Vishnupriya Tawania
Cross-border mergers & acquisitions have become common in this era of globalisation, when two or more companies come together to form a completely new entity or merge into one existing company, which may or may not relate to businesses of those companies. This process involves transfer of property rights, assets and liabilities and is called a merger and is sometimes used interchangeably with amalgamation but has a slight difference.
But when one or more companies acquires one or more other companies, it is called an acquisition. Both mergers and acquisitions are done to expand the market reach and enhance business operations. These strategies enable the companies to access new market and new technology.
The cross-border mergers in India were formally regularised through Notification No. S.O.1182(E) of section 234 of Companies Act, 2013 by Ministry of Corporate Affairs on 13th April 2017. This section relates to merger or amalgamation of a company with a foreign company. On the same date MCA has issued the Companies (Compromise, Arrangements and Amalgamation) Amendment Rules, 2017 inserting Rule 25A and Annexure B in prescribing rules in the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016 in relation to operation of section 234.
However, the cross-border acquisitions in India are subject to regulatory compliance under FEMA ,1999 along with RBI guidelines, and Competition act,2002 and SEBI regulations. Mergers are a statutory process under companies act, whereas acquisitions are the corporate transactions.
Cross-Border Merger
When two or more companies from different countries come together to form a completely new entity or merge into one existing company it is called a cross-border merger. It is a friendly combination between two companies from different countries.
Section 232 of Companies Act, 2013 deals with the merger or amalgamation of companies, including procedures, approvals, and filings. Though the term merger is generally used interchangeably with amalgamation, but this section specifically refers to merges where a company merges with another company without creating a new company. And when two or more companies come together to form a new entity it is called an amalgamation.
Cross-Border Acquisition
When a company or group of companies from one country acquires control over one or more other companies of another country, it is called a cross- border acquisition. The acquisition can be full acquisition, partial acquisition, purchase of assets or acquisition which is like a merger. So, in short it is when a company crosses borders to acquire another company.
Tax Implications
Cross-border mergers and acquisitions help the businesses to expand globally, access new technology and new market but they also bring complex tax issues and legal compliances as laws of different countries must be applied simultaneously without comprising with the legal rules of countries involved.
Tax implications in cross-border mergers and acquisition refers to understanding how the transaction will be treated and taxed both in India and abroad. This involves analysing tax laws of the countries involved, analysing liabilities, possible tax exemptions under the Indian laws as well as considering international tax laws and treaties to avoid double taxation and ensure regulatory compliance.
Key concerns in cross-border taxation includes indirect transfer rules, tax neutrality, capital gains tax, double taxation and its reliefs via DTAAs, withholding tax obligations and transfer pricing requirements. Each of these aspects are essential to ensure compliance and other essential requirements for successful cross-border mergers and acquisitions.
One of the major turning points in cross-border related taxation in India was Vodafone International Holdings B.V. v. Union of India (2012) 6 SCC 613 which is popularly known as Vodafone Hutchison Case. It involved indirect transfer tax on Indian assets and retrospective amendments in the tax laws.
Capital Gains Tax Liability
Tax implication on buyer and seller at the time of international dealings is different. The seller is typically liable for capital gains tax in India on profits made from sale of capital assets. In case of shares, if they are listed and held for more than 12 months, long term capital gains are taxed at the rate of 12.5% after an exemption of Rs. 1.25 lakhs replacing earlier 10% rate and Rs. 1,00,000/- exemption introduced through the Finance (No. 2) Act, 2024, which became effective from 23.07.2024.
In case of shares which are unlisted and other assets like real estate the holding period to qualify as long-term gains is 24 months and are taxed at the rate of 12.5% without indexation benefit when compared to earlier 20% with indexation benefit.
The short-term capital gains tax rate for listed equity shares and equity oriented mutual funds in India is 20% replacing earlier rate of 15%, effective from 23rd of July 2024. For unlisted shares, the short-term capital gains are taxed as per the individual’s income tax slab rates if the shares are held for 24 months or less.
