Cross-border amalgamation exemption shields foreign merger of Indian shareholding from Indian capital gains tax.

A proposed vertical short form amalgamation of a foreign company with its foreign holding company, resulting in vesting of shares of an Indian company in the amalgamated foreign company, was held not to trigger capital gains tax in India under section 47(via) of the Income-tax Act. The arrangement satisfied the statutory concept of amalgamation under section 2(1B), and the Canadian law mechanism was treated as meeting the amalgamation requirement. Although the India-Canada DTAA would otherwise permit India to tax gains from alienation of the Indian shares, the domestic exemption applied because the transaction was not shown to attract capital gains tax in Canada, including under the Canadian anti-avoidance provision referenced.

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Issues: Whether the proposed vertical short form amalgamation of a foreign amalgamating company with its foreign holding company, resulting in vesting of shares of an Indian company in the amalgamated foreign company, gives rise to tax liability in India on capital gains.

Analysis: The arrangement was examined under the Indian Income-tax Act, 1961 and the India-Canada DTAA. Although article 14(2) permitted India to tax gains from alienation of the Indian shares, the domestic exemption in section 47(via) applied if the transfer was in a scheme of amalgamation of a foreign company holding shares in an Indian company, at least 25 per cent of the shareholders continued in the amalgamated foreign company, and the transfer did not attract capital gains tax in Canada. The proposed transaction satisfied the statutory concept of amalgamation under section 2(1B), and the Canadian corporate law mechanism of a vertical short form amalgamation was treated as meeting the amalgamation requirements. On the Canadian tax position, the relevant provisions were read as indicating that the amalgamation would not give rise to taxable capital gains unless section 69(11) was attracted, and on the facts placed before the Authority no such Canadian tax incidence was shown.

Conclusion: No capital gains tax in India was chargeable on the proposed amalgamation under section 47(via), subject to the condition that the gains are not assessed to income-tax in Canada on the transaction or on a subsequent series attracting section 69(11) of the Canadian Income-tax Act.

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