Private Equity Investments in Production Houses and OTT Studios: A Tax and Structuring Primer

Summary: Private equity investment in Indian production houses and OTT studios raises interconnected questions of foreign investment regulation, fund structure, taxation and intellectual property ownership. The article considers company, LLP and project-specific SPV structures; equity, CCPS and CCD instruments; valuation and the abolition of angel tax; and the deductibility of film, distribution and streaming-content expenditure. It discusses withholding obligations on payments to production personnel, professionals, rights holders and non-residents, together with GST classification, input tax credit and export-of-services issues. It also addresses Category I and II AIF pass-through treatment, taxation of non-resident investors, capital gains and exit structures, including share sales, IPOs, buybacks and earn-outs. Post-investment concerns include continuity of carried-forward losses, start-up incentives, transfer pricing, minimum alternate tax, treaty substance and anti-avoidance rules. The article concludes with due diligence checks covering copyright ownership, tax disputes, withholding, valuations, foreign investment compliance and indemnities, and suggests that transaction documents should account for tax risks from entry through exit. Its statutory references span the Income-tax Act, 1961 and the Income-tax Act, 2025, and therefore require provision-specific checking before implementation.

Introduction

India’s media and entertainment sector has moved from promoter-funded, project-by-project film financing to institutional capital. Streaming platforms, a steady demand for regional-language content, and the commercial value of a deep content library have made production houses and OTT studios attractive targets for private equity (PE) funds. Content is an asset that can be monetised repeatedly through licensing, remakes, syndication, and music rights, which is exactly what a financial investor looks for.

Tax shapes almost every decision in these deals: how the investment is routed, which instrument is used, how film costs are deducted, how the exit is taxed, and what the investee must withhold on its payments. This article walks through those issues for a practitioner advising either side of the table.

A note on statutes: The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from April 1, 2026, and governs Tax Year 2026–27 onwards, while the 1961 Act continues for earlier years and pending proceedings [1]. Section and rule numbers have changed. This article refers to provisions by concept and, where it cites the 1961 Act, flags this so that readers can map them to the corresponding provisions of the new Act and the Income-tax Rules, 2026.

Why the Sector Is Tax-Sensitive

A production house or studio differs from an ordinary operating company in four main ways:

1. Lumpy, project-based income: Revenue is recognised on release, delivery, or licensing, so profits swing sharply between years.

2. Intangible-heavy balance sheet: The principal assets are copyrights, scripts, music rights, remake rights, and distribution rights, which are hard to value and easy to dispute.

3. Heavy use of freelancers and talent: Actors, directors, composers, and technicians are paid under contracts, which brings withholding obligations into play on a very large number of payments.

4. Related-party and cross-border flows: Co-productions, overseas licensing, foreign streaming platforms, and offshore holding structures raise transfer pricing and treaty questions.

Regulatory Gateway: FDI and Fund Regulation

Before tax, there is the question of who may invest and how.

Foreign investment: Film production, distribution, and exhibition have traditionally been open to foreign investment under the 100% automatic route, subject to sectoral conditions. Non-news broadcasting content businesses are also treated more liberally than news and current affairs. Digital media streaming sits less neatly within the policy, so investors should confirm how the target’s activities are classified rather than assume. Investors from countries sharing a land border with India are subject to Press Note 3 of 2020, which requires prior government approval. And the rules around it have been revised since, so this must be checked at the time of every deal.

Fund vehicles: Domestic PE capital typically comes through SEBI-registered Alternative Investment Funds (AIFs), most often Category II. Foreign capital comes either directly from offshore funds or through Indian-sponsored feeder structures, sometimes via Gujarat International Finance Tec-City (GIFT City).

Choosing the Investee Entity

The choice of investee vehicle dictates legal governance, tax efficiency, and exit flexibility:

Many PE deals also insert a holding company over several production subsidiaries so that the investor deals with one cap table, while individual films sit in separate SPVs. The holding company must then be tested for cascading withholding, dividend flows, and the usability of losses across the group, since losses in one entity cannot generally be set off against profits in another.

Instruments and Their Tax Consequences

Equity and Preference Shares

Equity is simple but offers PE funds little downside protection. Compulsorily Convertible Preference Shares (CCPS) are therefore widely used, as they give the fund a liquidation preference, anti-dilution protection, and conversion rights while still counting as equity for foreign exchange management purposes.

Compulsorily Convertible Debentures (CCDs)

CCDs are popular because interest on them can be deducted by the investee as business expenditure, which reduces taxable profit. The limits are real, however:

• Interest paid to a non-resident requires withholding tax under Section 195 (or Section 398 of the 2025 Act), subject to applicable Double Taxation Avoidance Agreements (DTAA
• The interest limitation rules (earlier Section 94B of the 1961 Act) restrict interest deductions on borrowings from non-resident associated enterprises to 30% of EBITDA
• Foreign exchange pricing guidelines and mandatory conversion timelines for CCDs must be rigorously met, or the instrument risks recharacterisation as debt/unauthorised borrowing

The End of Angel Tax

For years, share premium charged above fair market value was taxed in the investee’s hands as ‘income from other sources’ under Section 56(2)(viib) of the 1961 Act. The Finance (No. 2) Act, 2024 abolished this provision for share issuances made on or after April 1, 2025, and the Income-tax Act, 2025 has no equivalent provision. This removes a long-standing deal risk for studios that raise capital on the strength of an unproven slate or future library value, where valuation is naturally subjective.

