Cross-Border Mergers & Acquisitions: Key Tax and Regulatory Considerations in India (2025)

In today’s interconnected global economy, Cross-Border Mergers & Acquisitions (M&A) serve as powerful catalysts for growth, allowing businesses to expand their global footprint, acquire new technologies, access untapped markets, and realize strategic synergies. India, with its robust economic growth and burgeoning consumer base, is increasingly a focal point for such transactions – both as a target for foreign acquirers and as a source of outbound investments.

However, these complex transactions are far from straightforward. They are fraught with intricate tax implications and a dense web of regulatory requirements that demand meticulous planning and expert navigation. As a leading CA firm in Mumbai, CA Sweta Makwana & Associates specializes in guiding businesses through the labyrinthine landscape of cross-border M&A in India, ensuring compliance and optimizing financial outcomes.

Understanding Cross-Border M&A in the Indian Context

Cross-border M&A broadly refers to:

An Indian entity acquiring a foreign entity (Outbound M&A).
A foreign entity acquiring an Indian entity (Inbound M&A).
A merger or amalgamation between entities located in different tax jurisdictions.

The primary drivers often include market access, technology acquisition, consolidation, cost efficiencies, and expanding global market share.

Part 1: Key Tax Considerations

The tax implications of cross-border M&A are highly complex, touching upon both direct and indirect taxes.

A. Direct Tax Implications (Income Tax Act, 1961)

Capital Gains Tax:
- Seller’s Perspective (Indian Entity/Shareholders): The sale of shares or assets to a foreign entity triggers capital gains tax. The tax rate depends on whether it’s a Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG), with LTCG often benefiting from indexation for resident sellers. For non-resident sellers, specific tax treaty provisions (Double Taxation Avoidance Agreements – DTAAs) can significantly alter the tax liability.
- Indirect Transfer Provisions (Section 9(1)(i)): A unique and critical aspect in India. This provision taxes gains from the transfer of shares of a foreign company if such shares derive substantial value (over 50% and above a prescribed threshold) from assets located in India. This means even a foreign-to-foreign deal could be taxable in India.
Withholding Tax (TDS):
- Payments made to non-residents (e.g., consideration for shares, royalties, technical service fees, interest on acquisition finance) are often subject to Tax Deducted at Source (TDS) in India. The applicable rate can be influenced by DTAAs, potentially reducing the tax burden.
Tax Deductibility of Acquisition Costs:
- For the acquiring entity, understanding the tax treatment of acquisition-related costs (like interest on acquisition debt, legal fees, advisory fees) is crucial. While some costs may be capitalised, others might be deductible.
Carry Forward of Losses & Depreciation:
- Rules governing whether accumulated tax losses and unabsorbed depreciation of the target company can be carried forward post-M&A are complex. For instance, specific conditions under Section 72A of the Income Tax Act must be met for tax neutrality in amalgamations.
Amalgamation/Demerger Specific Provisions:
- The Income Tax Act lays down specific conditions (e.g., Section 47) for certain mergers (amalgamations) or demergers to be considered tax-neutral transactions. Failure to meet these conditions can trigger significant tax liabilities for the merging entities and their shareholders.
Transfer Pricing:
- Post-M&A, if the foreign entity acquires an Indian subsidiary, subsequent inter-company transactions (e.g., purchase of goods, provision of services, royalty payments) must adhere to arm’s length principles under India’s transfer pricing regulations.

B. Indirect Tax Implications (GST)

Transfer of Business as Going Concern:
- The transfer of a business as a “going concern” (i.e., a complete business unit) is generally exempt from GST.
Asset Sales:
- If the M&A involves the sale of individual assets rather than a whole business, each asset transfer (e.g., machinery, intellectual property, brand rights) may attract GST.
Share Transfers:
- Shares are considered ‘securities’ and typically fall outside the purview of GST.
Services Involved:
- Professional services (legal, financial, advisory, valuation) procured during the M&A transaction are subject to GST.

Part 2: Key Regulatory Considerations

Beyond tax, a complex web of regulatory frameworks governs cross-border M&A in India, demanding approvals from various bodies.

