CROSS BORDER MERGERS AND ACQUISITIONS
Agenda
ÜM&A – Introduction & basic legal aspects ÜM&A – strategic perspective ÜM&A – Strategic reasons & process ÜM&A – Case study dovetailing economic & Tax considerations ÜM&A – Flip or Swap deals.ÜDefinitions ÜSection 2(1B) “Amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company…….” ÜConditions All properties to be transferred to the amalgamated company All liabilities to be transferred to the amalgamated company Shareholders holding at least 3/4th in value of shares of the amalgamating company should become shareholders of the amalgamated company.ÜDefinitions ÜMerger – Undefined “De-merger” in relation to companies, means the transfer, pursuant to scheme of arrangement under sections 391 to 394 of the Companies Act, by a demerged company of its one or more undertakings to any resulting company 7 conditions, 4 explanationsSection 47 conditions for exemption
§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 [Section 47(vi)] §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: Ø the transfer is made in consideration of allotment to him of any share or shares in the amalgamated company; and Ø the amalgamated company is an Indian company [Section 47(vii)] Interest, FTS and royalty can flow independent of ownership pattern FTS and royalty would typically flow to an operating entity, which possess technical capabilities Principal drivers are tax costs associated with dividend flows and gains on disposal of shares Brand fee would flow to the IPR company
PRINCIPLES OF EVALUATIONNon-business parameters like jurisdiction stability, Currency, treaty network, skilled manpower, foreign investment guidelines etc., Business dynamics, supply chain efficiency, corporate structure, limitations of business etc., Legal framework, dispute resolution, secrecy laws Intermediary jurisdictional analysis, choice of appropriate corporate vehicle.
2. Migrate IP Assets Over Time – Tax implications
ÜSame tax implications as Simple Change in Ownership for Cash example ÜResearch & Development Cost Sharing Agreement and/or License and Consulting Agreements to migrate value of total IP offshore as new IP owned by the offshore entity ÜTransfer pricing between Indian Corp and Offshore Corp ÜPotential build up of income, tax, cash or receivables in Indian Corp needs to be considered ÜIf structured as “Debt”, economic substance of “Debt claim” to be provedMechanics of the structureÜSetting up a Holding Co in Netherlands ÜIndian Investors would invest in the Holding Co through another entity in Netherlands ÜShareholding of the Holding Co would be as follows: ÜStrategic Investors – 40% ÜFounder Promoters – 55% & ESOP - 5% ÜHolding Co would set up 100% subsidiary in Mauritius (Mauritius 1) ÜMauritius 1 to set up a 100% subsidiary in Mauritius (Mauritius 2) ÜMauritius 2 would set up a 100% subsidiary in Switzerland and India ÜSwiss Co will issue shares of different classes: ÜClass A of shares, which have larger right on dividends will be held by Holding Co ÜClass B shares will be held by Mauritius Co 2 ÜClass A shares held by the Netherlands Holding Co will be redeemed (to extract cash out from the Swiss Co)Tax ImplicationsDividend payout by Swiss Co to Holding Co
•Dividends paid will not be subject to WHT in Swiss •Dividends will not be taxable in Netherlands under Participation Exemption regime •Dividend payout by Swiss Co to Mauritius 2 •Subject to withholding tax @ 35% in Switzerland •Not liable to tax in Mauritius as tax credit available as per Mauritius domestic laws •However, class shares B shares will have minimal rights over dividend and hence will not lead to a any significant tax loss Dividend payout by Mauritius Co 1 to Holding Co
Migrating assets operation - Tax implicationsÜContinuation results in a tax event at the corporate level Deemed disposition of assets at FMV Not tax efficient unless minimal appreciation in corporate assets ÜOften attempted in Real Estate assets, whenever there is slump in price, and thereby FMV being lower than cost • No withholding of tax in Mauritius • Not liable to tax in Netherlands due to participation exemption •Dividend payout by India Co to Mauritius Co 2 • Subject to dividend distribution tax @ 16.995% in India •
Exchange Structure - no cash deals USA-CanadaÜMain purpose of exchangeable share structure is to defer tax until Canadian shareholder has a liquidity event (e.g. can sell the shares received in lieu of cash) ÜMain characteristics of exchangeable share structure Canadian Target shareholder exchanges shares in Target for shares in Canadian Acquisition Corp Canadian Acquisition Corp shares are exchangeable into shares of the US entity Canadian Target/Canadian Target shareholders have contractual rights with the US entity mirroring rights they would have if a shareholder in US entity
Tax Implications in exchange structure US-CanadaÜCanadian Target shareholders benefit from “roll-over” provisions as they continue to hold shares in a Canadian company ÜCanadian Acquisition Corp shares entitle (and may obligate) Target shareholders to exchange shares in Canadian Acquisition Corp for US Corp ÜCanadian Target Shareholders generally have certain rights and protections with US Corp to mirror rights they would have if US Corp shareholders ÜWhen exchange the Canadian Acquisition Corp shares for US Corp shares then tax event at Target shareholder level
