Basics of Tax Mergers & Acquisition
Contents
1
Recent M&A Transactions
2
Modes of M&A
3
Taxation Aspects
4
Regulatory Aspects
5
Case Studies
Recent M&A Transactions
Recent M&A Transactions – News Clippings
Adani Ports and Special Economic
Zone (APSEZ) completes 100%
acquisition of Dharma Port from
Tata Steel and L&T IDPL for INR
5,500 crore.
May 17, 2014
Flipkart buys out Myntra for $300 m
May 23, 2014, The Hindu
Google sells Motorola to
Lenovo for $2.91 billion
January 29 , 2014, The Verge
3
Need for M&A
Need for M&A
Acquisition
of
Competence
or Capability
Financial /
commercial
restructuring
Achieve
Economies of
Scale
Need
for
M&A
Diversification
– Entry into
new market/
product
Opening up
of Indian
Economy
Attract
overseas
investments
5
Modes of M&A
Mergers & Acquisitions (M&A) [1/2]
Modes
Modes of M&A
Acquisitions
Share Purchase
Amalgamation /
Merger
De-merger
Asset Purchase
Slump Sale
Capital Reorganization
Buy-back
Liquidation
Capital
Reduction
Itemized Sale
7
Mergers & Acquisitions (M&A) [2/2]
Key considerations under M&A Structuring……..its beyond Tax
 Scheme of arrangements u/s 391 –
394 of the Companies Act
 Approvals from RD/ ROC/ OL
 Complying with prescribed
procedures, resolution, filings etc
 Accounting implications and
disclosures.
Foreign
Exchange
Regulations
Companies
Act and
Accounting
Stamp Duty
Changing
Regulatory
Environment
Indirect Taxes
c
 Understanding state
specific stamp duty laws
 Planning levies/
registration charges
 Adjudication proceedings
etc.
 Understanding the FDI Regulations
 Seeking necessary RBI/ FIPB approvals
 Complying with prescribed guidelines
Securities
Law
Income Tax
Act
 Sales Tax / VAT applicability on
business transfer, mergers /
demergers
 Service tax regulations
Impact on stakeholders such as shareholders,
creditors and employees also important
 Compliance with SEBI
Regulations/approvals
 Stock exchange
compliances
 Tax implications in the hands of the
Seller, purchase / Transferor
Transferee / Company, shareholders
 Helping maximize depreciation benefit
 Continuity of Carry forward of losses
 Tax neutrality of restructuring and
continuity of fiscal benefits
8
Taxation Aspects
Merger
Merger conditions
Section 2(1B) – Amalgamation
Meaning -
Tax Neutrality
 Merger of one company (B Co.) with another company (A Co.)
 Merger of two or more companies to form a new company
A
Shareholders
B
Shareholders
Conditions  all property of transferor company become property of transferee
company
 all liabilities of transferor company become liabilities of transferee
company
A Co
MERGER
B Co
 shareholders holding not less than three fourths in value of the shares
in transferor company become shareholders of transferee company
(other than shares already held by transferor or its subsidiary
company)
Companies Act, 2013 permit cross border mergers or amalgamation. However, relevant provisions (sec 234)
have not been made effective yet
10
Merger
Key tax implications
Shareholders
• No capital gain on transfer of capital assets in the hands of
Issue of shares
Co. A
Key tax implications
Co. B
Co. B if Co. A is an Indian company [Sec. 47(vi)];
• No capital gains in the hands of shareholders of Co. B if :
Merger of Co B
into Co A
 The transfer is made in consideration of shares in the Co.
A except where the shareholder itself is the amalgamated
company, and
Issues:
• Whether deduction u/s 80-IA/80IB/80-IC would be carried forward to
amalgamated company
 Co. A is an Indian company.
• Expenditure on amalgamation – tax deductible in the hands
of Co. A in five equal installments [Sec. 35DD]
• Whether MAT credit in books of
amalgamating co would be
transferred to amalgamated co
11
Merger
Case study
Option 1
Option 2
A
Shareholders
75%
B
Shareholders
A
Shareholders
75%
Issue of shares
B
Shareholders
Issue of shares
25%
25%
A Co
A Co
75%
75%
B Co
Merger
Merger
25%
Structure
Mechanics
B Co
 Merger of B Co. into A Co.
 A Co. issues shares to B
shareholders i.e. 25% shareholders
of B Co.
25%
Structure
Mechanics
 Merger of A Co. into B Co.
