Background:

A leading software company in India engaged advisory services for a high-stakes acquisition by a unicorn company operating in the same field. The unicorn, headquartered outside India, was planning to acquire the software company to bolster its technological capabilities and market presence. Initially, the transaction terms posed a substantial tax liability for the Indian software company, threatening its financial outcomes.

Problem Identification:

After finalizing the transaction terms, the client faced an excessive tax burden, estimated to increase direct and indirect tax liabilities significantly. The tax exposure threatened to undermine the economic viability of the deal and necessitated immediate strategic intervention.

Scope Expansion:

The client extended the advisory engagement to include Transaction Advisory Services (TAS), aiming to:

1. Minimize the tax burden.
2. Structure the deal in compliance with Indian and international tax regulations.
3. Explore organizational restructuring to achieve tax efficiency.

Solution Design:

A comprehensive review of the transaction revealed potential restructuring opportunities:

1. Organizational Split: The client was restructured into two distinct undertakings:
   • Core Business Unit: Retained strategic operations.
   • Saleable Unit: Isolated assets and operations intended for acquisition.
2. Domestic Slump Sale: Instead of direct acquisition by the foreign headquarters, the saleable unit was offloaded to the Indian arm of the unicorn via a slump sale mechanism. A slump sale allowed:
   • Consolidated transfer of assets and liabilities as a going concern.
   • Eligibility for preferential tax treatment under Indian regulations.
3. Optimized Deal Structuring:
   • Addressed direct tax implications using capital gains computation strategies.
   • Managed indirect tax obligations through GST implications under the slump sale framework.

Results Achieved:

1. Direct Tax Savings: Approximately 20% reduction in tax liabilities due to the slump sale method’s favorable tax treatment.
2. Indirect Tax Savings: An additional 18% reduction achieved by mitigating GST exposure on the transfer.
3. Compliant and Efficient Transaction: The restructured model aligned with cross-border tax regulations, preserving transparency and legal compliance.

Strategic Takeaways:

• Tax-Efficient Structuring: Restructuring of transactions can significantly reduce tax exposure while maintaining the deal’s integrity.
• Slump Sale Mechanism: A strategic tool for seamless asset transfer under favorable tax terms.
• Proactive TAS Engagement: Incorporating tax considerations early in transaction planning can optimize financial outcomes.

This case exemplifies the pivotal role of advisory services in not just facilitating acquisitions but ensuring they are strategically and fiscally advantageous.