Tax Neutrality in Mergers
Mergers could be both inbound mergers and outbound mergers. Inbound mergers occur when a foreign company merges with an Indian company, making the Indian company as the surviving company. Outbound mergers happen when an Indian company merges with a foreign company and such foreign company is the surviving company.
The tax neutrality encourages corporate restructuring and consolidation by removing tax barriers that would otherwise diminish the financial benefits of mergers.It refers to the principle that the merging of two or more companies should not be triggering any immediate tax liability particularly capital gains tax for either the merging companies or their shareholders. It is to ensure smooth merger of companies without incurring excess tax liability at the time of such merger or acquisition.
In India, the inbound mergers can benefit the most from tax neutrality provisions, especially under section 47 of income tax act,1961 allowing the companies to merge or acquire or amalgamate without excess tax liabilities involving capital gains tax liability etc.
Double taxation and DTAAs
Whenever there is a cross-border merger or acquisition, the companies may face tax implication in both the domestic country i.e. India and also in the foreign country. This might involve the integration of different tax jurisdictions, which can result in several tax complexities. DTAAs help mitigate these complexities and helps avoid double taxation by allowing companies to avoid being taxed twice in both the countries on the same transaction.
DTAAs provides relief to the involving companies by providing tax certainties, reducing disputes related to international taxation through economic cooperations, by providing clarity and reducing tax burdens, allocating tax rights between the countries involved and relief to the countries by providing tax exemptions, tax credits and reduced tax rates and so on. India has signed DTAAs with over 90 countries including USA, UK, Canada, Singapore, Mauritius etc.
In practice, if a taxpayer pays tax on income in one country, DTAAs ensure that the same income is not taxed again fully in the other country by granting credit or exemption, thereby avoiding double taxation. Thus, DTAAs play a vital role in international taxation by balancing the taxation rights between countries, encouraging foreign investment and trade, and avoiding undue tax burdens on cross-border income
Withholding Tax Obligations
When payment of shares or assets are made across borders, as per Indian law the companies may require withholding the tax before making payment to the seller. The rates of taxes may vary based on relevant DTAAs.
Transfer Pricing Compliance
Transfer pricing rules apply to international transactions between associated enterprises and specified domestic transactions exceeding Rs. 20cr aggregate value. In India transferring pricing compliance refers to adherences governing the pricing of transactions between associated enterprises especially those involving international or specified domestic transactions.
So, in simple terms it means making sure that, when related companies like parent company and its subsidiary company or companies under same control, do business with each other, they charge prices just like they would have charged if they would be doing business with an unrelated company. This is called the “arm’s length price” a fair market price which independent companies might prefer to agree upon.
These are essential to prevent companies from fixing prices too high or too low to shift profits between countries and avoid paying the right amount of tax.
GENERAL ANTI-AVOIDANCE RULE (GAAR)
GAAR is a provision under income tax act, 1961 of India designed to tackle tax avoidance by taxpayers. It was introduced in the year 2017 and is applicable since AY 2018-19. It is applicable to both domestic and cross border transactions. It empowers tax authorities to scrutinize and, if necessary, disregard or recharacterize arrangements or transactions that are primarily made with the purpose of obtaining a tax benefit but lack genuine commercial substance or are otherwise abusive.
It targets the arrangements made with an intention to evade tax liabilities and obtain illegal tax advantages. It ensures that the taxpayers do not take undue advantage of loopholes through aggressive tax planning and that they pay their fair share of taxes.
Conclusion
Cross-border mergers and acquisitions are not only essential for businesses, but they are also essential for the nations involved. Which is so far also the reasons for evolving Cross-border mergers and acquisitions and easing of related regulations. India should try to ease the tax regulations on such transactions as the growth in mergers and acquisitions may in turn help our economy. Complex tax regulations may discourage the interest of foreign companies in India and at the same time make it difficult for the Indian companies to invest abroad. Over the time India has signed several treaties and agreements with various countries, like DTAAs etc to encourage M&A and they have become a significant contributor to our growing economy.
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