Taxation of demergers

For tax reasons, demerger entails a National Company Law Tribunal (or "NCLT") process, as is usually recognised. It is accomplished by a compromise or arrangement plan in accordance with Sections 230 to 232 of the 2013 Companies Act. The procedure comprises a contract wherein the demerged business (or transferor company) transfers its designated undertaking to another company known as the resultant company on a going-concern basis (or transferee company).

Shares are issued by the emerging company to the shareholders of the demerged firm as payment for such a transfer of business enterprise.

The term "resulting company" refers to one or more businesses, including a fully owned subsidiary, to which the undertaking of the demerged business is transferred during a demerger. Any authority, body, local authority, public sector firm, or organisation founded, constituted, or formed as a result of a demerger is also referred to as a "resulting corporation."

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Income-tax repercussions of the demerger

Dealing with a demerger transaction may need consideration of a variety of income tax difficulties/questions. The Act offers various tax breaks to corporations taking part in the demerger plan as well as to their shareholders.

Demerger

The Act offers various tax breaks to shareholders and participating corporations in demergers. For these purposes, the Act defines demerger as a transfer that satisfies the requirements listed below:-

    (a) Companies are the parties to a demerger, and the transfer is carried out in accordance with a plan of the organisation under Sections 230 to 232 of the Companies Act, 2013;

    (b) One or more undertakings (demerged undertakings) are transferred from the transferor firm (demerged company) to the amalgamated company (resulting company) during a demerger;

    (c) By virtue of the demerger, all of the assets of the demerged undertaking that were there immediately prior to the demerger are now assets of the new business;

    (d) Due to the demerger, the liabilities of the new firm include all obligations of the demerged entity that existed immediately before the demerger.

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In line with Ind AS, the assets and liabilities of the undertaking are transferred at the values recorded in its books of account as on the demerger. In exchange for the demerger, the resultant company issues its shares in a proportionate manner to the demerged company's shareholders, unless the succeeding firm is also a stakeholder of the demerged business.

By virtue of the demerger—rather than as a result of the resulting successful acquisition of the demerged company's property or assets or any undertaking thereof—the shareholders holding at least three-fourths of the value of the shares in the demerged company become shareholders of the resulting company or companies. Read a wonderful excerpt about 80c.

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