications

Tax exemption to Hold Co in India subject to conditions under Section 47

Tax / company law implications in resident countries of Hold Co and F Co to be analysed

Would X Co share transfer be outside TP purview if exempt under Section 47? Is this on the same footing as an exempt share transfer under a treaty?

GAAR implications if F Co is in a more favourable treaty country?

Other TP implications? ‘Business restructuring’ between 2 NR AEs?

Cross Border Restructuring - Tax and Legal Issues