Two caveats remain:

1. Pending assessments and appeals for earlier assessment years continue to be governed by the legacy Section 56(2)(viib) provisions.

2. The abolition of angel tax does not end scrutiny of the investor’s identity and source of funds. The cash-credit provisions (Section 68 of the 1961 Act / Section 135 of the 2025 Act) still apply to share capital raised by closely held companies, making investor KYC and fund source documentation essential.

Valuation

Even without angel tax, valuation remains vital for transfers between existing shareholders, for preferential allotments under the Companies Act, 2013 and Foreign Exchange Management Act (FEMA) rules, and for transfer pricing between related parties. Valuing a film library or a development slate relies heavily on Discounted Cash Flow (DCF) projections; the underlying commercial assumptions must be meticulously documented to withstand tax scrutiny.

Deductibility of Film Costs

Production cost is the largest expense line, and its timing directly drives the investee’s taxable profit.

Production costs: Under the 1961 Act regime, costs of producing a feature film were allowed as business expenditure under Rule 9A of the Income-tax Rules, 1962, generally in the year of release, with a spread over two years where the film was not fully exploited in that year.

Distribution rights: Costs of acquiring film distribution rights received separate treatment under Rule 9B, using a broadly similar timing mechanism based on commercial exploitation.

Series and streaming content: Legacy rules were drafted specifically for feature films. Episodic and web content produced for OTT platforms does not fit neatly within Rule 9A/9B. Consequently, the deduction of such costs is claimed under general principles of business expenditure (Section 37 of the 1961 Act / Section 16 of the 2025 Act) and aligned with the investee’s accounting policy (Ind AS 38 / AS 26 for intangible assets and content amortisation). Practitioners should confirm how these concepts have been codified into the Income-tax Act, 2025 and the Income-tax Rules, 2026 before computing deductions for Tax Year 2026–27 onwards. An investee that has revised its amortisation policy post-PE entry must be prepared to defend the consistency of the change with applicable accounting standards.

Withholding Tax on Production and Licensing Payments

Withholding tax (Tax Deducted at Source / TDS) compliance is the most frequent source of tax notices and audit disputes for production houses:

• Contracts for production services: Payments to production crews, line producers, and contractors fall under Section 19C (formerly Section 194C of the 1961 Act)
• Fees to talent and professionals: Payments to actors, directors, writers, and composers are treated as professional/technical fees attracting TDS under Section 19F (formerly Section 194J).
• Royalty and licensing: Payments for the use of copyright, music, or content library rights are categorised as royalty under Section 19F/398, subject to non-resident treaty rates .
• Non-resident payments: Payments to overseas studios, technicians, or foreign directors require determination of Indian taxability, availability of DTAA benefits, and acquisition of lower/nil withholding certificate.

Failure to withhold tax results in statutory disallowance of 30% (or 100% for foreign payments) of the expense in the investee’s hands (Section 16(b) of the 2025 Act / Section 40(a) of the 1961 Act), in addition to interest and penal consequences. For a PE investor, adverse TDS non-compliance is a classic diligence finding that translates into purchase price adjustments or specific indemnities.

Goods and Services Tax (GST)

Content businesses provide services including copyright licensing, assignment of distribution rights, and film production under contract. Key considerations affecting cash flow include the place of supply rules, the classification of temporary licensing versus the permanent transfer of rights, and the full availability of Input Tax Credit (ITC) on heavy production expenses. For OTT studios supplying content to foreign streaming platforms, qualifying for ‘export of services’ (zero-rated supply) requires strict compliance with all statutory conditions under the IGST Act. A comprehensive GST audit must be integrated into the deal diligence process alongside direct tax reviews.

Taxation of the Investor

Resident Investors and AIFs

Category I and II AIFs enjoy tax pass-through status under Section 115UB of the 1961 Act (and equivalent provisions of the 2025 Act) [27]. Income (other than business income) is exempt at the fund level and taxed directly in the hands of investors in the same character in which it was earned. Business income of Category I/II AIFs and all income of Category III AIFs are taxed at the fund level at the maximum marginal rate [28]. Fund managers must carefully categorize gains to distinguish between capital gains and business income.

Non-Resident Investors

Non-residents are taxed on Indian-sourced income, including capital gains from transferring shares of an Indian production house [29]. Gains from the transfer of foreign holding company shares deriving substantial value from Indian assets fall within India’s tax net under the indirect transfer rules [30]. While DTAAs can provide tax relief, benefits are strictly subject to the Principal Purpose Test (PPT) under the Multilateral Instrument (MLI) and domestic General Anti-Avoidance Rules (GAAR) [31]. Substance in the offshore jurisdiction – such as real commercial rationale, local decision-making, qualified directors, and functional office space – is compulsory.

