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 Tax, Antitrust and Cross Border Mergers: An
Interdisciplinary Perspective
-Saurav Agarwala & Navaneet Desai*

Abstract

The Ministry of Corporate Affairs through a notification dated April 13,

2017 validated cross-border mergers. This breakthrough was followed by
the RBI notifying the Foreign Exchange Management (Cross Border
Merger) Regulations, 2017 on 20 th March, 2018. Through both these
decisions, the Government's steps to relax the conditions in relation to
inbound mergers and sanction the creation of outbound mergers, have
created a butterfly effect that is no longer restricted to just mergers as a
study, but will also affect the study of competition policy and the tax scheme
of the country. This paper, firstly, attempts to discern the antitrust
ramifications of such relaxationsin cross border mergers, and in particular,
the outbound ones by highlighting certain nascent yet potentially complex
issues, such as extra-territorial jurisdiction, that these mergers might
encounter and endeavours to suggest certain remedies to overcome them.
Secondly, on the taxation front, this paper deals with the consequences that
these cross-border mergers will have on the tax liabilities of the merged
company and the shareholders involved with it. Moreover, it points out the
other nemeses which would make outbound mergers a nightmare from the
tax perspective. Finally, it also suggests necessary amendments which would
be requiredto make outbound mergers tax neutral under this new regime.

Keywords: Cross-border mergers, antitrust, jurisdiction, tax neutral,

implementation.

*Fifth Year Students at Symbiosis Law School, Pune. The authors can be
contacted at
srva&jwalaCgmailco
2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS

I. Introduction

The recent notificationI of Section 234 of the Companies Act, 2013 along
with the Foreign Exchange Management (Cross Border Merger) Regulations,
20182 (hereinafter "Cross Border Merger Regulations"), which was cheered
on by India Inc., opened the gateway to outbound mergers (i.e., a merger of
an Indian company into a foreign company situated in certain permitted
jurisdictions with such foreign entity as the surviving entity) and relaxed
inbound mergers 3(i.e., a merger of a foreign company into an Indian
company with the Indian company as the surviving entity) in India. At that
time, little did these companies know about the Pandora's box which lay
ahead, waiting for them to open it. This paper attempts to gauge the scale of
a select few troubles (in the form of Tax and Antitrust) that might hound any
merger (read adventure) seekers that might unsuspectingly wander into the
dense regulatory jungle that is India.

II. Outbound Mermers and Antitrust - Unchartered Indian Waters

In the world of cross border mergers, the Indian waters, till now, have
remained densely murky with a few inbound mergers executed under the

'Enforcement date of Section 234 of Companies Act, 2013, MCA Notification

No. SOI 182(E) (13/04/2017), available
athtt:,w x vma oj.n/Minisrx'df/secio234Notificati 4042)1 r df , last seen on
21/12/2017.
2Foreign Exchange Management (Cross Border Merger) Regulations, 2018, RBI
Notification No. FEMA.389/2018-RB (20/03/2018), available at
lt s~iiwwrlbi~or~ t s/Notificationiser, aspid~ 235&Mo de=, last seen on
02/08/2018.
3Ibid
 NUALS LAW JOURNAL V61.12

watchful, all-seeing lidless eye of the Government. 4 Now, it would be a folly

to assume that with the opening of the outbound merger gates, the mist
would clear. Even if it did, antitrust would be one of the first creatures that it
would need to face off everywhere against, as such is the nature of the beast
that it would hound the merger across all the continents that the latter
"effects", 5 . And the credit for unleashing the beast goes to none other than

Section 234, under which, one would have to meet the compliance
requirements under Sections 230-232, such as notifying sectoral regulators
including the CCI. Though recently, the government, through another
notification.6 , waived off the 30 day notification trigger deadline for reporting
a proposed "combination", which it had earlier strictly enforced as seen in
7
the Jet/Etihad case , which had caused increasing gun jumping panic attacks,
earning it considerable flak and thereby, rubbed off a target on its back.