A. Foreign Exchange Management Act (FEMA), 1999 & RBI Regulations

Entry Routes for FDI: Foreign Direct Investment (FDI) into India is governed by FEMA. Investments can come via the Automatic Route (no prior government approval needed for most sectors) or the Government Approval Route (requiring approval from the Ministry of Finance for sectors with FDI caps or prohibitions).
Pricing Guidelines: The RBI sets specific minimum/maximum price guidelines for the transfer of shares involving non-residents, ensuring fair valuation and preventing round-tripping of funds.
Reporting Requirements: Extensive post-transaction reporting to the Reserve Bank of India (RBI) is mandatory, including filing of Advance Remittance Form (ARF), Form FC-GPR (Foreign Currency-Gross Provisional Return), Form FC-TRS (Foreign Currency-Transfer of Shares), and Outward Direct Investment (ODI) reporting if an Indian company is acquiring a foreign entity.

B. Companies Act, 2013 & Ministry of Corporate Affairs (MCA) Regulations

Mergers & Amalgamations: For mergers and demergers, a Scheme of Arrangement must be approved by the National Company Law Tribunal (NCLT). This is a court-driven process involving statutory meetings for shareholders and creditors, and approvals from regional directors and official liquidators.
Acquisition of Shares/Assets: Requires compliance with provisions related to board resolutions, shareholder approvals, and obtaining valuation reports as per prescribed methods.
Corporate Governance: Post-M&A, the combined entity must ensure adherence to corporate governance norms, especially if it’s a listed company or planning to list.

C. Competition Law (Competition Act, 2002)

Combinations: Any M&A transaction meeting prescribed asset or turnover thresholds (in India and globally) mandates a pre-notification to the Competition Commission of India (CCI). The CCI scrutinizes the proposed transaction for potential anti-competitive effects or dominance issues. Non-filing or gun-jumping can lead to significant penalties.

D. Sector-Specific Regulations

Certain highly regulated sectors in India, such as telecom, banking, insurance, defense, pharmaceuticals, and multi-brand retail, have specific FDI caps, licensing requirements, and operational conditions that must be met. These often involve approvals from respective sectoral regulators (e.g., IRDAI for insurance, TRAI for telecom).

E. Securities and Exchange Board of India (SEBI) Regulations

Takeover Code: For acquisitions involving listed Indian companies, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (commonly known as the Takeover Code) might trigger a mandatory open offer to public shareholders if the acquiring entity crosses certain shareholding thresholds.
Listing Regulations: Compliance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, for listed entities.

Critical Success Factors for Cross-Border M&A in India

Navigating this intricate landscape requires more than just capital. Key success factors include:

Thorough Due Diligence: Comprehensive financial, tax, legal, commercial, and operational due diligence is non-negotiable to identify hidden liabilities, undisclosed risks, and potential deal-breakers.
Expert Structuring: Designing a tax-efficient and legally compliant deal structure from the outset is paramount.
Robust Documentation: Meticulous drafting of Share Purchase Agreements (SPAs), Shareholder Agreements (SHAs), and other transaction documents.
Post-Merger Integration Planning: Critical for realizing the anticipated synergies and ensuring smooth operational continuity of the combined entity.
Engaging Expert Advisors: Relying on experienced legal, financial, tax, and regulatory advisors with deep local expertise.

The Indispensable Role of a CA Firm in Cross-Border M&A

Given the multi-faceted complexities, a seasoned CA firm like CA Sweta Makwana & Associates is an indispensable partner in any cross-border M&A transaction:

Financial & Tax Due Diligence: Uncovering financial risks, tax exposures, contingent liabilities, and identifying potential value drivers.
Deal Structuring Advisory: Providing strategic advice on tax-efficient structuring of transactions (e.g., share sale vs. asset sale, merger vs. direct acquisition).
Valuation Services: Conducting independent valuations of target and acquiring entities.
Comprehensive Tax Advisory: Offering in-depth advice on direct and indirect tax implications, benefits under DTAAs, and transfer pricing nuances.
Regulatory Compliance Support: Assisting with FEMA, RBI, MCA, SEBI, and CCI filings, approvals, and ongoing compliance.
Post-Merger Integration: Supporting the financial integration process, accounting harmonization, and ongoing regulatory compliance for the merged entity.
Negotiation Support: Providing crucial financial insights and scenario analysis during deal negotiations.

Conclusion

Cross-border M&A in India presents immense opportunities for strategic growth. However, success hinges on anticipating and meticulously navigating the intricate web of tax and regulatory considerations. From direct and indirect tax implications to complex foreign exchange, corporate, competition, and sectoral regulations, every aspect demands careful planning and execution. Engaging experienced professional advisors is not an option but a necessity to ensure a smooth, compliant, and value-accretive transaction.

Considering a cross-border M&A in India or abroad? For expert guidance and comprehensive M&A advisory services, get in touch with CA Sweta Makwana & Associates today. We are committed to simplifying complexity and driving your success.

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