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A ₹200 crore mid-sized pharma manufacturer in Gujarat receives a term sheet from a European strategic buyer for a majority stake. The commercial case makes sense for both sides.
But before signing, the Indian company needs to ask some important tax questions. How will the buyer’s global structure affect withholding tax on future dividends? Could the transaction create a permanent establishment issue? How will transfer pricing between the Indian company and its new parent be managed and documented from the start?
These questions are far easier and cheaper to address before the deal is signed than after closing. They also arise specifically because the transaction is cross-border and would not arise in a domestic deal.
This checklist covers the key tax risks in inbound and outbound cross-border M&A for Indian enterprises with ₹100–500 crore in turnover. Whether you are acquiring a foreign business or being acquired by a multinational group, the goal is to identify and address tax issues while the deal terms are still open for negotiation.
Why Cross-Border Deals Carry Higher Tax Exposure for Growing Indian Enterprises
Domestic M&A is complex, but the tax questions are generally familiar: capital gains, stamp duty, GST, treatment of accumulated losses and transaction structuring.
Cross-border M&A add a layer of risk because the transaction is now across two tax jurisdictions, foreign exchange regulations and possibly different treaty positions. The exposure can continue well beyond closing.
Depending on whether the transaction is inbound or outbound, a cross-border deal can create exposure across:
- Withholding tax, payments to or from non-residents can trigger withholding obligations, affecting deal economics and cash flows.
- Permanent establishment (PE), the way a foreign entity operates in India can create an Indian tax presence and ongoing tax liability.
- Transfer pricing, once entities come under common ownership, intercompany services, loans, royalties and supply arrangements may require arm’s-length pricing and documentation.
- FEMA and overseas investment rules, outbound acquisitions must comply with India’s foreign exchange and overseas investment framework.
- DTAA provisions, treaty benefits can reduce or eliminate certain tax liabilities, but eligibility and documentation matter.
- Repatriation, dividends, interest, royalties and other returns from an overseas investment can have tax and regulatory implications when funds are brought back to India.
The financial exposure can be substantial. For a ₹100–500 crore enterprise, a cross-border transaction can easily involve deal values of ₹50 crore to several hundred crore.
Even relatively small tax exposures can therefore have a meaningful impact:
5% tax leakage on a ₹200 crore transaction = ₹10 crore.
More importantly, some risks are not limited to the transaction itself. A PE finding can create an ongoing Indian tax liability for a foreign entity. A transfer pricing adjustment can affect multiple years of tax positions, potentially leading to interest, penalties and prolonged scrutiny.
CFOs and M&A Heads often underestimate the risk by:
1. Assuming tax is a transaction-document issue
Legal teams focus on documentation and regulatory approvals, while investment bankers focus on valuation, financing and deal structure. These are critical, but they do not necessarily address the tax consequences that emerge after closing. You must check:
- Was withholding tax correctly assessed and structured?
- Could the operating model create a PE?
- What transfer pricing obligations will arise after closing?
- Are treaty benefits actually available?
- How will cash and profits ultimately move across borders?
2. Assuming the global tax team will cover everything
A multinational’s global tax team manages the group’s overall tax position. The specific Indian exposure may be only one part of that broader picture.
For the Indian CFO or M&A Head, responsibility for the local exposure cannot simply be assumed away.
3. Treating tax as a compliance cost rather than a deal risk
The real cost of getting cross-border tax wrong is not limited to the tax demand.
A post-closing demand of several crore can materially reduce acquisition returns. An unexpected PE exposure can create recurring tax costs. A transfer pricing adjustment can trigger years of scrutiny and litigation.
These risks can change the economics of the deal itself.
Cross-border tax should therefore be treated as a deal-value issue. The question to be asked has to be more specific than, “Have we completed the tax compliance?” to “Have we identified and priced the tax exposure before we sign?”
For CFOs and M&A Heads, bringing tax into the deal process early can help protect transaction value, avoid avoidable leakage and ensure that the post-deal operating model is tax-efficient as well as commercially sound.
Inbound Deals: Withholding Tax and Permanent Establishment Risk
When a foreign investor acquires an Indian enterprise or enters into a joint venture with it, tax risk extends beyond the Indian target.
The transaction can create obligations for payments to non-residents and, depending on how the foreign acquirer operates in India, a separate Indian tax exposure for the foreign parent itself.
