Taxation of - PowerPoint Presentation

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Taxation of - PPT Presentation

Business Restructuring Anup P Shah Chartered Accountant 13 th July 2012 JB Nagar CPESC amp WIRC of ICAI Scope PRAVIN P SHAH amp CO 2 PRAVIN P SHAH amp CO 3 ID: 323533

shah amp shares pravin amp shah pravin shares merger sale tax transfer capital business slump loss unlisted transferor date

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Slide1

Taxation of Business Restructuring

- Anup P. ShahChartered Accountant 13th July 2012JB Nagar CPESC & WIRC of ICAISlide2

Scope

ACQUISITIONSlide4

Merger© PRAVIN P. SHAH & CO.

4Slide5

Definition of Merger - S.2(1B)

(A) Only of Companies: Not for LLPs / Firms © PRAVIN P. SHAH & CO.5A

CSlide6

S.2(1B) – Definition

(B) Three Conditions:All propertiesAll liabilitiesAt least 75% shareholders (Valuewise) of Tor Co. should become shareholders

of T

Co.

The above conditions are cumulative

6Slide7

Forward MergerX Ltd.Loss Making Co.A Ltd.Profitable

Merger

Reverse M

erger

X Ltd.

Loss Making Co.

MERGER

A Ltd.

ProfitableSlide8

Forward v. Reverse Merger - ComparisonAdvisable?

Required?

Capital Reduction

Unlisted can be listed?

Continues?

Listing

Available?

MAT Credit of Loss making Co.

Available?

C/f Unabs. Dep

Available?

C/f Bus. Loss

Reverse Merger

Forward MergerSlide9

Forward Merger – S.72AAvailable to companies owning a few selected industrial undertakings :

Mfg. / IT/ Shipping / Telecom/ Hotel / Bank / MiningQ. Loss-making companies in trading, finance, real estate, stock broking, etc? Q. Hospital - Whether an “Industrial Undertaking”?Apollo Hospitals Enterprises Ltd., 300 ITR 167 (Mad)© PRAVIN P. SHAH & CO.9Slide10

Forward Merger – S.72A

Conditions u/s. 72A & Rule 9CTor engaged in Bus. For 3 years or moreTor held 75% of BV of FA for 2 yrs prior to MergerTee continues to hold 75% of BV of FA for 5 yearsQ. Meaning of BV – Purchase Price or Book WDV? Tee carries on Business for 5 yearsTee achieves production level of 50% of Installed Capacity before 4 yrs from merger and continues for 5 yrs from Merger CA’s Certificate for the same - Form 62

From year of Capacity utilisation till 5 years from Merger

10Slide11

Forward Merger – S.72A

Would a company which has an eligible undertaking and a non-eligible undertaking (e.g., industrial undertaking and trading or financing business) be covered? B/f Bus. loss of Tor Co becomes Current Year’s Loss of T

Can be set off against CG of T

Q. If 8

year of

B/f

Business loss – Any solution?

11Slide12

Reverse Merger & TaxationMerger of a healthy co

. with a loss-making co. Better than Forward Merger All losses and UAD will be allowed to be carried forward and set off.Any conditions to be fulfilled? © PRAVIN P. SHAH & CO.12Slide13

Appointed Date Of Merger

Merger with retrospective date – valid?Marshall Sons & Co. (SC)Appointed Date: Effective Date: Effective Date relevant for Taxation? Scheme must provide for Appointed DateQ. GAAR for Retrospective AD?

13Slide14

Appointed Date Of Merger

Merger with retrospective date – valid?Scheme of merger modified to take effect from an earlier date to enable transferee Co. to take advantage of losses of transferor co - Merger otherwise in public interest

Can sanction be refused?

Ambalal Sarabai Enterprises (

Guj

)

14Slide15

Appointed Date & Assessment … Transferee Co. can file Revised Return after Merger

Beyond Due Date u/s. 139(5)?Assessment on Transferor after Merger Even for periods prior to amalgamation for which assessment was not completed. © PRAVIN P. SHAH & CO.15Slide16

Tax Implication For Tee Co.

Benefit of substitution of FMV on 1.4.1981 available? Depreciation In year of transfer–pro rata to Transferor & TransfereeOn what value To Transferee? Merger Exp.– Equal Dedn. to Transferee in 5 Years

Period of Capital asset held by Transferor included for determining Holding Period of Transferee

16Slide17

Tax Implication For Tee Co.

