29 Jan 2024
This update outlines some key developments in M&A tax jurisprudence during 2023, which include the expanded scope of angel tax provisions, practicalities of share valuation, the decision on most favoured nation clauses in tax treaties, grandfathering benefit under tax treaty availability for convertible instruments, and denial of forex neutrality provisions, amongst others. These developments will have a significant impact on the M&A landscape as we progress into 2024.
The year 2023 witnessed a global slowdown in M&A activity, amidst rising geopolitical tensions, soaring interest rates, and a dampening of the global investment climate. At USD 71 billion, deal value in India may have dropped to a third of 2022 figures. With valuations getting more realistic, the focus shifted to smaller, strategic acquisitions for integrating specific and targeted capabilities. However, not all is bleak – with global institutions projecting India to grow by 6.50% in 2024, India anticipates sustained M&A growth in the near future.
Against this backdrop, we reflect on key developments in M&A tax jurisprudence during 2023 – the expanded scope of angel tax provisions, a rising trend of reverse flipping, and a myriad of noteworthy tax rulings.
Angel tax provisions in India seek to tax share subscription amounts received by private limited companies in excess of their fair market value. Until financial year 2022-23, shares issued to overseas investors were outside the scope of these provisions. With amendments in early 2023, the scope of the angel tax regime was expanded to include overseas investments (albeit with limited relief for funds raised by certified start-ups from certain categories of investors from select jurisdictions). Further, additional valuation methodologies were prescribed for shares issued to non residents in line with recognised global methodologies (which include the comparable company multiple method, option pricing method, and probability weighted expected return method, amongst others). The valuation methodologies for equity shares were extended to also apply to compulsorily convertible preference shares. In a welcome move, a safe harbour margin of 10% was introduced. However, many issues persist with respect to applicability to and valuation of convertible instruments, including situations where there are different valuation requirements for regulatory and tax purposes or if there is a down round in the same financial year. (To read our detailed analysis of the new valuation rules under the angel tax regime, click here .)
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