Host Country Criteria

The pre-requisite for such hounding, according to the new Rules notified by
the government, is that the host jurisdiction of such a foreign company
permits such schemes with an Indian company. Also, only those host
countries would be allowed:

4Outbound Acquisitions by India Inc., Nishith Desai Associates, available at

ht tl:/-wwnishithdesai.coi/fileadmin/user d /Research%20Papers/Ou bound A
cciuisitions by India Inc.df , last seen on 23/12/2017.
5 V.Dhall,The Indian Competition Act, 530-31 in Competition Law Today: Concepts, Issues,
and the Law in Practice (Vinod Dhall, 1st ed., 2007).
6
Notification regarding exemption from notifying a combination within thirty days
mentioned in Section 6(2) of the Competition Act, 2002, MCA Notification S.O. 2039 (E)
(29/06/2017), available at
htt ://www.c.goviiesic /default/filesinotificati or/S.O.% 202039% 20% 28E% 29% 20-
%2029th%2June%202017.pdf , last seen on 21/12/2017.
7 Etihad Airways PJSC/Jet Airways (India) Limited, Combination Registration No. C-
2013/12/144,
8
(Competition Commission of India, 05/02/2014).
Rule 25A, Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS 5

(i) whose securities regulator is a member of the International

Organization of Securities Commission's Multilateral Memorandum
of Understanding (or a signatory to bilateral Memorandum of
Understanding with Securities Exchange of India); or
(ii) whose central bank is a member of the Bank for International
Settlements (BIS); and
(iii) identified in the public statement of the Financial Action Task Force
(FATF) as regards certain specified matters.

Generally, the provision encompasses a scheme of merger providing for,

inter alia, payment of consideration, including by way of cash or country
specific/ global depository receipts or a combination of those which gives
rise to the Tax trouble discussed later on.

Cross Border Mergers and Jurisdiction of Antitrust Authorities

A fundamental issue arising as a result of cross-border mergers is the fact

that the merger must be reported to, and approved by, the authorities in more
than one country and, as a result, a possibility of inconsistent decisions in
different jurisdictions arises.

Cross-border mergers can be defined either on the basis of the "structure" or

the "effect" of the merger. 9 A merger can be construed to be a "cross-border"
one in structure if it pertains to companies established in more than one
jurisdiction.1 0 An "effect" merger is one where, regardless of where the

9
Cross-Border Merger Control: Challenges for Developing and Emerging Economies,
Organisation on Economic Co-operation and Development, available at
hq:iiwwwecd.or fetitionmerers/50114086,.df, last seen on 23/12/2017.
l°Ibid.
 NUALS LAW JOURNAL Vol.12

merging companies were incorporated, the merger affects the markets in

more than one jurisdiction.

The Draft FEMA Regulations1 1 define 'Cross border merger' as "any

merger, demerger, amalgamation or arrangement between Indian
company(ies) and foreign company(ies) in accordance with Companies
(Compromises, Arrangements and Amalgamation) Rules, 2016 notified
under the Companies Act, 2013".Thus, these regulations envisage a cross-
border merger both on basis of structure and effect.

As per the theory of harm, it is generally accepted that two dimensions

relating to an amalgamation need to be reviewed by the Competition/Anti-
trust Authorities 12

i. whether the amalgamation leads the merged firm to unilaterallyexercise

market power and raise prices (i.e., leading to single firm dominance)
(i.e., the unilateraleffects)), and
ii. where though the amalgamated firm may not unilaterally increase prices,
whether the amalgamation leads to such industry conditions where the
scope of collusion (called coordinated effects) between the remaining
firms in the market increases (i.e., leading to joint/collective dominance)
(the pro-collusive effects)).

Now, the objective of the Competition Act, 2002 ("Act"), inter alia, is to
regulate mergers& acquisitions activity in India in order to protect, enhance

"Supra 2.
12 M. Motta, Competition Policy: Theory and Practice, 39 (2004).
2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS 7

and preserve competition in the markets and prevent creation of monopolies

that are detrimental to the consumers.13

The Act provides for a compulsory, ex ante, suspensory regime, which needs
combinations breaking the prescribed thresholds of assets or turnover
("Jurisdictional Thresholds") under the Act, to be notified to the CCI for its
approval.14 Based on the threshold trigger, the CCI commences an
investigation of whether a potential merger is likely to cause an 'appreciable
adverse effect on competition ("AAEC") within the relevant market in
India'. 15

Furthermore, the Act1 6 confers upon the CCI extra-territorial jurisdictional

power to render the Act applicable to Combinations taking place outside
India and to parties located outside India, if such mergers have or are likely
to have, an appreciable adverse effect on competition in the relevant market
in India. Earlier, Schedule I of the Combination Regulations exempted those
mergers from notification requirement, which took place entirely outside
India with negligible local nexus and effect on markets in India ("Offshore
Exemption"). However, by way of amendments 1 7 to the Combination, the
said exemption has been omitted and the criteria for notification of offshore
transactions is based on the Jurisdictional Thresholds being met. However,

13Preamble, The Competition Act, 2002.

