Union Budget: Redomiciliation of companies; the India view and expectations

India has been successful in navigating several global and domestic challenges. In the backdrop of the global uncertain environment, the rising growth story and the promising environment in India, dealmakers have been having their own share of successes. From a successful streak of IPOs to private equity interest, to active family offices, the M&A market continues to be buoyant.
Tapping the financial markets and public funds is one of the discussion points on cross-border deals. A related topic which often comes up is tax implications of undertaking any such steps to achieve these objectives. Legal entity structuring plays an important role in such conversations. This may require re-domiciliation of companies from India to other countries – a proposition which is fairly addressed by the tax laws of various countries. With the budget being around the corner, it is time for the deal makers to bring out their set of expectations on this topic though it is likely that they will only be an initial announcement with the detailed one to follow in the next few months.
So what are the asks from the dealmakers looking at such cross-border transactions? The topmost ask from the industry is to bring about simplicity in the tax law on the subject. M&A players are desiring certainty on exemption of cross-border outbound mergers. Whilst there is clarity in the corporate law and the FEMA regulations, the expectation is to receive clarity and exemption under the tax law for an Indian company merging into an overseas entity.
Some of the practical challenges which exist and needs to be addressed in this regard include a situation where an Indian entity merges into an overseas entity and it has business, assets, operations in India as to how would this be treated post the merger from a tax standpoint. In such a case would the Indian presence be regarded as a Permanent Establishment of the merged overseas entity is a question which needs to be clarified. Further, in case the Indian entity prior to the merger has borrowed loans from Banks, the withholding tax rates on interest payments on such loans need clarity. Indian entities prior to the merger could have investments in and outside of India. The tax treatment of holding such investments, return on such investment and repayment of the investment would also need to be ascertained. Similarly, there would be several deductions and exemptions being claimed by the Indian entity which span over a period of time – what would happen to the balance unclaimed period in such cases where the merger takes place. Similarly, cases where employees of the Indian entity (pre-merger) are deputed to overseas locations would need clarity on the tax treatment on payments made post the merger of the Indian entity with the overseas entity. These and other practical situations could be clarified by the government as this will enable to plug the final large open aspect on cross border mergers.
The tax regulatory announcements in the recent past are more forward-looking and aim to resolve the cloud of uncertainty on several practical positions. Just like in the past, it is expected that the government would make the appropriate change in the tax law to facilitate these transactions.
The author is Partner, Deloitte India. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views.
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