Business Restructuring Tax and Legal Aspects. December 30, 2010 Alok Mundra Director - M&A Tax

Size: px

Start display at page:

Download "Business Restructuring Tax and Legal Aspects. December 30, 2010 Alok Mundra Director - M&A Tax"

Lynne Warren
6 years ago
Views:

1 Business Restructuring Tax and Legal Aspects December 30, 2010 Alok Mundra Director - M&A Tax

Agenda MERGER DEMERGER SLUMP SALE CAPITAL REDUCTION LEGAL ASPECTS affiliated with KPMG

MERGER DEMERGER SLUMP SALE CAPITAL REDUCTION LEGAL ASPECTS affiliated with KPMG

4 Section 2(1B) defines Amalgamation Amalgamation, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ; (iii) shareholders holding not less than [three-fourths] in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first mentioned company If all the above conditions are fulfilled, then affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 4

5 If all the conditions fulfilled Then following will not be considered as transfer and hence will not be subject to capital gains Transfer of capital asset by an amalgamating to the amalgamated company if amalgamated company is an Indian company.section 47(vi) Transfer of shares held in an Indian company on amalgamation of a foreign company into another foreign company At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and Such transfer does not attract tax on capital gains in the country in which the amalgamating foreign company is incorporated Section 47(via) Transfer by a shareholder of a capital asset being a share or shares held by him in the amalgamating company, if the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and the amalgamated company is an Indian company; Section 47(vii) Conditions similar to Clause 314 (16) of the DTC; additionally amalgamation to be in accordance with the Companies Act affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 5

6 Cost of Acquisition and Period of Holding of Shares received upon Amalgamation? What will be the cost of acquisition of shares of amalgamated company in the hands of shareholder of amalgamating company Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company Section 49? What will be the period of holding of shares of amalgamated company in the hands of shareholder of amalgamating company In the case of share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee..section 2(42A) affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 6

7 Benefit of carry forward of accumulated losses and unabsorbed depreciation Where there has been an amalgamation of Company owning an industrial undertaking, a ship, or a hotel; or Banking company; or Public sector engaged in the operations of aircrafts business then, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly Industrial Undertaking for this purpose means any undertaking which is engaged in - Manufacture or processing of goods; or Manufacture of computer software; or Business of generation or distribution of electricity or any other form of power; or Telecommunication services; or Mining; or Construction of ships, aircrafts or rail systems DTC does not provide for industrial undertaking affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 7

8 Benefit of carry forward of accumulated losses and unabsorbed depreciation Conditions to be satisfied for carry forward of accumulated losses and unabsorbed depreciation By Amalgamating Company Engaged in the business in which the accumulated loss has occurred and depreciation remains unabsorbed for 3 or more years Held 3/4th of the book value of fixed asset for 2 years prior to the date of amalgamation By Amalgamated Company Holds 3/4th of the book value of fixed asset for 5 years from date of amalgamation Continues business of amalgamating company for at least 5 years from the date of amalgamation To achieve production of at least 50% of the installed capacity of the undertaking before the end of 4 years from the date of amalgamation and to maintain the said minimum level till the end of 5 years from the date of amalgamation (Rule 9C) Whether fresh lease of life available in case of amalgamation? Clause 64 of the DTC however, test of continuity (Clause 314(260) of the DTC) to be satisfied to hold 3/4th of the book value of fixed assets and continuity of business affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 8

9 Other Relevant Provisions Depreciation Depreciation calculation calculation in in the the hands hands of of Amalgamated Amalgamated Company Company (Section (Section 32) 32) Aggregate deduction, in respect of depreciation tangible and intangible assets to the amalgamated company shall not exceed in any previous year the deduction calculated at the prescribed rates as if the amalgamation had not taken place; And such deduction shall be apportioned between the amalgamating company and the amalgamated company in the ratio of the number of days for which the assets were used by them Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation takes place Amortization Amortization of of expenditure expenditure in in case case of of amalgamation amalgamation (Section (Section 35DD) 35DD) affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 9

11 Case Study 1 Merger of wholly owned subsidiary into holding and shares are not issued...will it be tax neutral Amalgamation? Company A? Whether merger of wholly owned subsidiary into holding company where shares are not issued will be a tax neutral event? Merger Company B 100% shareholders holding not less than [three-fourths] in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 11

12 Case Study 2 Whether transfer of asset under the scheme of merger is subject to deemed dividend tax? Company A? Whether transfer of capital asset on merger of Company B into Company A results in distribution of dividend by the subsidiary company to its shareholder under Section 2(22)(a) or Section 2(22)(c)? 100% Merger Section 2(22)(a) is attracted in case of distribution entails release of an asset Section 2(22)(c) is attracted in case of liquidation Company B affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 12

13 Case Study 3 Merger of two loss making companies.. Company A Co A, a closely held company, proposes to merge Loss = Rs. 5 crores Loss Rs. 10 crores Merge into Co B Loss in FY Co B has losses of Rs. 10 crores Company B Which Section to apply Section 72A or Section 79? affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 13

