Amalgamations & Mergers Taxation

AMALGAMATIONS (MERGERS) & INCOME TAX IMPLICATIONS I.

INTRODUCTION

1.1

Need for Restructuring: (a) For survival & growth (b) Cost Competitiveness (c) Focus on core competence (d) Family Separation (e) Tax Planning (f) For JVs (g) Several Other reasons

1.3 Only Income Tax issues relating to merger: Selective II

MEANING OF MERGER

2.1 Form of Acquisition of a Company. 2.2 Tax Neutral  For Tor Co. and its Shareholders

 Subject to various conditions.  Partly in definition clause  Partly in s. 47, s. 72A, etc. 2.3 Definition (s.2(1B) of I.T. Act. (a) Only of Companies (b) Three Conditions: All properties All Liabilities and become of Tor Co. At least 75% shareholders (value wise)

III

Of Tor Co. TYPES OF MERGER  Forward merger (Weak  Reverse merger (Strong

Strong) Normal Weak)

IV

FORWARD MERGER (S.72A)

4.1

Merger of a loss-making company with a healthy company

4.2 Business loss and unabsorbed depreciation transferred Not Speculative B/L or Cap L. 4.3 Several conditions to be fulfilled. 4.4 Available to a few selected industries. 4.5 Conditions for Transferor Company  Should be engaged in business in which accumulated loss or UAD at least for three years: Q. From what date to count the date of engagement in the business? : Date of starting of business or date of setting up of business ? 4.6 Conditions for Transferee Company  The transferee company has to achieve the level of production of at least 50% of the installed capacity of the transferor company before the end of 4 years.  Q. Can the Tee Co. use the assets for any other business ?  If violation of any cond, deemed income in the year of violation.

V

REVERSE MERGER (S.72 & S.32(2) ETC.)

5.2 Merger of a healthy Co. with a loss-making Co. 5.3 All losses and UAD will be allowed to be carried forward and set off as if there was no merger. 5.4 No specific conditions to be fulfilled – none mentioned in s.72A applicable. VI

TAXATION FOR TRANSFEROR CO. Tax Neutral (s.47(vi))

VII.

TAXATION FOR SHAREHOLDERS OF TOR CO. 7.1 No tax if three conditions  Transferee is Indian Co.  Shares allotted  75% SHs of Tor Co. must become SHs of Tee Co. 7.2 Q. Do shareholders include both Equity and Preference Shareholders? 7.3 Q. What kind of shares by Tee Co. and how many minimum shares per shareholder? 7.4 If No shares to SHs of Tor Co ?  U/s 2(1B), 75%, SHs of Tor Co. must become SHs Tee

of Co.  Q. If no Shares? 7.5 Merger: Issue of Shares/Deb/Cash Q. If SHs receive shares & Debentures/Cash, would exemption for CGT be available? Q. If no, how do you value shares received in a Tee Co.? (= Consideration)

VIII

TAX IMPLICATION FOR TEE CO.

8.1 Non-depreciable Cap Asset  Cost of acquisition = Cost to Tor Co  Period of Holding of Tor Co..

 Q. Benefit of substitution of FMV on 1.4.1981 available ? 8.2 Depreciable Capital Asset  Actual Cost & WDV of Tor Co.

 Period of holding not relevant  Q. Depreciable assets taken over in merger – sold without putting them to use – whether s.50 would apply or would it be treated as a long-term capital gain if the assets were held by the transferor company for more than three years? 8.3 Stock-in-trade  Actual Cost of Tor Co.

 Period of holding not relevant  Comment with Substantial Appreciation in Stock:  Q. What Tax PI. Is possible? 8.4 Taxation of Shareholder of Transferor Co. on Sale of New Shares: (a) Period of Holding

(b) Cost of Acquisition (c) Q. Benefit of substitution of FMV on 1.4.1981 available? (d) Indexation ? IX

MERGER OF SUBSIDIARY WITH PARENT COMPANY

 Q. If 100 % subsidiary, whether it would be exempt

u/s. 47(vi) ? (Us.2(1B) 75% SHs, other than those who are already SHs have to become SHs of transferee Co.)  Q. Whether the same principle will apply to merger of less than 100 % subsidiary? X

MERGER W.E.F. PRIOR DATE Appointed Date = Date of Implementation Effective Date = All formalities over – relates back  Q. In Whose hands, profit the Appointed Date till the

date of Actual Transfer Taxable? XI

APPOINTED DATE OF AMALGAMATION (a) Merger with retrospective date – valid?  Whether device to evade taxes?

(b) Govt. did not object to Merger as a device at the first stage.  Q. Can it object at the appellate stage? (c) Merger otherwise in public interest – scheme of merger modified to take effect from an earlier date to enable transferee Co. to take advantage of losses of transferor co. Q. Can sanction be refused? XII

Q. CAN YOU DO MERGER FOR TAX AVOIDAMCE ?

XII

TAX HOLIDAY & MERGER

13.1 Tax Holiday u/s. 80-IA 13.2 S.80-IAB, S.80-IB & S.80-IC 13.3 Tax Holiday U/ss. 10AA, 10B

XIV S.79 : CARRY FORWARD OF LOSSES OF TOR CO.  Company with carried forward losses  Merges with another company  Q. Whether s.79 applicable? XV

FOREIGN CO. MERGER

15.1

Merger of Foreign Co.

Indian Co.

Q. Can you merge a Foreign Co. with an Indian Co. & whether I.T. exemption available? 15.2

Merger of India Co.

Foreign Co.

Q. Can you merge an Indian Co. with a Foreign Co. & whether I.T. exemption available? XVI OTHER ISSUES 16.1 Restructuring Prior to Merger by Transferor Co. FMV of stock-in-trade below cost – the transferor co sold stock-in-trade to transferee co. a day prior to the appointed date for merger Q. Whether the loss allowable to transferor co. as a business loss ? 16.2 Debtors Q. Debtors transferred from Tor co. to Teeco. in merger. If they become bad, whether deduction available to Tee co.? 16.3 Liabilities – Remission

Q. Liabilities transferred from Tor co. to Tee co. in merger if, remission or cessation available to ee T co. whether taxable ? 16.4 Gratuity/Bonus to Employees of Transferor Company  Actual payment of gratuity by Tee co. to employees of

Tor co. Q. Whether allowable to the transferee company? Q. Bonus to employees of transferor company, whether deductible? 16.5 S.43B  Disallowance to Tor co.  Paid by Tee co. after merger  Q. Whether allowable to Tee co.

16.6 TDs Example  Interest paid Tor co. to Tee co. from 1st April to 30th

June 2009 & TDS  Merger retrospectively w.e.f. 1st April 2009  Q. What happens to Interest & TDS?