14 S. 5, The Competition Act, 2002.
15S. 6, The Competition Act, 2002.
16S. 32, The Competition Act, 2002.
17The Competition Commission of India (Procedurein regard to the transactionof business

relating to combinations) Amendment Regulations, 2014, MCA Notification

No.CCI/CD/Amend/Comb.Regl./2014 (28/03/2014), available at
itt ~iiwwwcg isitsifalt/fes/rel 4in
dac 202014 , last seen on
28/12/2017.
 NUALS LAW JOURNAL Vol.12

Section 32 has rarely been invoked by the CCI, with the Titan case1 8 being
the only prominent case seeing the former's application.

Co-operation in Antitrust Investigations

But what happens when the criteria for determining whether a merger is hit
by antitrust scrutiny itself is different?

"Like other antitrust agencies we make our assessment of a merger or

antitrust case based on its impact on our jurisdiction, and not on the
nationality of the companies. This is exactly what the U.S. antitrustagencies,
the Justice Departmentand the FTC, do."
Mario Monti
19
It should be noted that as per European Union Merger Regulations
("EUMR"), transactions which may result in concentrations with a
community dimension, would result in the European Commission having the
exclusive jurisdiction to investigate and recommend action under the EUMR.
A 'community dimension' here is a broad criterion which is generally
understood to mean if such a transaction may raise competition concern
thatmay have an impact on the European community. Now what if its
decision differs from that of the CCI?

The principal anti-trust law in the United States is under the Hart-Scott-
Rodino Act (HSR Act), wherein certain combinations are subject to prior

isTitan
International Inc./Titan Europe Plc, Combination Registration No. C-2013/02/109,
(Competition Commission of India, 02/04/2013).
In Titan International Inc./Titan Europe Plc ("Titan International Case"), the transaction
required notification to the CCI since Titan International Inc.'s ("Titan") acquisition of the
entire share capital of Titan Europe Plc ("Titan Europe") led to an indirect acquisition by
Titan of Titan Europe's 35.91 per cent stake in Wheels India Limited.
19Control Of Concentrations Between Undertakings, available at ht tMieur-
_lx ~.&1 l-conj(ltent/LN/I'XT/PD /uri=CELEX:32004RO139&from=EN , last seen
on 29/12/2017
2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS 9

approval if they fall within certain predefined threshold levels based on the
revenue of the parties involved and size of the transaction. 2 The rules
prescribed under the HSR Act also provide certain exemptions which may be
available depending on the specifics of the transaction. The key
administrative watchdogs responsible for administering the abovementioned
Act are the US Federal Trade Commission ("FTC") and the US Department
of Justice ("DOJ"). So, its laws and criteria to judge a combination affecting
competition, vary to a certain extent when compared to India.

Thus, another fundamental area of concern with respect to cross-border

combinations is the potential for conflict in antitrust regimes of various
jurisdictions. A common problem of multiplicity of jurisdictions is the
possibility of inconsistent decisions by two different antitrust authorities
when investigating the same combination transaction. For example, the CCI
is supposed to have due regard to the factors listed out under section 20(4) of
the Act. There may be instances where the CCI may even permit cross-
border combinations affecting competition, when the pro-competitive effects
to the economy outweigh the negative ones, if any. However, the same
transaction may not be allowed by the corresponding competition authority
under whose jurisdiction the foreign company falls. What may thus be
regarded as anti-competitive and illegal in one jurisdiction may not be
regarded the same in another jurisdiction.

The answer to all these problems is one - Co-operation between the

agencies.

20Supra 4.
 NUALS LAW JOURNAL V61.12

"In today's world, competition agencies can no longer cooperate on

investigationswith only one or two otherjurisdictionsand call it a day. ,21

One proposal to resolve this issue is adopting a "Coordinating Agency

Model, 22 wherein the various antitrust authorities involved in a particular
cross-border transaction cede jurisdiction to an international agency and this
has worked to a certain extent when analysing certain blocks such as
ASEAN, COMESA, MERCORSUR, EU, etc. Such an agency would
undertake a scrutiny and submit its findings and recommendations to the
various local authorities involved. Such a model would not only prevent
divergent decisions but would also lay down a harmonizing standard to
circumvent the shortcomings in various antitrust laws.