Withholding Tax Risk
Payments to non-residents including royalties, fees for technical services and interest can trigger Indian withholding tax obligations. The domestic rate for royalties and fees for technical services is generally 20%, plus applicable surcharge and cess, although an applicable tax treaty may provide a lower rate.
Treaty rates vary by jurisdiction and type of income. For example, treaty rates on dividends may be lower than domestic rates, while interest and royalty rates can also vary significantly across jurisdictions.
CFOs need to establish whether treaty relief is available and whether the conditions for claiming it have been satisfied.
Before making a cross-border payment, the payer should establish the recipient’s tax residency and assess the relevant treaty conditions, including documentation such as a valid Tax Residency Certificate (TRC) and, where relevant, beneficial ownership and substance requirements.
Assuming that the foreign recipient will automatically claim treaty benefits can result in short withholding, interest, penalties and potential disputes.
Permanent Establishment (PE) Risk
The more overlooked risk in an inbound deal is Permanent Establishment (PE).
A foreign acquirer does not automatically create an Indian PE merely by acquiring an Indian company. However, its activities in India can create a taxable presence where they go beyond the limits permitted under the applicable domestic law and tax treaty.
PE risk can arise where the foreign parent:
- Deploys executives or other personnel in India to perform substantive business activities;
- Maintains a fixed place of business in India;
- Uses an Indian location as an extension of its own operations;
- Conducts activities in India that go beyond preparatory or auxiliary functions; or
- Operates through an agent who habitually exercises authority to conclude contracts.
Let’s take this post-acquisition scenario to highlight the risk. A MNC acquires an Indian pharmaceutical manufacturer and immediately sends its regulatory, quality or integration teams to India.
If those individuals are effectively performing the foreign parent’s business activities from India, the arrangement needs to be examined carefully. Structuring these activities through the Indian subsidiary, with clearly defined roles and appropriate intercompany arrangements, can help manage PE risk.
Importantly, PE exposure can arise before or immediately after closing, especially where foreign personnel are already involved in integration, negotiations or operational decision-making.
If a PE is established, profits attributable to that Indian presence may become taxable in India, creating additional tax, interest and potential penalty exposure for the foreign parent, separate from the Indian subsidiary’s own tax liability.
However, one area has become simpler. The angel tax provision under Section 56(2)(viib) was abolished from FY 2024–25, removing the earlier valuation-related tax exposure on share premium received by Indian companies from investors, including foreign investors.
This makes primary capital infusion structures easier to execute, particularly where a foreign acquirer is investing growth capital alongside or instead of a secondary acquisition.
The critical questions should be answered before closing: What needs to be withheld? Is treaty relief available? Does the foreign parent’s operating model create a PE? And how should post-closing personnel and activities be structured to prevent unintended tax exposure?
Outbound Deals: Overseas Investment Rules and Repatriation Tax
When an Indian enterprise acquires a foreign target, the transaction moves beyond India’s domestic M&A framework.
The deal must comply with FEMA’s Overseas Investment framework, while the tax implications of bringing returns back to India need to be considered from the start.
Overseas Investment Rules
Under the Foreign Exchange Management (Overseas Investment) Rules, Regulations and Directions, 2022, an Indian company can remit up to four times its net worth for overseas direct investment, provided the activity qualifies as a bona fide business. RBI approval is typically required once annual ODI crosses $1 billion.
CFOs and M&A Heads often underestimate:
Regulatory timelines. Valuation, transaction, financial and supporting documents should be prepared early. Where RBI approval is required, additional review can materially affect the transaction timetable.
Ongoing compliance. ODI reporting and other FEMA obligations continue throughout the investment period. Non-compliance can create complications when the investment is later sold, refinanced or repatriated.
Confirm the FEMA route and documentation requirements before committing to the transaction timeline.
Tax on Repatriation
Dividends, interest and gains from overseas investments may have different tax implications in India. Dividends received by an Indian company from a foreign subsidiary are generally taxable in India, with foreign tax credit potentially available for taxes paid overseas, subject to applicable conditions.
The foreign country may also levy withholding tax on dividends. The tax treaty and India’s FTC rules determine the overall tax cost and cash received by the Indian parent.
These tax implications should be modelled at the acquisition stage, not when the first dividend is received.