ÜM&A – Introduction & basic legal aspects ÜM&A – strategic perspective ÜM&A – Strategic reasons & process ÜM&A – Case study dovetailing economic & Tax considerations ÜM&A – Flip or Swap deals.ÜDefinitions ÜSection 2(1B) “Amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company…….” ÜConditions All properties to be transferred to the amalgamated company All liabilities to be transferred to the amalgamated company Shareholders holding at least 3/4th in value of shares of the amalgamating company should become shareholders of the amalgamated company.ÜDefinitions ÜMerger – Undefined “De-merger” in relation to companies, means the transfer, pursuant to scheme of arrangement under sections 391 to 394 of the Companies Act, by a demerged company of its one or more undertakings to any resulting company 7 conditions, 4 explanationsSection 47 conditions for exemption
§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 [Section 47(vi)] §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: Ø the transfer is made in consideration of allotment to him of any share or shares in the amalgamated company; and Ø the amalgamated company is an Indian company [Section 47(vii)] Interest, FTS and royalty can flow independent of ownership pattern FTS and royalty would typically flow to an operating entity, which possess technical capabilities Principal drivers are tax costs associated with dividend flows and gains on disposal of shares Brand fee would flow to the IPR company
PRINCIPLES OF EVALUATIONNon-business parameters like jurisdiction stability, Currency, treaty network, skilled manpower, foreign investment guidelines etc., Business dynamics, supply chain efficiency, corporate structure, limitations of business etc., Legal framework, dispute resolution, secrecy laws Intermediary jurisdictional analysis, choice of appropriate corporate vehicle.
2. Migrate IP Assets Over Time – Tax implications
ÜSame tax implications as Simple Change in Ownership for Cash example ÜResearch & Development Cost Sharing Agreement and/or License and Consulting Agreements to migrate value of total IP offshore as new IP owned by the offshore entity ÜTransfer pricing between Indian Corp and Offshore Corp ÜPotential build up of income, tax, cash or receivables in Indian Corp needs to be considered ÜIf structured as “Debt”, economic substance of “Debt claim” to be provedMechanics of the structureÜSetting up a Holding Co in Netherlands ÜIndian Investors would invest in the Holding Co through another entity in Netherlands ÜShareholding of the Holding Co would be as follows: ÜStrategic Investors – 40% ÜFounder Promoters – 55% & ESOP - 5% ÜHolding Co would set up 100% subsidiary in Mauritius (Mauritius 1) ÜMauritius 1 to set up a 100% subsidiary in Mauritius (Mauritius 2) ÜMauritius 2 would set up a 100% subsidiary in Switzerland and India ÜSwiss Co will issue shares of different classes: ÜClass A of shares, which have larger right on dividends will be held by Holding Co ÜClass B shares will be held by Mauritius Co 2 ÜClass A shares held by the Netherlands Holding Co will be redeemed (to extract cash out from the Swiss Co)Tax ImplicationsDividend payout by Swiss Co to Holding Co
•Dividends paid will not be subject to WHT in Swiss •Dividends will not be taxable in Netherlands under Participation Exemption regime •Dividend payout by Swiss Co to Mauritius 2 •Subject to withholding tax @ 35% in Switzerland •Not liable to tax in Mauritius as tax credit available as per Mauritius domestic laws •However, class shares B shares will have minimal rights over dividend and hence will not lead to a any significant tax loss Dividend payout by Mauritius Co 1 to Holding Co
Migrating assets operation - Tax implicationsÜContinuation results in a tax event at the corporate level Deemed disposition of assets at FMV Not tax efficient unless minimal appreciation in corporate assets ÜOften attempted in Real Estate assets, whenever there is slump in price, and thereby FMV being lower than cost • No withholding of tax in Mauritius • Not liable to tax in Netherlands due to participation exemption •Dividend payout by India Co to Mauritius Co 2 • Subject to dividend distribution tax @ 16.995% in India •
Exchange Structure - no cash deals USA-CanadaÜMain purpose of exchangeable share structure is to defer tax until Canadian shareholder has a liquidity event (e.g. can sell the shares received in lieu of cash) ÜMain characteristics of exchangeable share structure Canadian Target shareholder exchanges shares in Target for shares in Canadian Acquisition Corp Canadian Acquisition Corp shares are exchangeable into shares of the US entity Canadian Target/Canadian Target shareholders have contractual rights with the US entity mirroring rights they would have if a shareholder in US entity
Tax Implications in exchange structure US-CanadaÜCanadian Target shareholders benefit from “roll-over” provisions as they continue to hold shares in a Canadian company ÜCanadian Acquisition Corp shares entitle (and may obligate) Target shareholders to exchange shares in Canadian Acquisition Corp for US Corp ÜCanadian Target Shareholders generally have certain rights and protections with US Corp to mirror rights they would have if US Corp shareholders ÜWhen exchange the Canadian Acquisition Corp shares for US Corp shares then tax event at Target shareholder level