It is also proposed that to enforce Indian competition law effectively in case

of cross-border combinations, the CCI should enter into bilateral agreements
and treaties with other jurisdiction authorities keeping in line with its power
to do so under the proviso to section 18 of the Act. The objective of such
agreements is to promote, preserve and protect inter agency cooperation and
exchange of information between concurrently reviewing antitrust agencies.
It would also serve to lessen the possibility of differences between them in
the application of their competition laws. The US-EU Merger Working
Group 23 is one of many such examples of a bilateral agreement wherein the
major terms of this agreement deal with the timing of the scrutiny by the US

21C. A. Varney, International Cooperation: Preparing for the Future, Fourth Annual
Georgetown Law Global Antitrust Enforcement Symposium (21/09/2010).
22Supra 9.
23Best Practices on Cooperation in Merger Investigations, available at
htiier.e e/competitoni nteruat onl/batera~cusC, last seen on 31/12/2017.
2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS 11

and EU anti-trust agencies, collection and evaluation of evidence, discussing

their respective analyses at various stages of investigation, etc.

It is also key to note that confidentiality would be the cornerstone of such

agreements and utmost care must be taken while investigating these
companies and keep a lid on unwanted leaks which might put a thaw in the
potential merger

Merger Remedies

Another aspect in merger control concerns "merger remedies". It is arguable,

that despite certain apprehensions about the effects of a combination on
competition, the antitrust authorities may approve certain mergers, if the
remedies offered by the parties are found acceptable by the concerned anti-
trust authority. 4The US and European Competition Authorities explicitly
incorporate many of these aspects in their Merger Review Guidelines 25

Remedies may be either structural (i.e. some form of divestiture) or

behavioural (i.e. which may include licensing of intellectual property rights,
removal of exclusivity clauses in contracts with customers or price regulation
measures) in nature. Competition authorities overwhelmingly prefer
structural remedies over behavioural ones. Structural remedies are
considered to have greater effectiveness than behavioural remedies in
addressing the competition problems identified during merger appraisal. But
it is also true that most countries, especially developing nations, find it
practically difficult to implement and enforce such remedies due to lack of

24Supra 12.
25A. Goldberg, Merger Control in Competition Law Today, 93in Competition Law
Today:
Concepts, Issues, and the Law in Practice (VinodDhall, I t ed., 2007).
 NUALS LAW JOURNAL V61.12

availability of funds. India, in this regard is lucky to have a comparatively

strong framework to address these issues.

III. Outbound Mermers and the Present Tax Structure- Need for
Immediate Reforms

A wide range of tax critters have also been unleashed as a result of this
notification. In furtherance of this notification, any outbound merger would
involve unfavorable tax liabilities on the transferor company and its
shareholders. This necessitates, according to the authors, an amendment to
the income tax scheme of the country so as to align itself with the decision of
encouraging outbound mergers.

Capital gains, being one of the sources of tax, are applicable on all
transactions that lead to any profits or gains arising from the transfer of a
capital asset. 26 This source of income is backed by Section 45 of the Income
Tax Act, 1961 (hereinafter "Act"). 2 7 Since most amalgamations schemes
involve transfer of capital assets and shares from the transferor company to
the transferee company, it is obvious that capital gains tax would thus, be
attracted under the Act for any merger deal. 28 However, under international
jurisprudence and international practice, 9tax on national and international

26 S. 45, The Income Tax Act, 1961.

27
Ibid.
28Kusum, Tax Implications on Mergers and Acquisitions Process, 3 Journal of Business
Management & Social Sciences Research (JBM&SSR) 62,62 (2014)available at
htts9/wwwvvbojpu s ~ ~hoi ijsjcrrb,"ai/~fftc c/load/1703/1064, last seen on
01/01/2018.
29
Korea, for example, enacted several measures which permit capital gains taxes to
be
deferred and has reduced registration taxes. Japan introduced deferrals of capital gains taxes
applied to stock exchanges, stock transfers and corporate de-mergers. The United States has
a "tax-free" corporate reorganisation system which does not recognise gains or losses in the
process of corporate reorganisations, as long as certain conditions are met. Germany
2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS 13

mergers are generally waived off. Following the same, Section 47 of the
Indian Act 30 provides mergers resulting in the formation of an 'Indian
Company' as an exception to tax on capital gains. Clauses (vi) and (vii)
under Section 47 of the Act, deal with mergers and make transfer of capital
assets and shares as an exception to capital gains tax. However, this
exception is given only if the following conditions are fulfilled:

i. Firstly, the amalgamated company should be an Indian company.

