Taxation on shares on acquisition of a foreign company.

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Priya

Engineer

23 Points Posted on 08 March 2016

Hi all
This is a question which couldn't be answered definitely yet. The situation is

X is a share holder of a foreign company A (the stock are received through the employers as perquisites (Restricted stocks)).

the company A is acquired by a company B which is also a foreign company. Both the companies are listed at NASDAQ.

As a part of acquisition the shares possessed by X of company A are convered to shares of company B by a applying the relevent ratio depending upon their prevailing prices.

The question is will this transfer of share be considered as a taxable event in india. I.e. for indian taxation laws will it be seen as if X has sold all his shares of company A and got capital gains (the difference from the base (buying) price) and used them to bought equivalent shares of company B. And hence the value which is transfered from A to B will be considered as capital gains and X has to declare it in his return and pay taxes.

Please note that the money is still not realized and is in the form of stocks of company B. Whatever is done now for the taxation will decide how the actual sale will be taxed (on the gains from the base price). Even if one decides to pay taxes now it will not mean peace of mind for him if he is not obliged to. Because while paying the taxes during the actual sale (in another finantial year) the base price will again be debatable.

Please help....

thanks

Priya

Replies (3)

CA PRATIK DHRUVE

CHARTERED ACCOUNTANT

477 Points Posted on 08 March 2016

Section 47 specifies the details of transactions which should not be treated as capital gains. It does not contain any case where a foreign company is acquired by another foreign company.

However, since it would be an issue as to what should be taken as cost of acquisition of shares at the time of actual sale of such shares, it is better that the assessee takes a stand that capital gain would arise at the time of actual sale only and not at the time of such acquisition.

And at the time of actual sale, the cost of acquisition should be taken as actual cost paid to buy the shares in company A. Also, the period of holding should be calculated from the date of buying shares in company A and not in company B.

Priya

Engineer

23 Points Posted on 08 March 2016

Thanks a lot Pratik.

If X doesn't declare this as an income for this financial year (and say his colleages do declare), will he have to pay penalty (in case of a scrutiny) for not paying the taxes as well on non disclosure of income. He will be declaring the shares of company B as foreign assets though.

thanks

Priya

CA PRATIK DHRUVE

CHARTERED ACCOUNTANT

477 Points Posted on 09 March 2016

This will not result into a non-disclosure. But, will be a mere misinterpretation of law. So, no question of penalty would arise.

X might be have to pay normal interest for the period from date of acquisition of company A by company B till the date of actual sale.

However, looking practically, no such issues would arise.except X comes under assessment being a large tax payer. In any case, it would not be any bigger issue if tax is paid only at the time of actual sale of shares.