15 Section 2(19AA) defines Demerger Demerger, in relation to companies, means the transfer pursuant to a Scheme of Arrangement under sections 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertakings to any resulting company in such a manner that (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 15

16 Section 2(19AA) - Demerger Explanation 1 For the purpose of this clause, undertaking shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity DTC; only equity shares can be issued as a consideration, individual assets or liabilities or any combination thereof which constitutes a business activity would be regarded as an undertaking affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 16

17 Section 2(19AA) Demerger Explanation 2. For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall include (a) the liabilities which arise out of the activities or operations of the undertaking; (b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and (c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Explanation 3. For determining the value of the property referred to in sub-clause (iii), any change in the value of assets consequent to their revaluation shall be ignored. Explanation 4. For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils [such conditions as may be notified in the Official Gazette, by the Central Government]; affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 17

18 If conditions mentioned in Sec.2(19AA) are fulfilled Then following will not be considered as transfer and hence will not be subject to capital gains Transfer of capital asset by a demerged company to the resulting company if the resulting company is an Indian company.section 47(vib) Transfer of shares held in an Indian company by the demerged foreign company to the resulting foreign company At least 75% of the shareholders of the demerged foreign company continue to remain shareholders of the resulting foreign company; and Such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated Section 47(vic) On transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company, if the transfer or issue is made in consideration of demerger of the undertaking - Section 47(vid) Similar provisions under Clause 47(1) of DTC affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 18

19 Cost of Acquisition and Period of Holding of Shares received upon Demerger? What will be the cost of acquisition of shares of resulting company in the hands of shareholder of demerged company Cost of acquisition of shares in resulting company = Cost of acquisition of shares held in the demerged company X Net book value of the assets transferred in the demerger Net worth of the demerged company immediately before such demerger Cost of acquisition of shares in demerged company = Original cost of acquisition of shares in the demerged company Less Cost of acquisition of shares in the resulting company as calculated above Section 49(2C) and (2D)? What will be the period of holding of shares of resulting company in the hands of shareholder of demerged company In the case of share or shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, there shall be included the period for which the share or shares in the demerged company were held by the assessee..section 2(42A) affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 19

20 Other Relevant Provisions Depreciation Depreciation calculation calculation in in the the hands hands of of Demerged Demerged Company Company (Section (Section 32) 32) Aggregate deduction, in respect of depreciation tangible and intangible assets to the demerged company and resulting company shall not exceed in any previous year the deduction calculated at the prescribed rates as if the demerger had not taken place; And such deduction shall be apportioned between the demerged company and the resulting company in the ratio of the number of days for which the assets were used by them WDV of the assets in the hands of the demerged company WDV WDV in in the the hands hands of of Resulting Resulting Company Company (Section (Section 43(6)) 43(6)) Amortization Amortization of of expenditure expenditure in in case case of of demerger demerger (Section (Section 35DD) 35DD) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the demerger takes place affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 20

21 Benefit of carry forward of accumulated losses and unabsorbed depreciation in case of Demerger ALLOWABILITY Loss and unabsorbed depreciation directly relatable to the demerged undertaking In case loss and unabsorbed depreciation is not directly relatable to the demerged undertaking, loss and unabsorbed depreciation to be apportioned in the ratio of assets retained and assets transferred No other conditions as those mentioned for amalgamation needs to be satisfied Whether fresh lease of life available in case of demerger? affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 21

affiliated with KPMG International Cooperative ( KPMG

23 Case Study 4 Transfer of subsidiary s shares to the shareholders under scheme of arrangement.whether covered u/s. 47(vid)? Shareholders Issue of shares Company A Demerger Company B 100% Company C Co A, a listed company, demerges its business into Co B Shares issued by Co B to the shareholders of Co A By virtue of the demerger, Co B to also list its shares As a part of the Scheme of Arrangement, Co B proposes to transfer its shares held in Co C, its subsidiary, to the shareholders of Co A Whether transfer of shares of Co C covered under section 47(vid)? affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 23

24 Case study 5 Issue of shares by Resulting Company. Shareholders Issue of shares D Co Demerger R Co. Demerger 100% W Co. D Co, a listed company, demerges its business into R Co R Co. issues shares to the shareholders of D Co. Further, D Co. also demerges certain undertaking to W Co., wholly owned subsidiary of R Co. Pursuant to this demerger, R Co. issues shares to the shareholders of D Co. Definition of resulting company under Section 2(41A) includes its subsidiary company affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 24

25 Case study 6 Demerger of a division Shareholders ABC Ltd demerged Division X into XYZ Ltd Consideration has been discharged by issue of shares to the shareholders of ABC Ltd. ABC Ltd. Scheme of Arrangement provides for transfer of assets of the demerged undertaking at its fair values Division X Demerger XYZ Ltd. Division Y Whether the transfer qualifies as demerger? If yes, is the demerger tax neutral? Further, Can there be any capital gains tax liability in the hands of the ABC Ltd or its shareholders? affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 25