Cessation of Transferor liability’s - Taxable to Transferee u/s. 41(1)Debtors of Transferor – Turn Bad in Transferee’s HandsAllowable? Gratuity / Bonus to Transferor’s EmployeesAllowable? SIT of Tor which becomes SIT of Tee Co.Sold as SIT by Tee Co.

17Slide18

Depn. on GoodwillGoodwill arising on Merger?

Can Transferee claim Depreciation on Goodwill? Is It a Mere Accounting Entry required under AS-14? What if Brand Acquired under Merger?Depreciation Allowed?Same as Goodwill?© PRAVIN P. SHAH & CO.18Slide19

Taxation of Shareholder of Tor Co.Any transfer by SH of Transferor – Not a Transfer (s.47(vii))Period of holding for shares in Transferee = Transferor Co.CoA of shares in Transferee = that in Transferor Co. If not a tax-neutral Amalgamation

Exemption u/s. 47 for Trader?

Q. Whether Taxable?Slide20

Taxation of Shareholder of Tor Co.Q. If SHs of Tor Co. receive Debentures/Cash, would CGT exemption be available? Gujarat High Court

Slide21

Taxation of Shareholder of Tor Co. on Sale of New Shares

Q. Benefit of substitution of FMV on 1.4.1981 available?: Q. Indexation available from which date – Holding in Transferor Co. or Transferee Co.?Manjula Shah (Mum SB)Kotak Bank (Mum)© PRAVIN P. SHAH & CO.

21Slide22

Merger – Tax Avoidance

Can you do merger for tax avoidance?Wood Polymer (Guj) Indo Continental Hotels (Raj)

Konark

Investments, 97 Comp.

Cas

52 (SC)

22Slide23

Merger – Tax Avoidance … Cont

Star Television (AAR) - Merger of Foreign Co. into Indian Co.Vodafone Essar (Del) - Demerger without consideration

Vodafone

Essar

(Guj) -

Demerger without consideration

GAAR?

23Slide24

Merger of WOS with HoldCo

Q.Whether it would be exempt u/s.47(vi) because no shares issued? Whether Deemed Dividend by WOS to Holdco?Does Transferor have to pay DDT?

24Slide25

Merger & s.47AHolding Co.Wholly-ownedSub

Transfer of Capital Asset

No CGT – s.47(iv)

Subsidiary merged

into Holding Co.

Year 1

Year 4

S.47A(1)

Parent should own 100% of Sub for 8 years:

Is it possible to apply this section?

Is provision frustrated?Slide26

Foreign Co Merger With Indian CoQ. Can you merge Foreign Co. with an Indian Co.? Tax Implications?CGT by Fco

For Business in India?

Slide27

Merger / Sale wef Prior Date Q. In whose hands is profit after Appointed Date taxable? Transferor Transferee?Slide28

MergerQ. Is Capital Reserve (Excess of NA over Shares issued) arising on merger not taken to Capital Reserve but Credited to General Reserve taxable? Is it Merely an Accounting Entry?Is it Business Income u/s. 28(iv)? Slide29

Acquisition of SharesSlide30

Tax on CGT (Domestic Sellers)

LTCGSTCGPeriod of HoldingMore than 12 months – even for Unlisted Cos.Less than 12 months

On-market & STT paid

Nil

15%

Off-market (Listed)

10% or 20% with Indexation

Normal Tax Rates / 30%

Unlisted Shares

20% with Indexation

Normal Tax Rates / 30%

MAT for Company SH

Yes

30Slide31

Sale of SharesSale at below FMVNotional CGT on Seller?

GAAR?S.56(2)(vii) / (viia) for BuyerFMV = Book Value u/R. 11UA Purchase price at or above FMVAppreciation in underlying assets irrelevant© PRAVIN P. SHAH & CO.31Slide32

32Tax on Sale of Listed Shares by FCo. Thru Market & LTCG : No Tax Thru Market & STCG: 15%Off-market Sale of sharesWith Indexation –

20%

Without Indexation –

10%

Q. Concessional rate of

10%

available to

FCo

? (s.112)

Judicial Controversy?Slide33

Sale of Unlisted Shares by FCo.