Take for instance an Indian specialty chemicals company acquiring a distribution and blending business in Southeast Asia within FEMA limits and closing without regulatory issues. Two years later, the subsidiary generates significant profits.
If the acquisition model did not account for local dividend withholding tax, treaty relief or India’s FTC rules, the post-tax cash yield could be materially lower than projected.
For outbound deals, two questions should be answered before signing:
Can we make the investment under the FEMA framework, and can we bring the economic returns back to India efficiently?
A deal that is commercially attractive at acquisition can produce a very different return once regulatory constraints, foreign withholding tax and Indian taxation of repatriated income are factored into the model.
Transfer Pricing Exposure in the Combined Post-Deal Group Structure
For both inbound and outbound deals, one of the most significant tax risks begins after the transaction closes.
Acquisition itself is not the issue, it’s the related-party transactions the new group structure creates.
Once the Indian entity and its foreign parent, subsidiary or affiliates come under common ownership, transactions such as the following may become subject to India’s transfer pricing rules:
- Intercompany sale of goods or services
- Royalty or licence payments for intellectual property
- Management and shared-service charges
- Interest on intercompany loans or acquisition financing
- Cost-sharing and other group allocations
These transactions must generally be priced on an arm’s-length basis, supported by appropriate analysis and documentation.
Here’s what needs a closer look because it’s prone to errors:
1. Transfer pricing starts on Day One
The intercompany arrangements created by the acquisition should be designed and priced before they start operating. A management fee agreed informally at closing, or a supply arrangement priced for administrative convenience, can become difficult to defend if the arm’s-length analysis is carried out only months later.
For international transactions, Form 3CEB and contemporaneous transfer pricing documentation also need to reflect the new related-party flows.
The current documentation framework requires prescribed records to be maintained by the applicable tax return/reporting deadlines, with penalties for non-compliance.
2. The acquisition can change the existing transfer pricing position
An acquisition can change the group’s functions, assets and risks (FAR) and therefore the appropriate pricing for intercompany transactions.
Even where the Indian company’s underlying operations remain unchanged, its transfer pricing position may need to be reassessed because its counterparties have changed.
For example, an Indian manufacturer that previously sold products to an independent overseas customer may, after acquisition, sell the same products to a group company. The commercial transaction may look similar, but the transfer pricing analysis, documentation and benchmarking requirements are different.
3. The risk extends beyond individual transactions
Transfer pricing should also be considered alongside GAAR (General Anti-Avoidance Rules).
GAAR gives tax authorities the ability, subject to its statutory conditions, to challenge arrangements or steps primarily undertaken to obtain a tax benefit where the arrangement lacks the required commercial substance.
This makes the broader deal structure important. A transaction may satisfy the rules applicable to each individual step and still attract scrutiny if the overall arrangement appears to have been structured primarily for a tax outcome without a corresponding commercial rationale.
Transfer pricing should therefore form part of deal structuring and integration planning, not be left to the tax team after closing.
Before the first intercompany transaction takes place, the group should establish:
- Which new related-party transactions the deal will create;
- Who performs the relevant functions and assumes the risks;
- How each transaction should be priced;
- What benchmarking and documentation will be required; and
- Whether the overall structure has a clear commercial rationale.
Getting the transfer pricing framework right from Day One can prevent recurring disputes, unexpected tax adjustments and costly remediation later.
Deal Structuring: Share Purchase, Asset Purchase, or Slump Sale
The structure of the deal, share purchase, asset purchase, or slump sale, has significant tax implications for both the buyer and the seller.
The choice should therefore be made with tax, commercial and liability considerations in view, rather than after the deal structure has already been decided.
Share Purchase
In a share purchase, the buyer acquires the target company’s shares. The company continues to own its assets, contracts and licences, while its existing liabilities and tax history remain with the entity.
For the seller, the primary tax consequence is capital gains tax on the sale of shares, subject to the applicable holding period and tax rules.
For the buyer, there is generally no immediate tax on acquiring the shares. However, the buyer effectively inherits the target’s historical tax position, including potential assessments, litigation, transfer pricing exposures, accumulated losses and other contingent liabilities.
Best suited where: continuity of the legal entity, contracts, licences and operations is commercially important.
Asset Purchase
An asset purchase allows the buyer to acquire selected assets rather than the entire company. This can help ring-fence unwanted liabilities but may require individual valuation, transfer and documentation for the assets being acquired.
