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Mergers and AcquisitionsMergers and Acquisitions
Concept
Reasons
Types- Horizontal, Vertical, Conglomerate
Examples
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Sec 2 (1B) of the Income Tax Act, 1961 defines amalgamation asfollows:
amalgamation in relation to companies, means the merger of oneor more companies with another company or the merger of two ormore companies to form one company in such manner that:
i. All the property of the amalgamating company or companiesimmediately before the amalgamation becomes the property ofthe of the amalgamated company by virtue of the amalgamation
ii. All the liabilities of the amalgamating company or companiesimmediately before the amalgamation become the liabilities ofthe amalgamated company by virtue of amalgamation
iii. Shareholders holding not less than 3/4th s in value of the sharesin the amalgamating company(s) becomes shareholders of theamalgamated company by virtue of the amalgamation,
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otherwise than as a result of the acquisition of the propertyof one company by another company pursuant to thepurchase of such property by the other company or
as a result of the distribution of such property to the othercompany after the winding up of the first-mentionedcompany
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In India, it is the UK Law that is followed and UKs case lawis honored as acceptable precedents by the learned courts
Experiences of the UK in this area could be reviewed withregards to-
a) implications for acquiree company
b) implications for the shareholders of the acquiree companyc) implications for the acquiring company
d) implications for the shareholders of the acquirer
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P
rovisions relating to carry forward & setP
rovisions relating to carry forward & set--off ofoff ofaccumulated loss (AL) & unabsorbed depreciation (UD)accumulated loss (AL) & unabsorbed depreciation (UD)allowance in amalgamationallowance in amalgamation
Carry forward- Closing account balance from the previousaccounting period , carried over as the opening accountbalance for a new accounting period
Set-off- Debtors legal right to reduce the creditors claim bythe amount the creditor owes to the debtors
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Accumulated loss- loss of the predecessor entity (as the casemay be) under the head Profits & Gains of business or
profession entitled to be set off under provisions of Sec 72.
Unabsorbed depreciation- allowance for depreciation of thepredecessor entity (as the case may be) which remains to be
allowed and which would have been allowed to thepredecessor entity (as the case may be) under the provisionsof this Act if the amalgamation had not taken place
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Notwithstanding anything contained in any other provisionof the IT Act, the UD of the amalgamating company shall be
deemed to be a loss or,
As the case may be, allowance for UD of the amalgamatedcompany for the PY in which the amalgamation was effected
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ConditionsConditions
The amalgamating company-
a) Has been engaged in the business in which the accumulatedloss occurred or depreciation remains unabsorbed for 3 ormore years
b) Has held continuously as on the date of the amalgamation atleast 3/4th of the BV of the fixed assets held by it 2 yearsprior to the date of amalgamation
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ConditionsConditions
The amalgamated company-
a) Holds continuously for a minimum period of 5 years from the dateof amalgamation at least 3/4th of the BV of fixed assets of theamalgamating company in the scheme of amalgamation.
b) Continues the business of the amalgamating company for a
minimum period of 5 years from the date of amalgamation
c) Fulfills such other conditions as may be prescribed to ensurerevival of the business of the amalgamating company or to ensurethat amalgamation is for genuine reasons
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Implications relating to Capital GainsImplications relating to Capital Gains
Any profits or gains arising from the transfer {Sec 2(47)} of
a capital asset effected in the PY shall be chargeable toincome tax under the head Capital Gains and shall bedeemed to be the income of PY in which the transfer tookplace (Sec. 45)
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Transfer in a scheme of transactions not regarded asTransfer in a scheme of transactions not regarded as
transfer (Sec. 47)transfer (Sec. 47)
Any transfer in a scheme of amalgamation of a capital asset byamalgamating company to the amalgamated company if theamalgamated company is an Indian company
Any transfer in a scheme of amalgamation of a capital asset beinga share(s) held in an Indian company by the amalgamating foreigncompany to the amalgamated foreign company if:
a) At least 25% of shareholders of the amalgamating foreigncompany continue to remain the shareholders of the amalgamatedforeign company and
b) Such transfer does not attract tax on capital gains in the countryin which the amalgamating company is incorporated
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Transfer in a scheme of transactions not regarded asTransfer in a scheme of transactions not regarded as
transfer (Sec. 47)transfer (Sec. 47)
Any transfer by a shareholder in a scheme of amalgamationof 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 tohim of any share or shares in the amalgamated company and
b) The amalgamated company is an Indian company
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Implications relating to AmortizationImplications relating to Amortization
of/Expenditures in the case of Amalgamationsof/Expenditures in the case of Amalgamations
Where an assessee being an Indian company incurs anyexpenditure on or after the 1st day of April 1999 wholly and
exclusively for the purposes of amalgamation, the assessee shall beallowed a deduction of an amount equal to the 1/5th of suchexpenditure for each of the 5 successive PY beginning with the PYin which the amalgamation takes place
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Tax planning
Tax planning should be based on judicious selection
of alternatives: Payment of in cash or in shares on takeover to transferorcompanys share holders
Share exchange ratio
Possibilities of share reduction to reduce tax liability of
share holders
Reorganization of capital structure so that share holders aswell as company might pay minimum possible tax asincome tax or capital gain tax
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ConclusionConclusion-- M&A and taxationM&A and taxation
Carry forward & set off of losses
Capital gains implications
Amortisation implications
Tax planning
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Thank You
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