The Holcim-Adani deal could be the first high profile merger and acquisition deal that will face the test of India’s amended indirect transfer of shares regulations, especially in connection with the country’s double taxation avoidance agreement (DTAA) or tax treaties.
As per the indirect transfer of shares regulations any asset that derives most of its value (50%) from Indian assets, should be taxable domestically.
This essentially means that India will have the right to tax an M&A transaction, on the capital gains, if more than half of the assets (by value) are located in India.
Even if the deal is between two foreign entities or holding entities that are registered outside India.
In the past, the revenue department had questioned and sought tax on similar capital gains— albeit retrospectively— accruing from such deals whose value is derived primarily from India.
In 2012, the government had amended existing income tax laws to say that any transfer of assets — where most of the value (more than 50%) was derived from Indian assets — will be taxable domestically.
The law was again “amended” in 2020 to only include prospective transactions under scrutiny. The government even settled legacy issues with companies such as Vodafone and Cairn.
The question many are asking is whether the Adani-Holcim deal could face complications under India’s indirect transfer of shares framework?
Jan Jenisch, Holcim’s CEO, has gone on record to say that there would be no tax on the transaction.
“According to our analysis it is a tax-free transaction,” he said on Monday.
The transaction is essentially a sale of shares of a Mauritius company, held by a Netherlands company, which owns the Indian listed companies.
As per the arrangement, the Adani Group’s Mauritius entity Endeavour Trade and Investment Ltd. will acquire 100% stake in Holderind Investments Ltd, also based in Mauritius, from the Netherlands-based Holderfin B.V. The Holderind Investments holds 63.2% in Ambuja Cements and 4.48% in ACC. Holderind holds another 50.05% stake in ACC through Ambuja, as per the details of the agreement.
Tax experts say that since the seller here is the Netherlands entity, it will have the benefit of the India-Netherlands tax treaty.
“It will be interesting to see how the tax department deals with this first case under the amended indirect transfer of shares regulation. India-Netherlands tax treaty would mean that there would be no tax liability for Holcim under Indirect transfer of shares or for that matter any withholding tax too,” said Girish Vanwari, founder of tax advisory Transaction Square.
As per Section 195 of Indian Income Tax, which provides for withholding tax liability for indirect transfers, the obligation to withhold tax is on payment chargeable to tax in India, say experts.
“Since as per the India-Netherlands treaty, this payment is not chargeable to tax in India in the hands of a Netherlands Resident entity, the treaty provisions will override domestic Indian Income Tax law. Hence there will be no tax liability on Holcim and consequently no withholding tax obligation on Adani entity as well,” said Ved Jain, tax expert and former president at the Institute of Chartered Accountants of India.
India-Netherlands tax treaty— which is central to Ambuja, ACC acquisition— allows capital gains tax to be paid in the Netherlands (by Holcim) and not in India. Even the government’s promise on grandfathering gains mean that only capital gains after 2018 can be brought under scrutiny, if at all, say tax experts.
In the past the tax department had questioned tax treaties.
One of the main reasons for such a scrutiny was “substance.”
That is, if the tax department has reason to believe that a particular jurisdiction is merely used to evade taxes in India, and it has no substance, then domestic laws should be applied on that transaction.
“Income tax laws tend to supersede tax treaties if there is a question mark over substance in the jurisdiction where holding entity resides or if there’s any confusion in the law on the wordings— in India-Netherlands tax treaty this doesn’t seem to be the case,” said a senior tax lawyer aware of the development.