What are the tax implications for foreign companies involved in M&A in India?

Foreign companies involved in mergers and acquisitions (M&A) in India face several tax implications. Primarily, the transfer of capital assets, including shares and securities, is subject to capital gains tax. For non-residents, capital gains tax is levied only on the transfer of assets situated within India. The tax rate on long-term capital gains is typically 20%, while short-term gains are taxed at 30%​​.

When acquiring a company through share purchase, no step-up in the cost base of the underlying assets is allowed, meaning the purchase price cannot be used to revalue assets for tax purposes. The purchaser assumes the target company’s liabilities, necessitating extensive tax indemnities and warranties. This often leads to due diligence exercises to assess the target’s tax affairs​.

Tax losses and unabsorbed depreciation can be carried forward and set off against future profits, subject to shareholding continuity tests. This continuity requirement mandates that the beneficial ownership of at least 51% of the voting power remains the same between the year the loss was incurred and the year it is offset. These provisions ensure that companies maintain substantial continuity in their operations post-acquisition​​.

Engaging a corporate lawyer in India is crucial for navigating these complex tax implications. They ensure compliance with tax regulations, help structure deals to optimize tax liabilities, and provide vital advice on managing inherited liabilities and leveraging tax benefits. A corporate lawyer in India also assists in obtaining necessary tax clearances, ensuring a smooth transaction process.