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“From an M&A taxation perspective, in cross border share swaps, many times employee stock options are also swapped.
While share swaps done by way of tax neutral mergers enjoy a tax exemption, stock options do not enjoy similar exemption, which raises issues around taxability for employees on the swap, esp, when the options are already vested.
Providing clarity on such swaps and bringing them at par with share swaps will add more certainty for cross border M&A transactions.”
“Mergers and demergers usually carried out through the High Court and then NCLT approval route have enjoyed the same tax neutrality.
However, under the new law, fast track mergers are tax neutral, but a similar benefit is not available for fast track demergers.
While this may not be intended, the language of the law has cast a shadow on the tax neutrality of fast track demergers.
It is important to clarify this appropriately to ensure that the Government’s objective of simplifying and deregulating internal corporate reorganisations is not marred by undesirable tax exposure.”
“A key question that arises in case of earn-outs and performance linked consideration on a share sale is whether taxability triggers in the year of sale or the year of receipt.
Since most of the times, this consideration is based on achievement of profitability or other financial/ operating milestones in the future, the consideration truly accrues only when such milestones are achieved.
Hence, it is natural to tax it when the income has accrued.
Full tax neutrality is granted to shareholders receiving shares on domestic mergers or demergers or mergers/ demergers into Indian transferee companies.
However, in case of overseas mergers or demergers involving Indian assets, tax neutrality to the resident or non-resident shareholders is not provided.
This puts overseas reorganisations at a disadvantage to domestic reorganisations.
While foreign shareholders are exposed to taxes in India on such mergers/ demergers only if the substantial value test under section 9 is met, resident shareholders are taxed irrespective of the value.
It will be useful to extend the tax neutrality to the shareholders considering that the tax neutrality is provided to the transferor company itself.
Similar to mergers between companies, mergers between limited liability partnerships should also be considered for tax neutrality.
While the LLP law permits such mergers, the absence of tax neutrality has led to barely any precedence around the same.
Similarly, on conversion of partnership and LLP structures into companies, while the partnership/ LLP is not taxed subject to compliance with prescribed conditions, such tax neutrality is not available to the partners who receive shares of the company upon conversion.
To reduce ambiguity and litigation, it will be worthwhile to extend the tax neutrality to partners as well,” says Vaibhav Gupta, Partner, Dhruva Advisors.