27 Section 2(42C) - Slump Sale Section 2(42C) of the IT Act defines : Slump Sale as the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. The term Undertaking shall have same meaning as assigned in the definition of Demerger. It shall include: - any part of an undertaking; or - a unit or division of an undertaking; or - a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Determination of value of asset for the purpose of stamp duty shall not be regarded as assignment of values to individual assets explanation to Sec 2(42C) affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 27

28 Slump Sale Tax implications In the hands of Seller Consideration less cost of acquisition would be Capital Gains in hands of Seller Cost of acquisition = Tax net worth of the undertaking Section 50B(2) of the IT Act - Net Worth = Aggregate value of total assets less aggregate value of total liabilities - Depreciable assets Income tax WDV of the block of assets Section 43(6)(c)(i)(C) - For other assets book value If undertaking held for more than 3 years, gain would be LTCG and in other cases as STCG Chartered Accountants report in Form 3CEA needs to be obtained for the valuation of net worth Possible to claim exemptions against long term capital gain u/s 54EC, 54ED and 54F of the IT Act. Indexation benefit not available and revaluation of assets, if any to be ignored affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 28

29 Slump Sale Tax Implications In the hands of Buyer Allocation of cost among the assets acquired - No methodology prescribed Assets (tangible and intangibles) acquired could be recorded at their fair values (As per AS 10) - Backed by an independent valuation report which allocates purchase consideration to various assets / liabilities - Balance purchase consideration, if any, attributable to goodwill Can values be assigned to intangibles to claim tax depreciation over it? affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 29

30 Slump Sale As per Direct Tax Code 2010 Slump sale has been defined (under clause 314 (234) of DTC 2010) as to mean: The sale of any undertaking or division of a business for a lump-sum consideration without values being assigned to the individual assets and liabilities in such sale.. The above definition includes division of a business which is not covered in the Act. Slump sale will be taxed under the head capital gains similar to the existing provisions of the IT Act as against the business income proposed in the earlier draft of DTC issued in August Capital gains on slump sale taxable at 30% in all the cases. Net worth and Undertaking in relation to slump sale not defined in the DTC 2010 affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 30

31 Going Concern Requirements Normally, litigation in slump sale transaction arises on two components- - What quantifies as Undertaking for the purpose of Section 2(42C) - If consideration is not lumpsum and determined on the basis of individual values of assets / liabilities, Definition of Undertaking is wide enough to include even a business activity which in normal parlance may not resemble an Undertaking Transfer to be regarded as slump sale even if certain assets are not transferred provided it does not impair the operation/ continuity of the business transferred affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 31

33 Deemed Dividend In the hands of Shareholders Deemed Dividend and Capital gain tax implications Section 2(22) Dividend includes:- (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of assets of the company; (b) (c). (d) Any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses the accumulated profits which arose after the end of the previous year ending next before the 1 st day of April 1933, whether such accumulated profits have been capitalised or not; (e). affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 33

34 Transfer Section 2(47) transfer, in relation to a capital asset, includes,- (i) (ii) the sale, exchange or relinquishment of the asset; or the extinguishment of any rights therein; or (iii). (iv). affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 34

35 Issues for consideration Return of capital whether accumulated profits for the purpose of deemed dividend? The expression used in section 2(22) of the IT Act is accumulated profits, whether capitalised or not. The legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which are also capable of being capitalised. This would clearly exclude return of part of a capital of the company, as the same cannot be regarded as profit capable of being capitalised. (CIT v. Urmila Ramesh [1998] 96 Taxman 533 (SC)) Share Premium whether accumulated profits for the purpose of deemed dividend? The amount of premium is neither 'profit' nor 'gain' of the company, it is capital receipt for company. This amount cannot be credited in the profit and loss account of the company. It is in nature of shareholders funds. Therefore, share premium account cannot be included in 'accumulated profits' of the company. Any question as to "whether capitalized or not" cannot be raised for share premium as only profits can be kept as revenue reserve or they can be capitalized and transferred to capital reserve. affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 35

37 Restructuring Approval of High Court Merger Combination of two or more companies Spin off Hiving off of one or more undertaking into a separate company Buyback not covered by Section 77A of Companies Act Issuance of debenture out of accumulated profit Any other arrangement contemplated with shareholders /creditors Repayment of capital through capital reduction or adjusting accumulated losses affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 37

38 Approval of High Court - Process Determination of swap ratio Preparation of arrangement /amalgamation scheme Board Approval Filing of the Scheme with stock exchanges in case of listed companies Application to the High Court for directions to convene / dispense with meetings Convening of Meetings (if ordered by the Court) Submission of the chairman s report Petition to the High Court Obtaining approval of the RoC, Regional Director and Official Liquidator (for merger) Hearing at the High Court and order of the High Court Filing of the High Court Order with ROC and appropriate authorities to give effect to the Scheme Entire process takes about 4-6 months affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 38

Thank You affiliated with KPMG International Cooperative (

Tax implications of Amalgamations & Demergers. - Jayesh Sanghvi

Tax implications of Amalgamations & Demergers - Jayesh Sanghvi July 2017 Modes of M&A and Corporate Restructuring Modes of M&A and Corporate Restructuring Acquisitions Amalgamation / Merger De-merger Capital