The tax treatment can differ depending on the nature of the assets and how the transaction is structured. GST and stamp duty implications also need to be evaluated.
Best suited where: the buyer wants specific assets or operations without taking on the seller’s entire corporate history.
Slump Sale
A slump sale involves transferring an entire business undertaking as a going concern for a lump-sum consideration, without assigning individual values to each asset and liability.
The tax treatment is governed by the applicable slump-sale provisions, including Section 50B of the Income-tax Act. The seller’s capital gain is determined broadly by reference to the undertaking’s net worth and prescribed valuation rules.
For the buyer, the transaction can provide a different tax basis for the acquired business compared with a share purchase. The valuation and computation therefore need to be established and documented carefully before signing.
The common mistake is choosing the structure based only on commercial simplicity without considering the tax implications.
A share purchase may be simpler commercially, but it comes with the target company’s tax history including its litigation exposure, its transfer pricing positions, and its accumulated losses. An asset purchase or slump sale may be more complex commercially, but it allows the buyer to start with a clean tax slate.
Another common error is failing to consider the stamp duty implications. Stamp duty on the transfer of shares is levied at varying rates across states.
The right structure is the one that delivers the best after-tax outcome while managing inherited liabilities, regulatory requirements and future tax exposure.
Treaty Benefits and DTAA Considerations
Double Taxation Avoidance Agreements (DTAAs) can significantly reduce the tax exposure in cross-border M&A deals, but only if the conditions for treaty benefits are met.
Key treaty provisions commonly relevant to cross-border transactions include:
- Capital gains: Treaty outcomes depend on the jurisdiction, the type of asset and the applicable treaty provisions. India’s treaty framework has also evolved significantly, particularly for share transfers through jurisdictions such as Mauritius and Singapore.
- Dividends: Treaty withholding rates can be lower than domestic rates and vary by jurisdiction.
- Interest: Treaty rates commonly range between 10% and 20%, depending on the country and applicable treaty.
- Royalties and fees for technical services: Treaty rates are often lower than domestic withholding rates, subject to the relevant conditions.
For example, investments made before 1 April 2017 in Indian shares through Mauritius can retain grandfathered capital-gains protection under the India–Mauritius treaty, subject to the applicable conditions. This should not, however, be treated as blanket protection for every subsequent transaction involving the structure.
Here’s that CFOs and M&A Heads often get wrong:
1. Assuming that a favourable treaty automatically means a favourable tax outcome.
A foreign entity generally needs to establish its tax residency, supported by documentation such as a valid Tax Residency Certificate (TRC), and satisfy the relevant treaty conditions. Beneficial ownership, substance and the commercial rationale for the structure may also become important.
2. Treating treaty eligibility as a purely technical exercise:
Modern treaties increasingly incorporate anti-abuse provisions, including the Principal Purpose Test (PPT). These provisions allow treaty benefits to be denied where obtaining the treaty benefit was one of the principal purposes of an arrangement and granting the benefit would be inconsistent with the treaty’s object and purpose. GAAR may also need to be considered where an arrangement is structured primarily to obtain a tax benefit.
This is particularly relevant where an intermediate holding jurisdiction such as Mauritius, Singapore, the Netherlands or the UAE is part of the structure.
For CFO and decision makes, the right questions are:
Why is the structure located in that jurisdiction? Does it have genuine commercial substance? Can the treaty position be documented? And would the structure still make commercial sense if the tax benefit were removed?
For today’s cross-border deals, treaty benefits should be validated and documented as part of deal structuring, not assumed from historical precedents.
A Pre-Deal Tax Diligence Checklist for CFOs of ₹100 Cr+ Businesses Scaling Through M&A
Before signing a cross-border M&A deal, review these seven areas:
| Diligence area | What to confirm |
| Withholding tax on consideration | Correct rate and documentation for every seller, resident and non-resident, before any payment is released |
| Permanent establishment exposure | Whether the buyer’s post-close activity in India, secondments, direct contract negotiation, creates a PE separate from the target’s own position |
| FEMA route for outbound deals | Whether the investment fits the 400% net worth automatic route, or needs prior RBI approval on a longer timeline |
| Repatriation and foreign tax credit | Whether the foreign jurisdiction’s withholding tax and India’s credit mechanics actually avoid double taxation on future dividends |
| Post-deal transfer pricing | Whether every new intercompany arrangement the deal creates has been priced and will be documented from year one, not retrofitted later |
| Deal structure selection | Whether a share purchase, asset purchase, or slump sale genuinely produces the intended tax outcome for both sides, not just the intended commercial outcome |
| Treaty structure substance | Whether a holding jurisdiction used in the structure would hold up under a principal purpose test, not just a treaty eligibility check on paper |
Now, the important question:
“We already have M&A lawyers and investment bankers. Do we really need a separate cross-border tax advisor?”
