Tax Benefits of Amalgamation of Indian Companies

 

Tax Benefits of Amalgamation of Indian Companies


Definition:

Amalgamation as a merger of one or more companies into another company or a merger of two or more companies to form a new company such that:

- all the properties and liabilities of the merging companies immediately before the amalgamation become the properties and liabilities of the amalgamated company.

- shareholders holding at least three-quarters of the shares in the amalgamating companies become shareholders of the amalgamated company (any shares already held by the amalgamated company or its nominees are excluded for purposes of this calculation).

Key Takeaways:

Ø    Tax Neutrality for company- No capital gain implications [sec 47 (vi)]; depreciation shifts to amalgamated company.

Ø    Tax neutrality for shareholders-no transfer on a/c of amalgamation [sec 47 (vii)] holding period is also inclusive 

Ø     Carry forward of losses and accumulated depreciation [sec 72A; Rule 9C]

Ø     Amalgamation Expenses and Bad Debts - sec. 35DD

Ø  Apportionment of Depreciation [sec 32(1):43 (1): 43 (6)]

 

Income Tax:

Taxability in the Hands of Amalgamated Company (WPF):

Extract:

As per sec 47 (vi) of IT Act, 1961, any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company.

Generally, the transfer of any capital asset is subject to capital gains tax in India. However, amalgamation enjoys tax-neutrality with respect to transfer taxes under Indian tax law — both the amalgamating company transferring the assets and the shareholders transferring their shares in the amalgamating company are exempt from tax as per sec 47 of IT Act, 1961.

To achieve tax-neutrality for the amalgamating company (or companies) transferring the assets, the amalgamated company should be an Indian company. In addition, to achieve tax-neutrality for the shareholders of the amalgamating company, the entire consideration should comprise shares in the amalgamated company.

Further, India tax laws provide for exemption from capital gains arising pursuant to indirect transfer of shares resulting from a merger or demerger of two foreign companies.

 

Taxability in the hands of shareholder - Sec 47 (vii) - not regarded as transfer

Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if

 (a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and

(b) the amalgamated company is an Indian company

 

Carry forward and offset of accumulated losses and unabsorbed depreciation

Unabsorbed business losses, including depreciation of capital assets, of the amalgamating company (or companies) are deemed to be those of the amalgamated company in the year of amalgamation. In effect, the business losses get a new lease of life as they may be carried forward for up to 8 years.

However, the carry forward is available only where:

-   - the amalgamating company owns a ship or hotel or is an industrial undertaking (manufacturing or processing of goods, manufacturing of computer software, electricity generation and distribution, telecommunications, mining or construction of ships, aircraft or rail systems

·        -  the amalgamating companies are banking companies.

The carry forward of losses on amalgamation is subject to additional conditions under the income tax law.

 

Extracts: Sec 72 (2)

Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless—

(a) the amalgamating company—

 (i) has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;

 (ii) has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation;

 

(b) the amalgamated company—

(i) holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation;

 

  (ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;

 (iii) fulfils such other conditions as may be prescribed84 to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

In a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with.

 

Others points:

The basis for claiming tax depreciation on assets of the amalgamating company (or companies) acquired on amalgamation remains the same for the amalgamated company. No step-up in the value of assets acquired on amalgamation is possible for tax purposes.

The total depreciation on assets transferred to the amalgamated company in that financial year is apportioned between the amalgamating and amalgamated company in the ratio of the number of days for which the assets were used by each entity during the year. Thus, depreciation up to the effective date of transfer is available to the amalgamating company and depreciation after that date is available to the amalgamated company.

As per Sec 35DD, Amalgamation expenses can be amortized in five equal annual instalments, starting in the year of amalgamation.

Unamortized instalments of certain deductions eligible to the amalgamating company (or companies) are allowable for the amalgamated company.

As per Section 2(42A) of the Act, Period of Holding of the shareholders for the amalgamated company shall include period for which the shares were held in the amalgamating company

As per section 49(1) of the Act, the cost of acquisition of the said asset to the amalgamated company shall be cost for which the amalgamating company acquired it

As per Section 49(2) of the Act, the cost of acquisition of the shares for the shareholders in the amalgamated company shall be the cost of acquisition of the shares in the amalgamating company.

If capital asset was acquired by the amalgamating company before 01.04.2001 then COA may be taken as the cost or F.M.V. as on 01.04.2001, whichever is higher – sec 55 (2)

The cost of improvement incurred by the amalgamating company shall be deemed to be the cost of improvement incurred by the amalgamated company.

 

Corporate Law

·         Require the approval of the National Company Law Tribunal

·         Can be opted for fast-track mergers


Stamp Duty

The transfer of assets, particularly immovable properties, requires registration with the state authorities for purposes of authenticating transfer of title. Such registration requires payment of stamp duty. Stamp duty implications differ from state to state. Generally, rates of stamp duty range from 5 to 10 percent for immovable properties and from 3 to 5 percent for movable properties, usually calculated on the amount of consideration received for the transfer or the market value of the property transferred (whichever is higher). Some state stamp duty laws contain special beneficial provisions for stamp duty on court-approved mergers.

 

GST

Typically, no GST implications may arise on sale of a business as a whole on a going-concern basis wherein all the assets and liabilities (including movable and immovable property and including stock-in-trade and other goods) are transferred under mergers/demergers.

 

Competition:

Any merger or amalgamation is regarded as a combination if it meets certain threshold requirements; if so, approval from the Competition Commission of India is required. Exemptions are available for an amalgamation of group companies in which more than 50 percent of the shares are held by enterprises within the same group. 

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