Cross Border Taxation on M&A

Submitted by

Shaurya Shobhit | PRN- 18010224165 | Division- C ( 2018-23)

Of

“Symbiosis Law School, Noida”

Symbiosis International (Deemed University), Pune

Under the guidance of

Mr.Rajnish Jindal
Introduction

“A cross-border merger is an event where two organisations originating from two different coun-
tries join together to form one entity. A cross-border merger or an acquisition would result in the
transfer of control and authority of the organisation either into a newly formed organisation or to the
acquiring organisation. India has made great stride in reforming and making cross-border mergers
and acquisitions possible under the guidance of the Government of India and other governmental
organisations as applicable. The Companies Act, 2013 under section 234 permits the merger and
amalgamations of an Indian company with a foreign company and vice-versa. 1 Moreover, Rule 25A
in the Companies Rules, 2014, per the Reverse Bank of India.”

Article review

1. Tax reforms under cross border transaction - Ayush Verma /‘The journal’ page no.3
(2019)

“In cross-border transactions, tax issues occur when two jurisdictions attempt to tax the same in-
come or legal entity, resulting in double-taxation. However, many countries recognise that double
taxation deters cross-border trade and activity, so countries join bilateral DTAAs (Double Taxation
Avoidance Agreements) to restrict their taxing rights willingly through self-restraint, preventing
conflicting tax claims. It seems many nations engage in bilateral treatment to prevent duplication of
taxation. India has double tax avoidance agreements with Mauritius, Singapore, Cyprus, and the
Netherlands to voluntarily restrict its taxation jurisdictions. In such instances, the agreement on dual
tax avoidance or Section 90(2) of the Act on income tax, whichever advantages the entity will be
preferred.”2 
The G-20 nations endorsed the 15 point OECD (The Organization for Economic Co-operation and
Development) BEPS (Base Erosion and Profit Shifting) action plans to curb Base Erosion and
Profit Shifting in 2015. “These guidelines have been created to prevent practices that are only aimed
at reducing or evading taxes. The introduction of the OECD BEPS has had an influence on mergers
and acquisitions around the globe. In addition, 94 countries joined the Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) to im-
pose a series of tax treaty measures to modernise international tax law and decrease multinational
corporations’ ability to avoid paying taxes. These provisions were designed to promote trans-
parency and deter tax evasion through aggressive tax planning and hybrid tax instruments in the
context of mergers and acquisitions. However, it has increased the expense of compliance, and the
absence of universal application of these rules has created additional issues for regulatory agencies
and enterprises.”

2. “Managing tax risks in cross-border merger and acquisition” - Tax/merger and acquisi-
tions by Abhilasha Banerjee (8 January 2021)
1 KPMG International Cooperative (“KPMG International”)
2 Ayush Verma /‘The journal’ page no.3 (2019)
“The government has taken many steps to better the measures and process of cross-border mergers
and acquisition in India and to create a tax-friendly environment for investors and companies. But
in case of these transactions, tax risks continue to remain a big hurdle. In India the following tax
risk exists”
• “Withholding tax obligation on the buyer while paying the sales consideration to a non-resi-
dent seller, if the gains are held to be taxable in India.” 
• “The buyer can be treated as an agent of a non-resident seller under section 163 of the Act,
which would lead to an assessment on the buyer in a representative capacity for the income
arising to the non-resident seller.”
• “Assets transferred by a seller on whom there are outstanding tax demands / pending proceed-
ings can be held void under section 281 of the Income-tax Act (Act) in certain circum-
stances.”
“To mitigate these risks and possible liabilities, the parties indemnify each other depending upon
the agreement from the above risk accordingly.”3

