Taxation aspects in case of corporate restructuring

Now a day’s cross border transactions, mergers and acquisitions and amalgamations, demergers have been increasing significantly…

Various interested people of diversified profession getting benefited from the above transactions, they are-

§  Companies searching /looking for a new channel in establishing their business different GEOS, instead of establishing/floating a new organization/company, they will acquire a company which is already registered and well established in that particular geo because of which they can easily penetrate in that market and will have existing chain of business channels and customer base

§  Professional firms formed by CA’s, MBA’s, CFA’s, lawyers and other professionals

§  And various other interested parties

With this back ground I have already written an article “points to be considered while acquiring a company “where I have discussed so many points in general covering all aspects. My present article is on discussing taxation aspects to be considering in case of corporate restructuring….

Amalgamation- The income tax act uses the words ‘Amalgamating Company’ for Transferor Company and ‘Amalgamating Company’ for Transferee Company.

According to section 2(1B), “Amalgamation” in relation to companies MEANS:

a)      The merger of one or more companies With another

b)     The merger of two or more companies to form a NEW company

In such a manner (by virtue of amalgamation) that –

1)      All the property and liability of amalgamating company becomes the property /liability of amalgamated company;

2)      Shareholders holding 75% or more in value of the shares become shareholders of the amalgamated company.

This definition is significant since certain concessions are provided in case of amalgamation under some of provisions of the Income tax Act. For instance, the loss of amalgamating company shall be allowed to be set off and carried forward by the amalgamated company by virtue of Sec.72A (Reverse Merger). The INCOME of the amalgamating company from EFFECTIVE date of transfer shall be assessed as the income of the amalgamated company and shall be assessed accordingly.

Demerger – The income Tax act uses the words ‘Demerged Company” for Transferor Company and ‘Resulting Company’ for Transferee Company. Even this definition is significant because the income tax act recognizes demerger for exemption from capital gains and for other concessions. The relevant provisions as under:

According to 2(19AA)  “demerger” in relation to companies, MEANS the transfer, pursuant to a SCHEME of arrangement u/s. 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,

a)      All the property and liability of the undertaking, being transferred by the demerged company immediately before the demerger, becomes the property /liability of  the resulting company by virtue of the demerger;

b)     The property and liability of the undertakings are transferred at values appearing in the books (Without regard to revaluation)

c)      The resulting company issue shares to the shareholders of the demerged company on a proportionate basis.

d)     Shareholders holding 75% or more in value of the shares in the demerged company shall become shareholders of the resulting company

e)      The transfer of the undertaking on a going concern basis.

f)       The demerger is in accordance with the conditions, if any notified u/s. 72A(5) by the central government.

SECTION 47- Transaction which are not considered

AMALGAMATIONS OF COMPANIES	DEMERGER OF COMPANIES
Transfer of a CAPITAL ASSET by holding company to its subsidiary company or vice versa if the following conditions are satisfied: A.    It is a wholly owned subsidiary (WoS) company B.     the transfer company should be an INDIAN COMPANY.	Transfer of CAPITAL ASSET ina demerger, if the resulting company is an INDAIN COMPANY.
Transfer of a capital asset in a SCHEME of amalgamation, if the amalgamated company is an INDIAN COMPANY.	Transfer of shares in a SCHEME of demerger for the shares TRANSFERED or ISSUED by the resulting company.
Transfer of shares held in Indian company, in a SCHEME of amalgamation, between 2 FOREIGN companies, by the Amalgamating foreign company if the following 2 conditions are fulfilled: A)    At least 25% of the shareholders of the Amalgamating foreign company CONTINUE to be shareholders of Amalgamated foreign company & B)     Such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.	Transfer of a capital asset, being shares held in an Indian company by the DEMERGED foreign company to the resulting foreign company, if, A)    Shareholders holding 75% or more in the value of the shares continue to remain shareholders of the resulting foreign company & B)     Such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated.
III AMALGAMATIONS OF BANKING COMPANIES: 1)      Shall be as per the scheme of amalgamation by the central government. 2)      Shares shall be allotted in the amalgamated company. 3)      The amalgamated company shall be an Indian company.

In the following cases the deductions are allowed if by a scheme of amalgamation or demerger it is provided, that the amalgamated company/resulting company would be entitled to get the same deduction as that could have been availed by the amalgamating company/demerged company had it continued to exist.

The DEDUCTIONS include,

1)      Weighted deduction of 100/125/150% in respect of scientific RESEARCH expenditure u/s.35 can be claimed by the amalgamated company (if it is an Indian company).

2)      Expenditure for obtaining license to operate TELECOMMUNICATION u/s. 35ABB shall be allowed in equal installments during the years of license post amalgamation or demerger.

3)      Amortization of preliminary expenditure u/s. 35D over a period of 5 years, (the unexpired period) can be availed post amalgamation or demerger.

4)      Amortization of expenditure in case of amalgamation or demerger u/s. 35DD, where an Indian company incurs any expenditure wholly & exclusively for the purposes of amalgamation or demerger, the expenditure shall be allowed as a deduction over a period of 5 years in equal installments from the previous from the previous year of amalgamation or demerger.