ii. Secondly, it is essential that the merger falls within the definition
31
of 'amalgamation' described under the Act.

Thus, if the resulting company of a merger is an 'Indian Company' then,

Capital Gains tax would not be charged upon the transfer of assets and
shares, provided the other conditions required under the definition of
"amalgamation" are complied with by the merging and the merged entity. 32

Thus, it is clear through the reading of the Section that such an exception is
not available to mergers which result in the formation of a 'Foreign
Company'. As a necessary conclusion, since inbound mergers involve
formation of an Indian Company, the same would be covered by the

introduced a comprehensive "tax-neutral" corporate restructuring system in1995. Under the

Business Reorganisation Act, certain types of corporate restructuring, including mergers and
de-mergers (spin-offs, split-offs and split-ups), are simplified. A complementary Business
Reorganisation Tax Act enables qualifying firms to defer capital gains taxes when they
combine or divide. Germany also eliminated, as from 2002, corporate taxes on capital gains
when stocks of subsidiaries are sold, provided the shares are retained for more than one year
(German Federal Ministry of Finance, 2000); OECD Business and Industry Policy Forum
Reports on Proceedings, available at htiiw//vAwv.oed.or sti/lnd/2731209.vdf , last seen on
25/12/2017.
30 S. 47, The Income Tax Act, 1961.
31 S. 2(1B), The Income Tax Act, 1961.
32Mergers & Acquisitions in India, Nishith Desai Associates, available at
_i n coifieendin
Iihisa /us2/20d7iR.esetc %20Pa M er A
cgquiitons in t IdiaJ 4dlast seen on 31/12/2017.
 NUALS LAW JOURNAL V61.12

exception under Section 47 and no tax on capital gains would be imposed

upon it. 33 Favorable treatment 'only' in cases of resulting Indian Companies
was not a problem until recently, since cross border mergers resulting in the
formation of a foreign company or an Outbound Merger was not allowed
under the Act. 34 Since, such reorganizations were not allowed; any taxation
issues related to the same were not a concern.

Bone of Contention - Tax Neutrality

However, after the recent notification, the law needs to be modified in order
to make cross border outbound mergers, tax neutral. As mentioned earlier,
under an outbound merger, assets and shares are transferred from the Indian
Company to a Foreign Company and hence as a consequence, capital gains
would arise on the part of the Indian Company i.e. the transferor company.
This income is not provided as an exception under Section 47 and tax would
be applicable at the requisite rate.35 Consequently, the capital gains arising
from these mergers may result in tax liabilities in the hands of the
shareholders of the transferor company as well as at the corporate level. This
lack of tax neutrality may limit the attractiveness of outbound mergers in
India, despite the Act now allowing such mergers.

33 R. Begur and A.Karmakar, Taxation Aspects In Cross Border Mergers, Mondaq,

htt//www.nondacopm/india/x540748/Ci porate+Commercia+Law/Taxation+Asects+I
n+Cross+Border+.Mer grs,last seen on 25/12/2017.
34 R. Shroff & M. Varghese, A New Dawn for India's Cross Border Merger Regime, India
Corporate Law, available at hntts/ico orate. ri amarchandblog- ~o1I2O17i05inew
indias-cross-border-mer er-rcejme/, last seen on 26/12/2017.
35Provision Enabling Cross-Border Mergers Notified: India Further Integrates Into The
Stream Of Globalization, Nishith Desai Associates, available at
htty://www shihdesaicn!m/inf ratni~news-storage.news-deta is/articep'rvision-
e bling cros~s-order-mergers-notified-indi'-further-interates-into -the- stream-o f
global.html, last seen on 26/12/2017.
2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS 15

