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TAX NEWS - January 2010

India Tax: AAR concludes no tax liability of nonresident on merger into Indian company

The Indian Authority for Advance Rulings (AAR) issued a ruling on 21 January 2022 concluding that the amalgamation of nonresident companies into an Indian company does not give rise to any tax liability on the part of the nonresidents.

Three nonresident companies (Star Television Entertainment Limited, Star Asian Movies Limited and Star Asia Region FZLLC) belonging to the same group own "Indian language" entertainment channels. The group also has an Indian company, Star India Private Limited, that markets the channels and from which it derives subscription and advertising revenue. For commercial and business reasons, it was decided to consolidate the Indian language channels into the Indian company and to amalgamate the three foreign companies, together with all their assets and liabilities, into the Indian company through an amalgamation under the Indian Companies Act.

According to the scheme of amalgamation, the Indian company will issue shares to the shareholders of the nonresident companies. The scheme of amalgamation was filed with the jurisdictional High Court and is pending approval, but, before filing the application, the nonresident companies sold their "non-Indian language" channels to another overseas group company. The Indian tax authorities took the position that the proposed amalgamation should be disregarded because its sole purpose is to avoid capital gains tax in India and the transaction has no legitimate purpose other than to avoid tax. The foreign companies and their shareholders requested a ruling from the AAR on whether the proposed amalgamation results in any Indian tax liability.

The AAR concluded that the amalgamation of the three nonresident companies into the Indian entity does not give rise to any Indian tax liability for the nonresidents. The AAR reiterated the rule that contracting parties are free to enter into a transaction that has the effect of granting an exemption under the tax law, and that the proposed amalgamation and restructuring have a definite business purpose. This is a very pragmatic ruling in the area of cross border mergers.
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