Capital gain in case of Acquisition by a US Listed company of an Indian unlisted co.

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Indranil M

12 Points Posted on 29 January 2025

An unlisted Indian company in existence since March 2018 is getting acquired by a NASDAQ-listed company and the sale consideration is shares in the NASDAQ-listed US company against shares in Indian acquiree company

Need to understand as to the "When does taxability of capital gain arise" under the following scenarios:

1. Shares are issued by the NASDAQ-listed US company to the existing shareholders of the acquiree—without a lock-in period. The shareholders of the acquiree hold the shares and do not intend to sell them. What is the capital gain and when is it taxable?

2. Shares are issued by the NASDAQ-listed US company to the existing shareholders of the acquiree—without a lock-in period. The shareholders of the acquiree sell the shares. What is the capital gain and when is it taxable?

3. Shares are issued by the NASDAQ-listed US company to the existing shareholders of the acquiree with a lock-in period of 12 months. The shareholders of the acquiree do not intend to sell the shares. What is the capital gain and when is it taxable?
4. Shares are issued by the NASDAQ-listed US company to the existing shareholders of the acquiree with a lock-in period of 12 months. The shareholders of the acquiree sell the shares after the lock-in period. What is the capital gain and when is it taxable?

Replies (2)

Rama chary Rachakonda

Master in Accounts & high court Advocate

9615 Points Posted on 30 January 2025

A complex scenario involving cross-border mergers and acquisitions!

To address your questions, I'll break down the tax implications under each scenario:

Scenario 1: No Lock-in Period, Shares Held - *Capital Gain*: The capital gain arises when the shares are received by the existing shareholders of the acquiree company. - *Taxability*: The capital gain is taxable in the year of receipt of shares (Section 45 of the Income-tax Act, 1961). - *Fair Market Value (FMV)*: The FMV of the shares received will be considered as the sale consideration for computing capital gains.

Scenario 2: No Lock-in Period, Shares Sold - *Capital Gain*: The capital gain arises when the shares are sold by the existing shareholders of the acquiree company. - *Taxability*: The capital gain is taxable in the year of sale of shares (Section 45 of the Income-tax Act, 1961). - *FMV*: The sale consideration received will be considered for computing capital gains.

Scenario 3: Lock-in Period, Shares Held - *Capital Gain*: The capital gain arises when the lock-in period expires, and the shares can be sold or transferred. - *Taxability*: The capital gain is taxable in the year of expiration of the lock-in period (Section 45 of the Income-tax Act, 1961). - *FMV*: The FMV of the shares at the end of the lock-in period will be considered as the sale consideration for computing capital gains.

Scenario 4: Lock-in Period, Shares Sold After Expiration - *Capital Gain*: The capital gain arises when the shares are sold by the existing shareholders of the acquiree company after the lock-in period. - *Taxability*: The capital gain is taxable in the year of sale of shares (Section 45 of the Income-tax Act, 1961). - *FMV*: The sale consideration received will be considered for computing capital gains. In all scenarios, the capital gain will be computed as the difference between the sale consideration (or FMV) and the cost of acquisition of the shares in the acquiree company. It's essential to consult a tax expert or chartered accountant to ensure compliance with the latest tax regulations and to address any specific questions or concerns you may have.