LTCG taxable @ 10% STCG @ 42%No Tax if DTAA provides tax in Country of ResidenceMauritiusCyprusSingaporeVodafone Amdt. does not attack Treaty Benefits© PRAVIN P. SHAH & CO.33Slide34

Tax on Sale of Unlisted SharesTo claim DTAA benefitsPO Box Office & Professional Directors with TRC sufficient ?

Substantial Presence necessary?What if DTAA does not contain a LOB Clause?Treaty override by GAAR? Singapore better than Mauritius?© PRAVIN P. SHAH & CO.34Slide35

Sale of Unlisted Shares by F Co. Capital Gains Tax on sale of shares by FCo. Buyer & Seller located in USAShares of

ICo

. Sold / Purchased

Payment received in USA

Q. Whether taxable in India?

Under DTAA ?

U/s. 9(1)(i) & u/s.163?

Slide36

Ardex Investments

Invst

Mauritius

I Co.

Ardex

GmBH

(Germany)

India

Abroad

Trf of I Co. sharesSlide37

Ardex Investments

Whether Trf of I Co. shares is taxable in India?Held:As per Indo-Mauritius Treaty?Is Treaty Shopping valid? Now GAAR?If shares are held for a long period of time can an enquiry be made Return to be filed?© PRAVIN P. SHAH & CO.

37Slide38

Goodyear – Transfer Pricing

GTRC

GOCPL

Singapore

GIL

USA

Singapore

India

Gift of

GIL IndiaSlide39

Goodyear – Transfer PricingGift of Indian Sub’s shares by Foreign Holdco to Foreign Sub

Capital Gains Tax applicable?S.56(2)(viia) Applicable?Whether Donee required to deduct tax u/s. 195?Transfer Pricing applicable? Even if no tax payable?Amendment by FA 2012© PRAVIN P. SHAH & CO.

39Slide40

Transfer of CCDsZ Ltd (AAR)Transfer of CCDs by a Mauritius Co.

AAR held CCDs are nothing but Debt till converted into SharesIndo-Mauritius DTAA exempts Capital GainsIncome arising on CCDs is Interest Income which is not ExemptCorrectness?© PRAVIN P. SHAH & CO.40Slide41

SITUATION : Unlisted Co.Unabsorbed Depn. & B/f Business LossExisting SHs want to sell 100% stakeBuyer wants benefit of

Depn

. & Loss

PROBLEM

S.79 - Can’t Transfer > 49% stake

till

b/f

loss set off

S. 79 - Sale of Shares Unlisted Co. Slide42

Whether S.79 applies to UAD or only to Business Loss? What about business loss?

S. 79 - Sale of Shares Unlisted Co. Slide43

S. 79 - Sale of Shares Unlisted Co.

Merger of 98% HCo. with its SCo. - no change in management of SCo. : Q. Carry forward of loss allowable?Q. S.79 requires 51% voting power or shares? Q. Would transfer by Sub Co. to HoldCo trigger s.79?© PRAVIN P. SHAH & CO.

43Slide44

44S. 79 - Sale of Shares Unlisted Co. Transfer of shares by HoldCo. to Director Can it be said that s.79 N.A. since Transfer within Group? S.79 N/A if Indian unlisted Co. is Sub Co. of Listed Indian H Co.

Q. Whether S.79 applicable if

ICo

is a subsidiary of Listed

Fco

Slide45

45S. 79 - Sale of Shares Unlisted Co. Would s.79 override a Merger which is eligible u/s. 72A?In case of unlisted companiesWould c/f of losses of Transferor be disallowed since change of Shareholding takes place?Express Provisions?

Would s.79 nullify the provisions of S.72A?Slide46

TOR & CG for Inter Se Transfers For acquisition & merger it may be necessary to make internal transfer of sharesUnder TOR, ‘inter se promoter transfer’ and ‘inter se Relatives transfer’ exempt Necessary that shares which are acquired

are those sold by Seller

Else, Open Offer may be required if Limits breached

Under I.T. Act, LTCG is exempt

if sold through SE & STT paidSlide47

TOR & CG for Inter Se Transfers Issues:Identification of shares not possible when shares held in demat How to sell shares through SE

& ensure Sale to Promoters / Relatives?

