Corporate Restructuring

1. Corporate Restructuring Ashutosh Chaturvedi Associate Director

2. Corporate Restructuring -- Necessity • Companies worldwide are refocusing, downsizing andmerging to become globally competitive. • Developing core competence for global / domestic competition, technological development through collaboration and joint venture • Divesting non profitable business

3. Restructuring Restructuring Stock sale Mergers/ Amalgamation Demerger / Spin off Subsidiary Sale as a going concern- Slump sale Itemized sale

4. Amalgamation Shareholder X Shareholder Y Shareholders X & Y Company X Ltd.. Company Y Ltd.. Company XY Ltd. Cement Unit Cement Unit Cement Unit • Merger of one or more company into another or merger of companies to form another company provided • 75% in value of the shareholders of amalgamating company must become shareholders of the amalgamated company (Sec 2(1B)) • Amalgamation - Direct tax neutralized • No income to amalgamating company/shareholders on the transfer of business undertaking/receipt of income. (Sec 47(vi)) • Depreciation to amalgamated company on the basis of tax w.d.v in the hands of the amalgamating company (Explanation 7 to Sec 43) • Accumulated losses and unabsorbed depreciation of amalgamating company can be carried forward by the amalgamated company if specified conditions are fulfilled. (Sec 72A)

5. Income/ Loss transferred w.e.f Appointed date Capital Gains: To Transferor NIL To Shareholders NIL Depreciation basis for: Transferee Existing w.d.v Transferor Remaining w.d.v Quantum Prorated Tax Consequences On Companies

6. Tax incentives of undertaking Continue Subsequent Expenditure Allowed Holding Period benefit For Asset Transferred Continue 1/4/81 Option For resulting shares Continue B/f - carried forward Depreciation Allowed Loss Allowed Cessation of liability Taxed Expenses on process Deductible Tax Consequences…..Contd

7. ¾ shareholding criteria to be applied in respect of shares held as on Appointed date or Effective date? 43B payment by amalgamated Company Credit in respect of MAT paid by amalgamating Company Depreciation on cost or WDV 43(1) vs 43(6) Whether succession to business Transaction between holding & subsidiary in the intervening period Dividend distribution tax paid Amalgamation.. .Issues

8. Tax implications……c/f and set off of losses u/s 72A • Conditions prescribed: For Amalgamating Co. • Has been engaged in business in which accumulated losses occurred/depreciation remained unabsorbed for 3 or more years • Has held continuously as on date of Amalgamation 3/4 of book value of fixed assets held by it 2 years prior to date of Amalgamation • For Amalgamated Co: • Holds continuously for 5 years 3/4 of book value of fixed assets of Amalgamating co. • Continues business of Amalgamating co. for 5 years • Fulfill conditions prescribed under Rule 9C

9. Tax implications……conditions under Rule 9C in case of Amalgamation Conditions prescribed under Rule 9C • Amalgamated Co. to achieve production level of 50% of installed capacity of undertaking of Amalgamating Co. before end of 4 yrs & continue to achieve it till the end of 5 yrs • Amalgamated Co. to furnish a CA report to AO in Form No. 62 along with ROI for AY in which above condition is satisfied and for subsequent AY falling within 5 yr period

10. Demerger... Public - 60% Promoter - 40% Public - 60% Promoter - 40% Company(DC) Company (DC) Company(RC) Cement Unit Cement Unit Steel Unit Steel Unit • Transfer of business undertaking as a going concern by one company (DC) to another company (RC) pursuant to a court Scheme subject to fulfillment of following conditions (Section 2(19AA)) • All properties and liabilities of the business undertaking are transferred at book values; • Shares of the RC are issued to the shareholders of the DC on a proportionate basis; • Shareholders holding not less than 75% in value of the shares of the DC become shareholders of the RC;

11. Demerger ... Demerger - Direct tax neutral for company/shareholder. • No income to DC on transfer of undertaking (Section 47(vib)) • No income to shareholder on receipt of shares in RC (Section 47(vid)) • Proportionate depreciation in the year of demerger. Depreciation to RC on the basis of tax W.D.V. in the hands of DC.[explanation to Section 43(1)] • Accumulated business losses and unabsorbed depreciation (Section 72A):- • directly relatable to the demerged undertaking - allowed to be carried forward by RC • not directly relatable to the demerged undertaking - to be apportioned in the ratio of assets transferred to RC and assets retained by DC • Demerged business undertaking eligible for most tax exemption - benefits available even as part of RC (deduction u/s 80IA, 80IB available for unexpired period to resulting Co.)