 B Co. issues shares to A
shareholders i.e. 75% shareholders
of A Co.
12
Demerger
Conditions
Section 2(19AA) – Demerger
Tax Neutrality
A
Shareholders
Q Co
Meaning  Transfer of one or more undertakings of the demerged company (P Co.) to a
resulting company (Q Co.)
B
Shareholders
P Co
A
Demerger of A Business
B
Conditions  All the property and liabilities of the undertaking are transferred.
 Property and liabilities will be transferred at the respective book values.
 Resulting Company issues its shares to the shareholders of the demerged
company on a proportionate basis [except where the resulting company itself is
a shareholder of the demerged company].
 At least three-fourths shareholders in value of the demerged company will
become shareholders of the resulting company.
 Transfer of Business Undertaking is on a going concern basis.
Undertaking – includes part of undertaking or unit or division of undertaking or a
business activity taken as a whole, but does not include individual assets and
liabilities or any combination thereof not constituting a business activity
13
Demerger
Key tax implications
Key tax implications:
Shareholders
Shareholders
• No capital gain on transfer of capital assets in the hands of Co.
A [Sec. 47(vib)]
Issue of shares
• No capital gain on transfer / issue of shares [Sec.47(vid)]
• Expenditure on demerger– tax deductible in five equal
Company A
Bus. A
Demerger
Company B
installments [Sec. 35DD]
Bus. A
Bus. B
• Cost of shares in resulting company = (Cost of shares in
demerged company) x (Net Book Value of assets transferred/
Net Worth of demerged company pre-demerger) [Sec.49(2C)]
Bus. A
• Actual cost of transferred assets in the hands of Resulting
company = Actual Cost in the hands of Demerged company
[Explanation 7A to sec.43(1)]; and
Issues:
• Transfer of accumulated loss and unabsorbed depreciation to
resulting company allowed [Sec. 72A]
• Whether deduction u/s 80-IA/80IB/80-IC would be carried forward
to the Resulting co.
•
Where directly relatable to undertaking, such loss;
•
Where not directly relatable, in the proportion of the assets
retained and transferred
Bus. C
14
Merger & Demerger
Demerger – Case study
Option 1
Option 2
A
Shareholders
B
Shareholders
A
Shareholders
Discharge of
Consideration in
shares & cash
Discharge of
Consideration in
shares or cash
P Co
Q Co
A
B
Demerger of A Business
Manner of
Discharge of
Consideration
B
Shareholders
Issue of Shares & payment of cash
to all the shareholders.
P Co
Q Co
A
B
Demerger of A Business
Manner of
Discharge of
Consideration
Option given to the shareholders to
receive Shares or cash.
60% shareholders received Shares and 40% received cash.
15
Merger & Demerger
Continuity of business losses/unabsorbed depreciation in Merger/Demerger
Utilization of
tax losses &
unabsorbed
depreciation
Section 72A of the Act
Amalgamation/ Merger
 Carry forward of tax losses and depreciation allowed to Amalgamated Company if:
- Amalgamating Company
o Owns Industrial Undertaking (Manufacturing or processing of goods, computer
software, Power Generation/distribution, telecommunication business, mining or
construction of Ships, Aircrafts or rail systems) or a Ship or a Hotel.
o Has been engaged in the business for 3 or more years
o Has held 3/4th of the book value of fixed assets for preceding 2 years
- Amalgamated Company
o Continues to hold 3/4th of the book value of fixed assets for 5 years
o Continues the business for 5 years
o Achieve 50% of installed capacity of the undertaking before the end of 4 years
from the date of amalgamation & maintain upto 5 years
Demerger
 Benefit of set-off of tax losses & depreciation related to the Demerged undertaking
available to the Resultant Co
 Undertaking need not be an ‘Industrial Undertaking’, unlike in Amalgamation
 Allocation of losses on direct or proportionate basis
16
Merger & Demerger
Impact on business losses due to change of shareholding
Utilization of
tax losses &
unabsorbed
depreciation
Section 79 of the Act
 Applicable only to closely held companies
o companies other than companies in which public are substantially interested
 No carry forward / set off of accumulated business losses
o in case common shareholding of 51% is not maintained as on last day of the
financial year
 Includes all losses except carry forward / set off of unabsorbed depreciation
 Section not applicable where there is a change in shareholding of an Indian Company
which is a Subsidiary of a F Co. as a result of the Merger or Demerger of the F Co.
subject to the condition that 51% shareholders of the merging or demerging F Co.
continue to be the shareholders of the amalgamated or resulting F Co.
