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Amalgamations of Foreign Companies with Indian situs - Foreign Shareholders' tax exemption in India

Published: Sep 13, 2021

By Shankar Iyer, Direct Tax Leader, DAA Consulting

AMALGAMATION in India would mean a scheme whereby one company (amalgamating company) merges itself into another company (amalgamated company) and thereby forfeits its independent existence. Shareholders in amalgamating company effectively transfer the shareholding therein in lieu of shares in amalgamated company.

Exemption for shareholders of amalgamating company w.r.t transfer of shares therein pursuant to amalgamation with amalgamated Indian company

Under Indian tax law, an amalgamation is tax neutral so long as it satisfies certain conditions, such as, transfer of all property and liabilities of A Co to B Co, at least 75% (in value) shareholders of A Co becoming shareholders in B Co by virtue of amalgamation, etc. ('amalgamation test'). We assume amalgamation test would be satisfied and hence aforementioned amalgamation is tax neutral under Indian tax law.

Further, as illustrated in Case I, transfer of shares in A Co by shareholders of A Co in lieu of shares in B Co, as part of such amalgamation, is specifically exempt in India from any incidence of capital gains in their hands so long as the amalgamated company (i.e. B Co) is an Indian company. Thus, shareholders of A Co, whether Indian or foreign, enjoy an exemption from capital gains in India w.r.t transfer of their shareholding in A Co in lieu of shares in B Co upon such amalgamation, so long as B Co is an Indian company.

Shares of a foreign company 'deemed to be located in India' and exemption from tax for transfer of such deemed Indian shareholding pursuant to amalgamation

Under Indian tax law, shares of a foreign company, say F Co, shall be deemed to be situated in India if such share derives value (directly or indirectly) substantially from assets located in India - Indian Asset Test:

a. Fair market value ('FMV') of such gross assets i.e. without reduction of any corresponding liability in respect thereof, whether tangible or intangible, in India must exceed a threshold limit of c. USD 1.50 mn and

b. represent at least 50% of value of all assets owned by F Co.

Accordingly, transfer of such shares of F Co in whatsoever manner would be taxable in India unless specifically exempt. Further, for such foreign amalgamations, the Indian tax law provides for an exemption qua transfer of shares in F Co if they meet the aforementioned amalgamation test under the Indian tax law. We assume that the amalgamation test would be met in the case of amalgamation of Y Co with Z Co illustrated below.

Note: In Case II, shares of Y Co can also be deemed to be located in India if it satisfies the Indian Asset Test i.e. derives value significantly from shares of F Co which in turn derives such value from I Co. In that situation, even amalgamation of Y Co into Z Co would need to be analysed from an Indian tax angle vis-à-vis shareholders of Y Co.

Transfer of 'deemed Indian shareholding' by amalgamating foreign company pursuant to amalgamation is exempt from tax. However, whether shareholders in such amalgamating foreign company would also be exempt from tax in India per Case I?

In Case I, we observe that shareholders, whether Indian or foreign, of an amalgamating company enjoy an exemption from tax in India w.r.t transfer of shares therein pursuant to an amalgamation with an amalgamated Indian company.

However, there is no such exemption provided under Indian tax law to shareholders of amalgamating company where the amalgamated company is a foreign company. Case II would envisage that situation whereby,

a) shares in Y Co may also be deemed to be located in India as per Indian Asset Test, but

b) shareholders in Y Co may not have any specific exemption under Indian tax law w.r.t transfer of shares therein pursuant to an amalgamation of Y Co into Z Co, a foreign company.

This would naturally lead to a CASE III conundrum for shareholders of Y Co as below:

Accordingly, under Indian tax law, while there may be an exemption for Y Co w.r.t transfer of its deemed Indian shareholding in F Co to Z Co pursuant to amalgamation, shareholders of Y Co may not be exempt from capital gains arising in India due to transfer of shares therein in lieu of shares in Z Co as part of said amalgamation. Accordingly, shareholders of Y Co would be subject to capital gains taxation in India.

Ideally, considering such exemption exists in Indian tax law for shareholders of amalgamating company only when the amalgamated company is an Indian company, on the basis of non-discrimination, the Indian tax law ought to be amended in order to specifically provide for such an exemption to shareholders of amalgamating company even when the amalgamated company is a foreign company. This becomes even more relevant when in case of shares of a foreign company that are deemed to be located in India, specific exemptions are provided w.r.t transfer of shares therein vide foreign amalgamation.

One may need to factor these aspects under Indian tax law as part of global restructuring exercises involving Indian assets.

[The views expressed are strictly personal.]