• Acquisition with share swap

I'm the director of an Indian unlisted IT company with holding of 99.9% of the company shares. A foreign unlisted company wants to acquire the Indian company through a share swap deal. Selling 100% of the Indian company gets me 4% of the parent company, with no cash being transferred. What are the tax events and charges, if any, on this deal both on the seller side and the buyer side?
Asked 1 month ago in Corporate Tax

Hello,

Basis facts of the case, I would say that the way this transaction is being executed, it is highly inefficient from tax perspective, specially for shareholders of Indian company who will be required to pay capital gains taxes on transfer of shares without receiving any consideration through cash mode. This would also involve some valuation formalities which will add to your costs and cause issues in future at the time of disposal of stake in an unlisted foreign company. 

Having said that, there are alternative ways, to structure this acquisition that can help nullify the tax liability altogether, avoid valuation formalities as well as future tax related complexities which won't be possible in existing mode. 

From buyer perspective, they will also be having several business benefits and future tax efficiencies. 

Lastly, it will be relatively easy to secure regulatory & statutory aprovals for acquisition in the alternative approach rather than the existing one, thereby making it a win win proposition for both the parties 

Feel free to reach out to me through telephonic mode for detailed discussion on this case. 

 

Best Regards, 

Vikram Aggarwal
CA, Gurgaon
46 Answers
6 Consultations

5.0 on 5.0

Income tax implications to you:

 

1. Pay capital gain tax on sale of shares. You will need a valuation certificate also for valuing shares of your company as well as parent company

 

There will not be any income tax implications in the hands of parent company assuming all the transactions are at arm's length basis valuation report.

 

We can assist you with the end to end procedure along with valuation of shares 

 

Lakshita Bhandari
CA, Mumbai
5514 Answers
594 Consultations

5.0 on 5.0

- Capital gain would be applicable in the year of exchange of shares as exchange is treated as transfer of assets.

- Sale consideration would be Fair Market Value of 100% shares of Indian unlisted company. In case of existing company, FMV is based on the book value of Assets and Liabilities. No need to obtain valuation report.

- Cost of Acquisition (COA) would be paid up value of 100% of shares which is generally face value of shares. Apply indexation of such COA from the date of subscription.

- 20% tax is applicable in case of long term capital gain and in case of short term capital, tax will be calculated as per slab rate.

- No income tax implications for foreign unlisted company for this transaction if above FMV is calculated properly.

 

For detailed discussion, you may consult over a phone.

Vivek Kumar Arora
CA, Delhi
4135 Answers
365 Consultations

5.0 on 5.0

Sir,

In this case, CG would arise to the director of Indian unlisted company. The sale consideration would be the FMV of shares on the date of exchange. CG would be calculated after deducting the indexed cost of acquisition of shares and any brokerage paid to carry the sale.

Thanks

Siddharthh Jain
CA, Gurgaon
50 Answers
1 Consultation

5.0 on 5.0

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