This is very relevant in Acquisitions (including global acquisitions) which leads of
change of shareholding
17
Merger & Demerger
Continuity of business losses/unabsorbed depreciation in Merger/Demerger – Case Study 1
Case Study
ABC Co
XYZ Co
A Co
X Co
Services & Investment
business
Accumulated Loss
Manufacturing
business
Options
Facts of the Case
 A Co is a closely held company & X Co is a
Listed Company
1
Merger of A Co with X Co – Availability of losses?
 A Co has accumulated tax losses in
services business
2
Reverse merger of X Co with A Co. – Availability of
losses?
3
De-merger of Services business of A Co into X Co. –
Availability of losses?
 Proposal to consolidate A Co and X Co
18
Merger & Demerger
Impact on losses due to change of shareholding – Case Study 2
Pre - Acquisition
A Ltd (Listed
Co)
Post - Acquisition
A Ltd
Shareholder
B
100%
40%
60%
X Ltd
• X Ltd is engaged in the business of manufacturing
and selling soaps
• A Ltd proposes to acquire the shareholding of X Ltd
from B
X Ltd
Accumulated
Losses
• Whether accumulated tax Losses of X Ltd would
lapse ?
• Whether possible to protect losses
19
Merger & Demerger
Impact on due to change of shareholding – Case Study 3
Pre - Acquisition
Post - Acquisition
Shareholder
A
Shareholder
B
40%
100%
60%
Q Ltd
Accumulated
Losses
100%
P Ltd
Shareholder
A
Q Ltd
100%
Accumulated
Losses
A proposes to acquire the shareholding of Q Ltd from B
P Ltd
• Would accumulated tax Losses of Q Ltd lapse ?
• Would accumulated tax Losses of P Ltd lapse ?
20
Merger & Demerger
Impact on losses due to change of shareholding – Case Study 4
Pre - Merger
Post - Merger
Shareholder
A
Shareholder
B
Shareholder
A
Shareholder
B
40%
60%
40%
60%
X Ltd
Merger
Y Ltd
100%
Y Ltd
Accumulated Tax
Losses
X Ltd proposes to merge into Y Ltd
Would accumulated tax Losses of Y Ltd lapse ?
21
Merger & Demerger
Carry forward of tax incentives and MAT Credit
 Tax Incentives are either based on business (u/s 80-IA/80-IB/10B) or Area/ Region
Tax Holidays
based (u/s 80-IC/10A /10C)
 Continuity of unexpired period of tax holiday to the transferee company in
amalgamation / de-merger except u/s Section 80-IA(12A)
 Explicit provisions not provided for Slump sale in the Act leading to ambiguity on
availability or otherwise
 MAT payable on book profits in the absence of Nil/lower tax profits
MAT Credit
 Credit for MAT allowable to the assessee company who has paid such taxes
 Amalgamating Co ceases to exist after amalgamation.
1.
SKOL Breweries vs ACIT
(Mumbai ITAT)
 No specific provision for carry forward of MAT credit in case of amalgamation or de-
merger
 Recent Judicial precedents allowing the credit to Transferee Company
22
Merger & Demerger
Concept and relevance of Appointed Date in Merger/Demerger
Concept: Date on which merger/ demerger is deemed to be effective.
Appointed
Date
 Choice of Appointed date
 Not specifically defined in the Act
 Interpreted based on rulings of the Apex Court
 The date of amalgamation is the date mentioned in the scheme and approved by the
court unless the Court specifies any other date
 Relevant for tax purposes as it is classified as the date of amalgamation / de-merger
Effective
Date of
Merger
April 1, 2014
September 30, 2014
April 1, 2015
Appointed
Date
Appointed
Date
Retrospective
Prospective
23
Slump Sale / Asset Sale (1/1)
Concept and taxability
Concept of
Slump Sale
Meaning of
Undertaking
Capital Gain
Computation
 Transfer of “undertaking” for lump sum consideration without values being assigned to individual
assets and liabilities
 Undertaking includes any part of the undertaking or a unit or division of an undertaking or business
activity taken as a whole but does not include individual assets and liabilities or any combination
thereof not constituting a business activity
Slump Sale
 Capital gain = Slump Sale consideration minus Tax Net-worth of undertaking;
 Tax Net-worth: Book Value of Non-depreciable Assets + WDV of Depreciable Assets - Value of
Liabilities
 Any change in the value of assets on account of revaluation is ignored.
