What post-acquisition restructuring, if any, is typically done and why?
Post-acquisition restructuring would depend on the business and commercial objectives of the acquirer. Consolidation with other subsidiaries operating in India is often implemented. This is done through a merger or reverse merger, crisis sale, or business transfer. Streamlining and aligning transfer pricing methodologies is an important post-acquisition step. The Finance Act 2021 amended the scope of the term “crisis sale” to provide that all types of transfers, whether cash or non-cash, must be covered under a crisis sale. In addition, the law has also been amended to provide that the down sale must be made at the fair market value prescribed by the national tax law.
Can tax-neutral business divisions be achieved 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 spin-off of a business can be accomplished through a court-approved spin-off.
Demerger refers to the transfer by the Transferor (Split-Off) Company of one or more of its businesses to the Transferee (Resulting) Company, provided it is undertaken in accordance with Indian Company Laws and meets the following conditions:
- all the assets and liabilities of the divided company become the assets and liabilities of the resulting company and are transferred at their book value;
- the resulting company issues shares to the shareholders of the split company on a pro rata basis;
- shareholders holding at least 75 percent of the value of the shares of the split company become shareholders of the resulting company; and
- the transfer of the business is done on a going concern basis.
The concept of “business” is understood broadly as an independent business operation operating as a separate division comprising its assets, employees and independent contracts. Based on the principles established by the Indian courts, a company would mean a separate and distinct business unit or division created with an identifiable investment and capable of being managed and operated on its own.
The demerger that meets the above conditions is fiscally neutral and the unabsorbed capital losses and amortizations relating to the contributed company can be carried forward and offset by the resulting company over the unexpired period. Transfer rights apply even in the event of a demerger.
Migration of residence
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 still considered resident and taxed on worldwide income. Indian laws do not allow the migration of the residence of an Indian company to another jurisdiction.
However, an Indian company could have dual resident 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 “tie breaker rule” provided by the tax treaties.
A foreign company can be considered an Indian resident if its place of effective management (POEM) during the year is in India. The POEM has been defined as the place where, in substance, the main management and commercial decisions necessary for the conduct of the affairs of the foreign company as a whole are taken. The concept of POEM to determine the residency status of a foreign company was introduced into law on April 1, 2016. The detailed guidelines providing a “substance rather than form” test to determine a POEM application were prescribed by national tax law. Since “residence” is determined for each year, the POEM must also be determined on an annual basis.
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 any national exemptions to these withholdings or are they dependent on a treaty?
All interest payments by residents are subject to withholding tax unless such interest is paid for business conducted outside India. Interest payments by non-residents are taxable if made in connection with business activities carried on in India. Under national tax law, the 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 currencies before July 1, 2023 (subject to certain conditions being met), a reduced 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 be subject to withholding tax at the rate of 5 per cent (plus applicable surcharge and education tax) on a gross basis.
Dividends distributed by Indian companies were tax-free in the hands of shareholders until March 31, 2020; therefore, no withholding tax was applicable. The 2020 finance law gave shareholders the benefit of tax dividends by abolishing the tax on the distribution of dividends in the hands of the distributing company. The 2020 Finance Law therefore introduced withholding tax provisions to deduct the 20% withholding tax on dividends, subject to treaty benefits for foreign shareholders. India has a concept of “deemed dividend”, in which certain forms of payment (out of accrued profits), such as distribution in the event of liquidation or release of any part of the assets of the company upon reduction of capital corporate, are considered deemed dividends and subject to withholding tax.
In 2018, the law was amended to clarify that cumulative profits would include all profits belonging to merging and merged companies due to past consolidations.
The Finance Act 2021 prescribed that the rate of withholding tax on interest and dividends paid to foreign portfolio investors (REITs) must be in accordance with the rates provided for in the relevant tax treaty or the rates prescribed by national tax legislation. , whichever is more advantageous. to FPIs upon delivery of the Tax Residence Certificate to the payer.
Tax-efficient profit extraction
What other tax efficient means are adopted to extract profits from your jurisdiction?
India has legislated the general anti-avoidance rules for fiscal years commencing April 1, 2017. Therefore, if a transaction or any of its steps is designed with the aim of obtaining a tax advantage, the tax advantage may be refused.
The buyback of shares by a company was previously considered a commonly tax-efficient means of extracting profits since national tax law specifically provided that proceeds received in connection with a buyout would not be treated as dividends. ; rather, they will be characterized as capital gains. Therefore, in cases where the shares of an Indian company are held by a foreign company, and if the applicable tax treaty provides that the capital gains are not taxable in India, share buyback was an option. interesting for the repatriation of profits.
However, India has legislated an anti-abuse measure in the form of a buy-in tax (BBT) at the rate of 20% (plus applicable surcharge and tax), making such buy-ins tax inefficient for listed companies. and unlisted. This tax is applicable regardless of the mode of transaction; namely, including a court-approved diet.
BBT is levied on “distributed income”, representing the difference between the consideration paid to shareholders when shares are redeemed and the amount received by the company when those shares are issued (regardless of the amount the shareholder may have paid upon acquisition of the shares, in the event of a secondary acquisition). No treaty relief is available against BBT. If the shareholder has subscribed for the shares at a premium, a redemption of shares may also be carried out at a premium without entailing adverse tax consequences, provided that the redemption price is not higher than the subscription price.