Yes, you do. Lawyers focus on transaction documents, regulatory approvals and closing. Investment bankers focus on valuation, deal structure and financing. Neither is a cross-border tax specialist.
Cross-border M&A tax requires specialised knowledge of the Income Tax Act, tax treaties, transfer pricing, FEMA, and evolving judicial interpretations. These issues can create significant tax exposure if missed early.
A dedicated tax advisor like PKC brings specialised expertise, deal experience and a sharp focus on identifying tax risks that may be invisible to non-specialists.
At PKC, we provide end-to-end cross-border M&A tax advisory, beginning with pre-deal tax due diligence and a review of the target’s tax position, the deal structure, and the cross-border tax risks.
The due diligence identifies material tax exposures and provides a roadmap for addressing them before signing. The ongoing engagement includes deal structuring, treaty analysis, post-deal integration support, and transfer pricing compliance.
If your business is evaluating a cross-border acquisition, an inbound investment, or a joint venture with a multinational group, Schedule an call with PKC to review the tax exposure in your specific deal structure before terms are finalised.
FAQs
Q1: What tax risks are unique to cross-border M&A deals for growing Indian enterprises?
Cross-border M&A deals carry tax risks that domestic deals do not: withholding tax on payments to non-residents, permanent establishment risk (which can create tax liability for the foreign entity in India), transfer pricing obligations in the combined post-deal group structure, overseas investment compliance under FEMA, and DTAA benefits that may be denied if conditions are not met.
Q2: What is permanent establishment risk in an inbound acquisition?
A permanent establishment (PE) is a fixed place of business in India through which a foreign enterprise conducts substantial business activity. If a PE exists, income attributable to the PE is taxable in India at 40% (for foreign companies) of attributable profits. In an inbound acquisition, PE risk arises when the foreign acquirer sends personnel to India, establishes a project office, or has a dependent agent in India. The risk is often overlooked until after the deal closes.
Q3: How does deal structure (share purchase vs slump sale) affect tax outcomes for a ₹100 Cr+ buyer?
In a share purchase, the buyer acquires the shares of the target company and steps into its tax history including its litigation exposure, transfer pricing positions, and accumulated losses. In a slump sale under Section 50B, the buyer acquires an entire business undertaking and starts with a fresh tax depreciation schedule. GST is not levied on a slump sale. The choice of structure affects the buyer’s tax liability, the seller’s tax liability, and the post-deal tax position of the combined group.
Q4: What role does transfer pricing play after a cross-border acquisition closes?
After an acquisition, the combined group will have related-party transactions, intercompany sales, royalties, management fees, interest, cost-sharing arrangements. Each of these transactions must be conducted at arm’s length. Transfer pricing documentation must be contemporaneous (prepared by 31 October following the end of the financial year).
Q5: How can DTAA benefits reduce tax exposure for a ₹100 Cr+ business scaling through M&A?
DTAAs can reduce withholding tax rates on dividends (5-15%), interest (10-20%), and royalties (10-15%). However, treaty benefits must be claimed and the conditions must be met. The foreign entity must have a valid Tax Residency Certificate. The arrangement must have “commercial substance.” The Supreme Court’s Tiger Global ruling (2026) narrowed the protective scope of the India-Mauritius DTAA, holding that treaty benefits cannot survive where an arrangement lacks commercial substance.
Q6: How does PKC support cross-border M&A tax due diligence for growing Indian groups?
PKC provides end-to-end cross-border M&A tax advisory for Indian enterprises. The engagement typically begins with a pre-deal tax due diligence that involves a review of the target’s tax position, the deal structure, and the cross-border tax risks. The due diligence identifies material tax exposures and provides a roadmap for addressing them before signing. The ongoing engagement includes deal structuring, treaty analysis, post-deal integration support, and transfer pricing compliance.