 Provisions relating to indexation not applicable.
Asset Sale
Normal capital gains computation applicable
Choice of MNC’s
Increasing choice of MNC’s investing in Indian
businesses especially when there are past
Tax liabilities/doubts of hidden liabilities
Lien of tax authorities on assets transferred
• Tax Authorities may declare a transaction void if a
tax demand is pending against an assessee –
Tax clearance certificate to be obtained;
24
Slump sale vis-à-vis Demerger – Case Study
Mechanics
Mechanics
Shareholders
Shareholders
100%
100%
X Ltd
Transfer of
Business A
X Ltd
A
Transfer of
Business A
Y Ltd
Issue of shares
to shareholders
Whether this transaction is “demerger” or “slump
sale”??
A
Y Ltd
Issue of shares
to X Ltd
Whether this transaction is “demerger” or “slump
sale”??
25
Buyback (1/1)
Concept and taxability
Concept
Source
Key
Conditions
 Purchase of own shares by Company - empowered under section 68 of Companies Act, 2013
 Out of Free reserves or Securities premium account or Proceeds of a fresh issue of shares or
securities other than the proceeds of an earlier issue of shares of the same kind of shares / securities
 Maximum buyback in a financial year = 25% of the company’s paid up capital + free reserves
 Maximum buyback of equity shares in a financial year = 25% of the total paid-up equity capital in that
financial year
 Debt equity ratio not to exceed 2:1 post buy back
 Permitted for fully paid up shares only
 Buyback possible in case specified defaults have been remedied and 3 years have passed from time
of remedy of default
 Not permitted out of money borrowed from Banks/ Financial Institutions.
Key Tax
implications
 Not subject to deemed dividend – specifically excluded from definition of deemed dividend u/s 2(22)
 Subject to capital gains (long term or short term depending upon period of holding of shares) u/s 46A
in the hands of shareholder.
 New levy on buyback of unlisted shares u/s 115QA introduced by Finance Act 2013
 Applicable to domestic companies on buyback under s. 68 of Companies Act, 2013
 Levy @ 20% on the company buying back shares on “distributed income” i.e. consideration paid
less amount received for issue
 Exemption in the hands of shareholder (Section10(34A))
26
Capital Reduction / Liquidation (1/1)
Concept and taxability
Concept
 Capital Reduction: Repayment of excess capital by Company - empowered u/s 66 of Companies
Act,2013
 Liquidation: dissolution of company and distribution of assets to its shareholders
Source
Key
Conditions
 Out of surplus cash / assets with the Company
 To be authorized by Articles of Association
 Special resolution to be passed by shareholders
 Subject to approval from High
Court/ Tribunal
 Subject settlement of dissenting creditors
Key Tax
implications
 Subject to deemed dividend u/s 2(22) (d) / u/s 2(22) (c) read with Section 46
 deemed dividend to the extent of accumulated profits
 incremental distribution to be treated as capital gains - cost of acquisition available as deduction
 No indirect tax or stamp duty implications
27
Typical Court process in Merger/ Demerger/ Capital reduction
1
2
3
Drafting of the Scheme of
arrangement, finalization of the
appointed date, etc
Board meetings of Transferor Co.
and Transferee Co. to approve the
Scheme
Application to Jurisdictional
HC(s) for Directions for
meeting
6
Issuing notices to Regional
Director (RD) & Official
Liquidator (OL)
7
5
Holding of shareholders’/
creditors’ meeting (if not
dispensed) as per the
directions of jurisdictional HC(s)
File Chairman’s report and
petitions with the HC(s)
8
Public notices in
newspapers
4
Obtaining NoC from RD
& OL, if any
9
Final Court
hearing(s) and filing
the final order with
RoC
Timeline for completion of implementation process ~ 6-8 months
Under the Companies Act 2013, National Company Law Tribunal (‘NCLT’) would have the powers to approve the High Court Scheme.
However, relevant provisions of Cos Act 2013 has not been notified yet.
28
Regulatory Aspects
Regulatory aspects of M&A (1/4)
Key securities control regulations
Concept: Every listed company is required to sign a listing agreement.