Slide48

Land in Co.- Substantial appreciation – Less than 3 yearsShares in Co. owned for more than 12 monthsNo Other Businesses

Substantial Stamp

duty on sale

of Land

Sale of Shares of Co.

ST / LT

Land Sale by

.Slide49

SALESlide50

DemergerSlide51

Demerger-s.2(19AA)Demerger of UndertakingA&L of Demerged Co. that of Resulting Co.

Specific Loans /Debentures that of RCo.Apportion Other Loans – Assets Trfd./Total Assets Transfer @ Book Values onlyRevaluation to be IgnoredSH of 3/4th in value of DCo. - SH in RCo. RCo. Issues shares to SH of DCo. Proportionately

51Slide52

Demerger-s.2(19AA)Can Resulting Co. issue to SH of D Co.:

Any other InstrumentsTransfer on a going concern basis Business must be carried onAs per Conditions by CG Nothing prescribed like for Mergers© PRAVIN P. SHAH & CO.52Slide53

Tax ConsequencesAny trf

. of a Capital Asset – not a Taxable Trf. Issue of Shs. By RCo. to SH of DCo. – not a Taxable Trf. CoA of shares in Rco.= CoA in DCo. * Net Book Value of Assets Trf

Net Worth of

DCo

CoA

of Shares in

DCo

.= Cost – Cost of

RCo

Period of Holding of

Shs

RCo

.= that in

DCo

53Slide54

Tax ConsequencesTotal Depn

. to be allocated between DCo. & RCo. Based on No. of Days usedActual Cost to DCo.= that of Rco.WDV to DCo.= that of Rco.WDV for DCo. = Total WDV (-) Assets Trfd.  Would have to work out WDV separately for each Unit

54Slide55

UndertakingUndertaking includes:any part of 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 a combination thereof not constituting a business activity Q. X Ltd. has a business of BPO & Investment in Shares:Demerger of Shares into a New EntityIs it an Undertaking as per

Expln

. 1 to s. 2 (19AA)?

Does it constitute a Business Activity? Slide56

Demerger of all AssetsA Ltd. has one activity – software businessQ. Can entire Software business be demerged into a New Co.?No assets / liabilities left behind in A Ltd.Only nominal capital & cash / bank left behindIs such a Demerger possible? Slide57

Slump / Itemised SaleSlide58

Slump / Itemised SaleSellerBuyer

Slump / Asset Sale of Bus.Slide59

Slump vs Itemised Sale

FactorsSlump SaleItemised SaleWhat is soldBusiness as a Going concern

Individual

A & L

Valuation

DCF / ECM / Ad-hoc without assigning separate Values

Separate Values to each A & L

Undertaking

Must constitute a Business Activity

such condition

Must all A&L be sold

Generally yes, unless facts permit otherwise

Sale only

Slump Sale – not Exchange

Can be an Exchange also

Taxation

S.45(1)

r.w

. s.50B

S.45 / s.50

/ s.50C

59Slide60

Tax Consequences Slump Sale Lump sum consideration – No itemised break-upExcess of SC over Networth = LTCG / STCGRevaluation to be ignoredGains Taxable u/s. 45 r.w. s.50B

S.50C applicable?

Itemised

Sale

Itemised

Break-up over A&L

Gains Taxable:

S.50C applicable even to S.50?Slide61

Slump SaleNegative NetworthShould it be Ignored or Considered u/s. 50B

Slump ExchangeIssue of shares against Transfer as Going ConcernSale v Exchange ~ Difference?Is it Taxable © PRAVIN P. SHAH & CO.61Slide62

Slump Sale v DemergerAvaya Global (Mum)

Loss-making Unit hived-off by Court SchemeNo consideration paid by TransfereeIs it a Demerger since no shares issued?Alternatively is it a Slump Sale? Final Decision© PRAVIN P. SHAH & CO.62Slide63

Slump or Asset Sale?Retention of Some Assets by SellerIs a Slump Sale if going concern not disturbed

Tech. K-how sold later onBuilding for IT Co.Doubtful Loans & Contingent LiabilitiesTreated as Itemised Sale (on Facts)Factory not soldLand because of ULCR ActLiabilities not sold© PRAVIN P. SHAH & CO.