Further, the problems would add up since the Indian tax authorities may be
concerned at what they may perceive to be an erosion of the Indian tax base
as a result of outbound mergers. This may encourage the tax authorities to
raise a high number of objections against sanction to such mergers. India, in
the year 2017, saw the onset of the General Anti-Avoidance Rule ("GAAR")
regime, which has been implemented from April 1, 2017. 36 Under the
GAAR, tax authorities have been given the power to scrutinize arrangements
and invalidate them as an 'Impermissible Avoidance Agreement' ("IAA")
where they lack commercial substance, thus resulting in denial of the tax
benefit under the provisions of the Act or tax treaty. 37 Under the Income Tax
Act, the GAAR authorities have been empowered to regularize mergers and
amalgamations irrespective of their residential or legal status (i.e. resident or
non-resident, corporate entity or non-corporate entity). Further, the
provisions of GAAR can be invoked only if tax benefit arising to all parties
39
to the arrangement exceeds Rs. 30 million in the relevant financial year.

The recent signing of the Multilateral Tax Instrument (MLI) 40 may force
India to replace its preamble in every Double Taxation Avoidance
Agreement ("DTAA") and make 'Treaty Abuse' a part of the
preamble. 4Thus, along with the problem of not getting tax neutral treatment,

36
GAAR, POEM to come into effect from April 1: Government, The Indian Express
(02/02/2017), available at http:/indianexpLresscoiarticle/businessiecoon aa--oem-to-
c me-into-effect -from-api Igovt-4504696/, last seen on 26/12/2017.
37 S. 96, The Income Tax Act, 1961.
38
Supra 33.
39
Rule IOU, Income Tax Rules, 1962.
40
India, 66 other nations sign multilateral BEPS convention, The Financial Express
(09/06/2017), available at httdwww.financialex ress.comieconomindia-66-other-
nions-sig-multiatera-be s co ~nnori0902i, last seen on 26/12/2017.
6, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
41Article

Base Erosion and Profit Shifting, available at hitsiwwvw.oecd.or!t axitreaties/multilateral-

 NUALS LAW JOURNAL Vol.12

the problem of getting multiple scrutinizes would also come up as a problem

to the companies going for outbound mergers.

Compliances Galore

Section 230(5) of the Companies Act, 2013, as stated earlier, requires

sanctions from various authorities before a merger deal is sanctioned by the
National Company Law Tribunal ("NCLT"). 42 This Section also requires the
scheme to be sent to the Income Tax Authorities for review. The tax
authorities under this section have to raise their objections/ comments within
the period of next 30 days. 43 After which, the NCLT may sanction the
merger. A recent notification by the CBDT clarified that where any court or
authority such as the NCLT has "explicitly and adequately" considered the
tax implication of an arrangement, the GAAR will not apply to such an
arrangement. 44 It may seem as a notification in favour of merging
companies, however deep within it may backfire the merging entities. This is
because, very often NCLT does not specifically address the question of tax
implications in case of a merger and generally calls the merger to be
appropriate. In a circumstance wherein a merger of an outbound company
leads to a tax benefit of more than 30 million and the merger order does not
specifically answer the tax liabilities, then the Income Tax Authorities can
invoke the GAAR provisions even after the merger has been sanctioned by

convention-toj-iplement -taxtrat-related-measure-to preent-BlPSdf , last seen on

28/12/2017.
42S. 230(5), The Companies Act, 2013.
43
Ibid.
44 Clarification on implementation of GAAR provisions under the Income Tax Act, 1961,
MOF Circular No. 7 (27/01/2017), available at
inw ncmetaxnd i viin nicatrns/c icularicircula7L2017.ndf, last seen on
28/12/2017.
2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS 17

the NCLT. Though this will remain to be a general problem for mergers of
all types, the fact that it is an outbound merger (higher chances of base
erosion and profit shifting) would call upon the GAAR authorities to raise
frivolous objections to the merger, further discouraging any outbound
merger.

Tax Issues Post Amalgamation and Payment of Taxes

The next concern which appears is, where will the activities of the former
Indian Company be taxed after the Company is merged into a foreign entity.
Under the Indian Income Tax Act, two entities are charges to tax- i. residents
45
and ii. non-residents till the limit of activities that are conducted in India.
The recently applied Place of Effective Management ("POEM") test is used
to determine whether the particular company is a resident company or a non-
resident company. For an outbound merger, it is critical to see that the
organization in India doesn't fulfill the POEM test so that the "foreign"
amalgamated company is not called a "resident" company for Indian Income
Tax purposes.