Analysis

“A cross-border merger means merger or acquisition between an Indian company and foreign com-
pany by the Companies (Compromises, Arrangements, and Amalgamation) Rules, 2016 under
Companies Act, 2013.  Section 234 of the Companies Act 2013 provisions apply to arrangements
and amalgamations involving only Indian entities apply on mutatis mutandis basis even to the cross-
border mergers, and there are two types of cross border merger is permitted.”4
• Inbound merger- “According to the Foreign Exchange Management (Cross Bound Merger)
Regulations, 2018, Section 2(v), an inbound merger is a merger where the resultant company
is an Indian company, i.e., when a foreign company merges with an Indian company, and the
foreign company ceases to exist.” 
• Outbound merger– “According to the Foreign Exchange Management (Cross Bound Merger)
Regulations, 2018, Section 2(viii), an outbound merger is a merger where the resultant com-
pany is a Foreign company, i.e. when Indian merges with an foreign company and Indian
company ceases to exist.” 

“The CBM (Cross Border Merger) Regulations established the notion of deemed approval, under
which any cross-border merger carried out in line with the CBM Regulations is deemed to have
been approved by the RBI, and no further permission under the CA, 2013 is necessary. Tax is an
important consideration while taking any business decision, specifically when competing against
other international players. But, only inbound mergers are treated tax-neutrally under the Income
Tax Act of 1961." The merger of two foreign companies involving the transfer of shares of an In-

3 Tax/merger and acquisitions by Abhilasha Banerjee (8 January 2021)

4 The Economist, 'The new rules of attraction', 15 Nov 2014
dian company is tax-exempt provided that the merger satisfies the conditions in Section 47 of ITA,
i.e. 
(i) “at least 25% of the shareholders of the amalgamating foreign company remain shareholders in
the amalgamated foreign company, and” 
(ii) “such transfer does not attract capital gains tax in the country in which the amalgamating for-
eign company is incorporated.” 
“However, if the resultant company is a foreign company, this exemption is not accessible, resulting
in a tax burden on the profit-making acquiring foreign company. In the operation of outbound merg-
ers, there is no tax neutrality, and the transfer of capital assets under the existing regime would al-
most certainly result in capital gains tax in the hands of foreign companies and shareholders, as fol-
lows”
“In the hands of the Indian companies- The Indian company being a transferor entity could be liable
to capital gains tax on the transfer of its assets in case of a merger. However, in the case of an amal-
gamation of two entities, the Indian company may not receive any consideration against the same;
therefore, there would not be any capital gains tax.”
“In the hands of the shareholder: Shareholders that experience capital gains as a result of a merger
or amalgamation should be taxed as long-term or short-term capital gains under the Income Tax Act
of 1961.” 5
"The transfer of assets in an inbound merger would be taxed for the foreign company under Section
45 of the Act. To the extent that the assets are located in India, such a transfer of assets will be
taxed in India. If a foreign company has no assets in India, there would be no tax ramifications for
the foreign company in India. The period of holding of the capital assets shall be reckoned from the
date of acquisition of such assets by a foreign company.”
"While the operational provisions relating to outbound mergers aim to assist Indian corporations to
reorganise/externalise their shareholdings and gain access to global markets, the absence of compa-
rable tax neutrality regulations puts outbound in precarious situation mergers as compared to in-
bound mergers. As a result, the announcement of cross-border mergers under the 2013 Act and the
establishment of Cross-Border Regulations, 2018 demand appropriate matching revisions in the In-
come Tax Act, 1961 to provide a favourable legal environment for cross-border mergers and acqui-
sitions in India, especially when Indian market is reeling with the nose-diving economy.”

Conclusion

“Mergers and acquisitions (M&A) are often embraced as a corporate expansion tool. The tax conse-
quences associated with the sale and purchase of the firm will have a major impact on the economy
of the transaction. In order to make the agreement tax-neutral, it must also be possible to satisfy the
different tax implications for transferor and transferee entities, and merger shall be regarded as
‘amalgamation’ for the purposes of ITA only if all the conditions listed in ITA are fulfilled. The
5 "M&A Statistics - Worldwide, Regions, Industries & Countries". Institute for Mergers, Acquisitions and Alliances
(IMAA
need of the hour is to support the cross-border M&A transaction for economic growth, and unless
the current tax framework impacting cross-border mergers is revised it will not be tax friendly.”