63Slide64

Slump or Asset Sale?Q. of Fact and Not Documentation

Sale of IPR, Assets & Goodwill by 9 separate Agr. Assigning separate ValuesHeld, to be a Slump Sale not Itemised SaleSubstance over form prevails. Totality of Agreements to be seenA/c. Treatment + Agr. Not conclusiveDir. Report / Absorption of Employees on Continuity / Non-Compete / Clauses showed it as a Slump SaleJust because land not sold irrelevant factFor this Biz., IPR was important not landMahindra Mainers Eng. (Mum)

64Slide65

Slump AcquisitionBuyer acquired a Going Concern by Slump Acquisition

Excess Payment over NAV was termed by Buyer as GoodwillDepreciation claimed on Goodwill Depreciation allowed? © PRAVIN P. SHAH & CO.65Slide66

Exempt SalesCG on transfer of Capital Asset to WOS Exempt u/s. 47(iv)

Is Capital Loss on such Transfer allowable? Exemption for transfers between Holdco-WOSNecessary that 100% shares must be in name of Holdco? © PRAVIN P. SHAH & CO.66Slide67

Exempt SalesCan Holdco claim exemption for sale to Sub of Sub?

CONVERSIONSlide69

Part IX ConversionFirm  Co. u/s. 565 of Cos. Act (“Part IX”)Q. Any liability for SD or I.T?No Transfer of Undertaking from Firm to Co.Statutory provision – ROC must Incorporate Co.No separate Conveyance reqd. Statutory vesting of property

payable on such Conversion?

Slide70

Part IX ConversionAny Transfer of Undertaking from Firm to Co.Capital Gains payable on such ConversionS.45(4), applicable?

Ch.VI-A Deductions of Firm continue? Slide71

Part IX ConversionNo Capital Gains payable on ConversionEven if Revaluation of Assets done prior to conversion? Can s.45(1) or 45(4) apply in such a case?

C/f of Losses of Firm – allowed to Co?

S.72A(6) provides for c/f in case of s.47(

xiiii

) case?Slide72

Part IX ConversionConditionsRegistered Firm7 or more Members of Co. On Conversion Co. only has Partners as MembersDo conditions of s.47(xiii) need to be satisfied? Slide73

Sale by Firm to Co. & ExemptionSlump / Itemised Sale by Firm / LLP for to Buyer Co.:Exemption u/s.47(xiii):All A / L of Firm / AOP become that of Co. All Partners become SHs in same proportionPartners do not receive any other consideration

SH of all Partners is at least 50% of Voting Power

50% SH of Partners continues for 5 years

Exemption N.A. if Sale to LLPSlide74

Analysis of s. 47(xiii):Can it be a New Co.? Firm can trf. 2 Businesses to 2 Cos.? Only Business A/L to be trf.?Can RPS be issued to partners?Shares can be issued at a Premium?

Transfer inter se Partners permissible in 5 years?

If conditions violated

Sale by Firm to Co. & ExemptionSlide75

RETURN OF CAPITALSlide76

Court Process u/s. 100 of Companies Act Capital in Excess paid back to ShareholdersCapital Gains:Amount Received (-) Cost of Shares Receipt on Reduction : Accumulated profits taxed as

Deemed Dividend

Who pays Tax on Deemed Dividend?

Any Exemption?

Excess over Dividend

Reduction of CapitalSlide77

Does Distribution of cash & immovable properties on Reduction amount to transfer? Reduction by reducing FV of Shares of ShareholdersNo. of shares not changed – remain sameIs it a Transfer?Capital Gain or Loss on such a Reduction?Reduction of CapitalSlide78

Buyback by Co.Deemed Dividend by Co. on Buyback?

Capital Gains on Shareholder Gains = SC – Cost of AcquisitionIndexation also available Buyback through Tender Offer: Buyback through Open Market Operations: © PRAVIN P. SHAH & CO.

78Slide79

Buyback by Co.Capital Gains exempt if DTAA provides

A Ltd (AAR)Buyback offered only by Mauritian Co.AAR ~ Device to evade DDTExemption denied and Income recharecterized as DividendSpirit of GAAR appliedCorrectness?© PRAVIN P. SHAH & CO.79Slide80

Redemption at parRedemption = Transfer, results in Capital Gains Redemption at Premium Premium on redemption  Deemed Dividend

Issue of RPS within the Group

Redemption a Sham?

Indexation available?

Redemption of RPS - Tax IssuesSlide81

Thank You !!