As mentioned earlier, India has recently signed ML. Though the Instrument
would not be applicable in the recent times due to the lack of ratification and
the number of safeguards provided within the Treaty, the same would
definitely affect all the DTAA's in the long run. As a consequence, it will
also affect the tax liability of multinational companies. Under the MLI,
Article 4 provides that in case of dual resident entities, the competent
authorities of the competing jurisdictions shall endeavor to determine by
mutual agreement the residency of such person for the purposes of the

45 S. 9, The Income Tax Act, 1961.

 NUALS LAW JOURNAL V61.12

Covered Tax Agreements. 46 Thus, under the new regime of MLI,both the
countries can sit together to determine whether the enterprises can be
considered to be a resident of a particular country and taxed in that country.
Though the authorities from all the relevant countries would be bound to sit
and decide whether the particular organization is a resident or not, the
company involved would not have any right to present its own case and
defenses.47 This may lead to unfavorable decisions wherein the company
might be forced to pay the tax in a place that has a higher tax rate.

The residential status of Permanent Establishment ("PE") is also a problem

since once such an outbound merger is completed; the operations of the
Indian transferor company will be carried out by the surviving foreign entity,
either directly or through a branch. In India, a non-resident is also taxed if
the same constitutes as a Permanent establishment in India. However, the tax
liability of the Company would be limited to the activities of the PE. If the
organization fulfills the Permanent Establishment test, then the activities of
the PE would be charged to taxes in India as well as the other country and if
a DTAA exists, then the company would receive a credit for the same. So,
for example if the Company is based in Mauritius, then the company would
be taxed in Mauritius for its global activities and would be taxed in India for
its activities conducted in India. Mauritius under the DTAA would then give
credit to the company of the amount it has paid as tax in India. But however,
if the merged company is based in a country with whom India does not have
a DTAA, then it may happen that the Company's activities would be taxed in

46Article 4, Supra 41
47
fndia 's MLU Positions, Nishith Desai Associates, available
athdpi/v i_ esai.co/fmileidmin
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2018 TAX, ANTITRUST, AND CROSS BORDER MERGERS 19

India as well as the other country. Consequently, there is a significant risk

that the tax authorities may characterize the India presence of the surviving
foreign entity as constituting a PE in India. If the surviving entity in India is
declared as a PE, the organization would be charged at a rate of 40% tax.

Further, Article 10 of MLI provides for triangular PE's wherein the

provision prevents company from using another PE established in a
favorable tax country from being used as a tool to prevent the PE in the
residence country to be considered as a PE. This may allow the authorities to
further question any arrangement and declare surviving entities as PE.

Moreover, a perusal of the recently notified Cross Border Merger

Regulations leads one to infer that in case of outbound mergers, any office of
the Indian company in India may be deemed to be a branch office of the
foreign company 4 8 and thus it is more vulnerable to be considered as a
Permanent Establishment/ business connection of the foreign company, in
which case, the profits attributable to such PE / business connection may be
taxable at a higher rate of 40 %, increased by applicable surcharge and cess.

IV. Conclusion

The Government still needs to cover more than a mile when it comes to
encouraging outbound mergers within the present Indian regime. Though the
steps taken are in consonance with the recommendations of the Dr. Jamshed
J. Irani Expert Committee on Company Law, which first suggested
implementation of cross-border mergers in India, further steps of amending
other contemporary laws are condiciones sine quibus non in encouraging any

48Regulation 5 (3), Foreign Exchange Management (Cross Border Merger) Regulations,

2018.
 NUALS LAW JOURNAL Vol.12

such reforms. Since these steps involve international measures and relate
with the legal system of other countries, it is expected that the Government
should take the initiative to collect consensus on the formation of various
international bodies, agencies and treaties, thereby addressing the concerns
hereinabove mentioned. It is also recommended that the Organisationfor
Economic Co-operation and Development which is responsible for forming
consensus on various Competition policies and which was also instrumental
in passing the Multilateral Tax Instrument, should address the concerns
mentioned in this article. It is the authors' opinion that global co-operation
and effective synergies are the key solutions to the complex problems that
arise from a cross border merger and any government that understands this,
unlocks the Pandora's box again to salvage the only content left inside after
the box was first opened-Hope!