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Parent-Subsidiary Exemption on Buy-Back of Shares
The Authority for Advance Rulings ("AAR") has pronounced an important ruling on the applicability of exemption under section 47(iv) of the Income-tax Act, 1961 on buy-back of shares held by a parent company in its wholly owned subsidiary. The AAR has ruled that the exemption provisions are not applicable in such cases and the gains arising from transfer of shares are chargeable to tax in India under section 46A of the IT Act ("provisions relating to buy-back"). Taxand India examines the issue of capital gains on buy back of shares and who can benefit from the parent-subsidiary exemption.
Facts of the case
The applicant, RST is a company incorporated in Germany. RST has a subsidiary in India which is incorporated as a public limited company under the Companies Act, 1956. RST held 99.99986 percent shares in the subsidiary and the balance shares were held by 6 other companies in their capacity as nominees of RST such that the provisions of the Co Act with respect to minimum number of shareholders were satisfied.
Taxand India discusses the ruling of the AAR in greater detail
The AAR ruling is important and could have far reaching impact on buy-back of shares, which have now become an important tool of corporate re-structuring. The AAR has given a strict literal interpretation to the provisions relating to the exemption. However, in interpreting the provisions of section 49(3) of the Co Act, the AAR has relied on commentaries and held that a parent company cannot hold 100 per cent of the shares of the subsidiary company, whereas a bare reading of the section would suggest that a company was allowed to hold the entire share capital of the subsidiary through its nominees.
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