12. ¾ shareholding criteria to be applied in respect of shares held as on Appointed date or Effective date? Transactions between holding & subsidiary Company during ‘Appointed date’ & ‘Effective date’? Dividend declared - DDT 43B payment by resulting Company Whether succession to business What happens if conditions for demerger are not satisfied Demerger.. .Issues

13. Capital gain to transferor / shareholder Deemed dividend to shareholder – dividend distribution tax Section 72A not applicable Depreciation to transferee on consideration paid Cost of shares issued to shareholders of demerging company Demerger.. .Tax consequences if conditions of demerger not satisfied

14. Subsidiary Promoter - 40% Public - 60% Promoter - 40% Public - 60% Company X Ltd.. Company X Ltd. Cement Unit Cement Unit Steel Unit New Company Y Ltd.. Steel Unit • Transfer of undertaking to WOS for a consideration • Direct Tax - Transaction is tax neutral subject to a lock-in period. (Section 47A ) • No capital gains to the holding company (Section 47(iv)) • Depreciation to subsidiary on the basis of the written down value • for the holding company (Explanation 6 to section 43) • Two layers of Dividend distribution tax

15. Slump Sale Promoter - 40% Public - 60% Promoter - 40% Public - 60% Y Ltd.. Company X Ltd.. Company X Ltd.. Cement Unit Steel Unit Cement Unit Steel Unit Transfer of business undertaking as a going concern for lump sum consideration without values being assigned to individual assets and liabilities.(Section 2(42C) Transferor Company • Transferor Company liable to short/long term capital gains (holding period 36 months)(Section 50B) • Capital gains computed by deducting ‘net worth’ from the sale consideration • Step up of Depreciation - possible as transferee entitled to depreciation on the cost of assets.(Section 32 & 72) – Valuation of assets required

16. Contingent consideration – tax implications to purchaser/seller Negative net worth – capital gain? Depreciation to purchaser on cost – impact of 5th proviso to section 32 Tax liabilities of predecessor – Sec 170 Approval u/s 281 – practical difficulty Slump sale.. .Issues

17. Stock Sale • Liable to long term capital gains depending on the period of holding (holding period 12 months) • In case of shares listed on a recognised stock exchange in India • Subject to securities transaction tax instead of Capital gains tax • Deduction under section 88E of STT available if income under ‘PGBP' includes any income from taxable securities transactions

18. Interest deduction of acquisition cost Tax liabilities of predecessor – Sec 170 Approval u/s 281 – practical difficulty Stock Sale.. .Issues s

19. Itemized Sale • Sale on the basis of value being assigned to a separate item. • Transferor liable to short/long term capital gains depending on the nature of asset & period of holding • Depreciable asset-Short term capital gain • Non depreciable assets • For stock-Long term if held for a period > 12 months • For others-Long term if held > 36 months • Depreciation to transferee on cost – opportunity to claim step up depreciation

20. 47A – No step up when holding Co. pays tax Tax liabilities of predecessor – Sec 170 Approval u/s 281 – practical difficulty Itemized sale.. .Issues

21. Tax issues Mapped • For Transferor • Carry forward of loss / depreciation • Capital gains tax. • Transfer pricing. • Tax avoidance device • Business closure • Diversion of income at source. • Depreciation. • Tax impact of alternate funding. • Staggered consideration. • Capital receipt. • Chapter XXC - Allocation of common assets / liabilities.

22. Tax issues Mapped • For Transferee • Carry forward of loss • Production / asset holding criteria. • Depreciation on tangible / intangibles. • Tax credit under MAT. • Deduction for 43B liabilities. • Deduction for liabilities of predecessor / remission of liabilities. • Cost of acquisition / fair market value. • Continuity of tax exemptions / deductions. • Restatement of value. • Succession of business.

23. Tax issues Mapped • For Shareholders • Deemed dividend • Capital gain / loss • Consideration in kind / staggered consideration. • Short term / long term capital assets • Cost of acquisition • Transfer pricing • Treaty protection • Foreign tax credit • Underlying tax credit • Tax sparing on exempt income • Tax avoidance

24. Long term tax Objectives • Reduce Dividend distribution tax • Opportunities to utilize losses. • Step up of tax depreciation base. • Reduced administrative cost. • Transfer pricing asymmetry. • Flexibility of allocating common expenses. • Impact on quantification of tax incentives. • Possibility of depreciation on intangibles • Mitigation of minimum alternate tax. • Impact on tax incentive of change in holding / migration of business. • Tax optimization by alternate funding methods.

25. Thank you!