What post-acquisition restructuring, if any, is typically done and why?
Post-acquisition restructuring would depend on the buyer’s business and business objectives. Consolidations with other subsidiaries operating in India are often set up. This is done by way of merger or reverse merger, business divestiture or business transfer. Streamlining and aligning transfer pricing methodologies is an important post-acquisition step. The 2021 finance law modified the scope of the term âslump saleâ to provide that all types of transfer, whether by means of cash or non-cash transactions, will be covered within the framework of a slump sale. The method of calculating capital gains on the sale in a burst takes into account the fair market value on the date of the sale because the sale price has been modified (Conseil Central des ImpÃ´ts Directs Opinion n Â° 68/20201 of May 24, 2021 ).
Can tax neutral divisions of companies be carried out and, if so, can the net operating losses of the divided company be preserved? Is it possible to carry out a spin-off without triggering transfer rights?
A tax neutral split of a business can be achieved through a court approved split.
Split refers to the transfer by the ceding (dissociated) company of one or more of its businesses to the transferee (resulting) company, provided that it is undertaken in accordance with Indian company laws and meets the following conditions:
- all the property and liabilities of the company being divided become the property and liabilities of the resulting company and are transferred at their carrying amount;
- the resulting company issues pro rata shares to the shareholders of the split company;
- shareholders holding at least 75 per cent of the value of the shares of the company being divided become shareholders of the company resulting from the merger; and
- the transfer of the company is on a going concern basis.
The concept of “enterprise” is widely understood as an independent business activity functioning as a separate division comprising its independent assets, employees and contracts. Based on the principles established by Indian courts, a business would mean a separate and distinct business unit or division created with identifiable investments and capable of being managed and operated on a stand-alone basis.
A demerger that meets the above conditions is tax neutral and the unabsorbed losses and depreciations relating to the sold company can be deferred and compensated by the resulting company for the unexpired period. Transfer taxes apply even in the event of a split.
Is it possible to migrate the residence of the acquisition company or the target company from your jurisdiction without tax consequences?
Under Indian tax law, a company incorporated in India is always considered a resident and taxed on worldwide income. Indian laws do not allow migration of residency from an Indian company to another jurisdiction. However, an Indian company could have dual residency status and be considered a resident of another country. In such a case, the residency status of the Indian company would be determined in accordance with the âtie-breaker ruleâ provided for in tax treaties. A foreign company may be considered an Indian resident if its place of effective management (POEM) during the year is in India. POEM has been defined as the place where, in essence, the main management and business decisions necessary for the conduct of the affairs of the foreign company as a whole are taken. The concept of POEM to determine the residence status of a foreign company was introduced in the law of April 1, 2016.
The guidelines provide for a âsubstance over formâ test to determine the POEM application. An Active Business Outside India (ABOI) test has also been prescribed to determine the POEM. For companies that do not meet the ABOI test, the determination of the POEM is based on identifying or verifying who or people actually make the key management and business decisions and where those decisions are made for driving. corporate affairs. The location of the board of directors, the delegation to the committees, the location of the company’s head office, the place of residence of the decision-makers or the place of decision-making are other important factors in determining POEM in India. The law provides that if there is a conflict between the determination of the POEM under the tie-breaking rules of the tax treaties, the POEM will be considered to be in India.
Interest and dividend payments
Are interest and dividend payments made outside your jurisdiction subject to withholding taxes and, if so, at what rates? Are there national exemptions from these deductions or are they treaty dependent?
All interest payments by residents are subject to withholding tax, unless such interest is paid for activities conducted outside India. Interest payments by non-residents are subject to tax if made in the course of business activities carried on in India. Under national tax law, withholding tax is 20 percent (plus applicable surcharge and education tax) on gross interest in the case of foreign currency loans. If funds were borrowed in foreign currency before July 1, 2023 (subject to meeting certain conditions), a lower interest rate of 5% (plus applicable surcharge and education tax) on a gross basis is applicable. Interest received from an Indian rupee denominated bond would result in withholding tax at the rate of 5 percent (plus applicable surtax and education tax) on a gross basis.
Dividends distributed by Indian companies were exempt from tax in the hands of shareholders until March 31, 2020; therefore, no withholding tax was applicable. The 2020 finance law resulted in taxing dividends in the hands of shareholders by abolishing the tax on dividend distributions in the hands of the distributing company. The 2020 Finance Law therefore introduced withholding provisions to deduct 20 percent withholding tax on dividends, subject to treaty benefits for foreign shareholders. India has a concept of “deemed dividend”, in which certain forms of payment (on accumulated profits), such as distribution on liquidation or the release of any part of the assets of the company upon reduction of capital social, are considered deemed dividends and subject to withholding tax.
In 2018, the law was amended to clarify that accrued profits would include all profits owned by amalgamating and amalgamated companies due to previous consolidations.
The 2021 Finance Law mandated that the rate of withholding tax on interest and dividends paid to Foreign Institutional Investors (FIIs) must be in accordance with the rates provided for in the relevant tax treaty or the rates prescribed under Indian law. on the 1961 income tax, as the case may be. more advantageous for the FII when the certificate of tax residence is delivered to the payer.
Tax-efficient extraction of profits
What other tax-efficient ways are being adopted to extract profits from your jurisdiction?
The buyback of shares by a company was previously seen as a tax-efficient way to extract profits. As a rule, national tax law specifically provided that proceeds received in connection with a redemption would not be treated as dividends; rather, they will be referred to as capital gains. Therefore, in cases where the shares of an Indian company are held by a foreign company, and if the relevant tax treaty provides that capital gains are not taxable in India, the repurchase of shares was an option. interesting for the repatriation of profits. In 2013, the introduction of the buyback tax (BBT) at the rate of 20 percent (plus the applicable surtax and tax) made such buybacks fiscally ineffective for unlisted companies. In 2016, buybacks, even under a court-approved program, attracted BBT. In 2019, the law was further amended to broaden the scope of the BBT to be levied on the buyback of listed shares. The BBT is deducted from âdistributed incomeâ, representing the difference between the consideration paid to shareholders when the shares are repurchased and the amount received by the company when these shares are issued (regardless of the amount that the shareholder may have paid upon acquisition of the shares, in the event of secondary acquisition). No conventional relief is available against BBT. If the shareholder has subscribed for the shares at a premium, the share buyback can also be carried out at a premium without causing unfavorable tax consequences, provided that the redemption price is not higher than the subscription price.