Deal structuring and tax implications

Abstract

With the increasing focus on India as the emerging economic power, there has been an increasing tendency among the global participants to set shops in India. This has seen numerous strategic acquisitions of Indian companies and mergers or joint ventures with the bigger ones. The entry of foreign competitors has also compelled the Indian players to consolidate their position through acquisition of smaller companies or through forward or backward integration. The key to these ventures and deals lies in the synergies that the entities manage to create. In addition, the structure adopted to pursue the acquisition/joint venture/tie-up in view of the existing regulations can impact the tax implications and thus further the advantage of the synergy of operations. The study is aimed at unveiling the various structures adopted over the recent years to explore the expansion opportunities in India and across the globe. The impact of tax treaties and agreements between various countries and the optimum use of the offshore finance centers and tax havens is critical to the structuring of a transaction. Through this study, we attempt to highlight the broad regulations for investments in India and the opportunities for Indian investors abroad in the light of the existing laws, regulations and tax considerations. Understanding the implications / benefits of the structures adopted in the context of the regulations surrounding the acquirer and the target company nations forms the core of this study The structure favoured by a foreign investor investing in India as observed through this study is to make the acquisition through offshore holding company located at Mauritius to draw maximum benefits from the tax treaty and the favourable tax regime in Mauritius. Similarly, typical structure for an Indian investor investing abroad would be to route the investment either through an offshore tax favourable jurisdiction or target a financial center, which would enable funding the acquisition. In the case of an Indian investor investing in an Indian company, focus ideally has been on gaining strategic competitive advantage in the industry through the alliance, or creating operational synergies and gains through the tax benefits offered for acquisition. We also highlight some key observations and issues of the nature of disputes arising out of the tax treaties or transaction structuring through LBO s and earn-outs that need to be addressed for improving the deal scenario for India.