Exit Taxation

• Capital gains on unlisted shares: Long-term capital gains (LTCG) on unlisted shares are taxed at a flat rate of 12.5% without indexation, with a qualifying holding period of 24 months. Shorter holdings yield short-term capital gains (STCG) taxed at applicable slab/corporate rates.
• IPO exits: Where the exit is via an Offer for Sale (OFS) or market sale post-listing, listed security rules apply, including Securities Transaction Tax (STT) obligations.
• Buybacks: Share buyback taxation has undergone significant reform. Under the updated regime (effective late 2024 / Union Budget 2026–27 adjustments), buyback proceeds are treated as deemed dividends in the hands of shareholders, while the cost of acquisition is treated as a capital loss.
• Earn-outs and deferred consideration: Common in creative studio acquisitions, earn-out structures require careful drafting to establish whether deferred payments constitute capital consideration or taxable management compensation.

Tax Issues That Arise After the Investment

Carry Forward of Losses

Studios frequently accumulate business losses in early growth years. Under Section 79 of the 1961 Act (Section 92 of the 2025 Act), a closely held company loses the right to carry forward accumulated losses if there is a change in shareholding exceeding 49% of voting power . While relaxations exist for DPIIT-recognised start-ups, a major PE buyout that breaches this 49% threshold can extinguish historical losses, directly altering deal valuation.

Start-Up Benefits

Studios and technology-driven OTT platforms recognized as start-ups by DPIIT may claim a 100% tax holiday for 3 consecutive years under Section 80-IAC PE entry does not automatically terminate start-up status, but eligibility thresholds (turnover ceilings and ownership caps) must be continuously monitored post-restructuring.

Transfer Pricing

Cross-border related-party arrangements—such as licensing content from foreign group studios or co-production agreements with foreign affiliates—must satisfy Arm’s Length Price (ALP) standards. Intangibles and royalty valuations attract heavy transfer pricing litigation in India.

Minimum Alternate Tax (MAT)

Companies under the regular corporate tax regime that report book profits but low taxable income remain subject to MAT (Section 115JB of 1961 Act) . Changes in MAT credit mechanisms under the 2025 Act framework must be incorporated into financial modeling.

Due Diligence Checklist

A comprehensive tax due diligence checklist for PE investment in a content studio includes:

• Chain of title and copyright ownership: Verification of legal assignment agreements across scripts, scores, and footage.
• TDS compliance history: Audit of withholding on talent, crew, international line production, and royalty payments.
• Film cost deduction audit: Verification of Rule 9A/9B/general accounting compliance for content amortisation.
• Pending tax disputes: Examination of outstanding notices, appeals, and historic share premium / angel tax inquiries.
• Loss continuity analysis: Evaluation of Section 79 impact following proposed equity dilution.
• GST compliance & ITC reconciliation: Review of place of supply, export zero-rating, and credit utilization.
• Transfer pricing documentation: Benchmarking reports for cross-border IP licensing and co-production deals.
• Valuation reports: Rule 11UA / DCF valuation certificates supporting historic share allotments.
• FDI & Press Note 3 compliance: Ultimate beneficial ownership (UBO) check of all existing shareholders.
• Indemnities & Escrow: Structuring tax indemnities that survive closing and match reassessment limitation periods.

Structuring Recommendations

• Vehicle selection: Prefer a corporate entity at the holding level and project-wise SPVs where investors demand ring-fenced slate exposure.
• Instrument choice: Utilize CCPS or CCDs rather than pure equity, but strictly model thin capitalization (Section 94B) and withholding limits before finalizing interest terms.
• Loss preservation: Structure investment tranches below the 49% voting power shift threshold where possible, or adjust deal pricing to absorb loss forfeitures.
• Substance in holding hubs: Ensure real commercial decision-making, physical offices, and qualified directors in treaty jurisdictions to withstand GAAR and PPT scrutiny.
• Tax indemnity and escrow: Negotiate specific tax indemnities and align escrow retention periods with the statutory reassessment window (typically 3 to 5 years under the 2025 Act).
• Exit planning: Factor exit taxation (LTCG rates, buyback rules, treaty entitlement) into term sheets from day one.

Conclusion

PE investment in production houses and OTT studios is highly lucrative but deeply tax-intensive. The abolition of the angel tax has eliminated a primary historical impediment to capital raising, while the introduction of the Income-tax Act, 2025 modernises the statutory framework. However, critical exposure remains in withholding compliance, content cost amortisation, loss carry-forward restrictions post-dilution, cross-border IP structuring, and exit taxation. Advisers who address these structural nuances early – and document the underlying commercial rationale—will secure both tax efficiency and legal certainty for their clients.