Listing
Agreement
 As per clause 40(A) of the listing agreement a company is required to maintain minimum level




of public shareholding of 25%
Approval of stock exchange / SEBI to the Scheme under clause 24(f) of the listing agreement
Fairness opinion to be obtained from Merchant Banker
Certificate from the Statutory auditor on compliance of Accounting Standards to be obtained
Public shareholders can play an active role in approval of Schemes as per revised circular
Concept: SEBI to monitor and regulate the control & acquisition of a listed company
Takeover
Code
 Any person acquiring 25% or more stake in a listed company shall make mandatory open
offer to public shareholders – minimum size of mandatory open offer 26%
 Creeping acquisition of 5% p.a. permitted beyond 25% holding but upto 75% holding without
triggering open offer
 Exemption for Court Schemes available with conditions i.e. Scheme directly involving the
Target Co. is exempt while not directly involving the Target Co. is exempt only if cash
consideration is <25% of total consideration and post Scheme, atleast 33% of voting rights in
combined entity to be held by same persons who held the entire voting rights earlier;
The objectives of the Stock Exchanges & SEBI is to protect the interest of the public shareholders
30
Regulatory aspects of M&A (2/4)
FDI and Stamp Duty aspects
 Issue of shares to non resident shareholders pursuant to Scheme
(merger/Demerger) of domestic companies is covered under automatic route
FEMA
 FDI regulations to be complied with – especially regulated sectors (sectors in
which FDI is restricted/prohibited)
 Reporting requirements as per the RBI needs to be complied with
 Pricing guidelines to be complied with;
 Payable on the High Court Order?
Stamp Duty
 Payable on transfer of immovable property and issue of shares
31
Regulatory aspects of M&A (3/4)
CCI:: Merger Control Regime - Meaning of ‘Combination’
 Subject to specified limits:
CCI
 Any acquisition of control, shares, voting rights or assets
 Acquisition of control over an enterprise if the person already has direct/
indirect control over another enterprise in similar product/ service
 Merger or amalgamation
requires mandatory pre-approval from Competition Commission of India
(CCI)
 Overseas transactions with impact on competition in India also covered
 Exemption for certain routine transactions e.g. Intra-Group restructurings,
asset acquisitions etc.
32
Regulatory aspects of M&A (4/4)
Changing game & new rules in the old games
Companies Act 2013 – Now notified
Impact of proposed DTC on M&A – CFC, GAAR, etc.
Exchange Control Regulations – FDI, Pricing Guidelines
Tax Accounting Standards enacted
Game
changers
Revamp of Stamp Duty provisions – Centre and State
International Financial Reporting Standards
Competition Act
Applicability of GAAR – Postponed till March 31, 2017
33
Transaction Case Study
MAT Planning
Shareholders
Mechanics of the Deal
100%
A Co.
B Co.
 A Co. to merge with B Co. under a court approved Scheme of
Amalgamation
 B Co. to record listed investments at fair value of Rs. 20
based on purchase method of accounting
Listed
Investments
Book Value –
Rs. 10
1.
No MAT on future sale upto Rs. 20
2.
Sale of listed shares exempt from tax if long-term
3.
Critical to justify commercial rationale for merger
Fair Value –
Rs. 20
35
Indirect transfers – Vodafone issue
F Co. 1
Mechanics of the Deal
100%
 Buyer can acquire shares of I Co. or F Co. 2 to acquire Indian
assets
F Co. 2
Buyer
 Acquisition of I Co. shares to trigger capital gains tax in India
Overseas
 Acquisition of F Co. 2’s shares – whether taxable?
1.
If F Co. 2 derives “substantial” value from I Co., gains
taxable in India
2.
“Substantial” is defined under the Act – At-least 50%
value of F Co derives based on value of I Co
I Co.
India
36
Listing without IPO
Shareholders
100%
Shareholders
Issue shares
Listed Co.
Unlisted Co.
Mechanics of the Deal
 Pursuant to merger / demerger, Unlisted Co. to issue
shares to shareholders of Listed Co.
 Unlisted Co. to automatically list without following the
IPO process
Option 1 – Merge Listed Co. into Unlisted Co.
Option 2 – Demerge a business undertaking
from Listed Co. to Unlisted Co.
37
Financial re-structuring
Pre
Option
Liabilities
Rs.
Capital
1,000
Losses
(800)
TOTAL
200
Assets
Net Assets
TOTAL
Rs.
200
 Company can approach the Court to adjust
losses against Capital
200
 Net Worth not impacted – however, ability to
repatriate cash through dividend improves
Post
Liabilities
Rs.
Capital
200
Losses
--
TOTAL
200
Assets
Net Assets
TOTAL
Rs.
 Tax implications including MAT liability to be
evaluated in detail prior to implementation
200
200
38
Thank You