When a foreign holding company merges with its subsidiary that directly owns shares in an Indian company, two tax lenses apply in India: (1) direct transfer of the Indian company’s shares—often exempt if section 47(via) conditions are met; and (2) indirect transfer under section 9(1)(i) Explanation 5—potentially taxing gains in India if the foreign company’s value is substantially derived from Indian assets (≥ INR 100 million and ≥ 50% of global asset value). Attribution, valuation, documentation and reporting requirements follow Rules 11UB/11UC and Section 285A/Rule 114DB. Treaty relief (e.g., India–Italy) may still protect the gain, though Form 49D, Form 3CT and record-keeping obligations can apply regardless.
Consider ABC Pvt Ltd, an Indian company. A foreign subsidiary (“Foreign Co”) holds 65% in ABC Pvt Ltd, and an Ultimate Foreign Co holds 100% in Foreign Co. The proposal: merge Foreign Co into Ultimate Foreign Co, post which Ultimate Foreign Co directly holds 65% of ABC Pvt Ltd. (Figures are currently book values pending prescribed valuation).
This merger raises two possible Indian tax events:
Section 47(via) exempts gains on the transfer of shares of an Indian company in a foreign amalgamation if both conditions are satisfied:
Subsidiary–into–parent nuance. In a downstream‑to‑upstream merger, condition (1) may be inapplicable/impracticable since a parent cannot “continue” to hold shares in itself—supporting a view that if the overseas merger is tax neutral locally (e.g., in Italy), the direct transfer may remain exempt in India.
Under section 9(1)(i) Explanation 5, a share or interest in a foreign company is deemed situated in India if it derives, directly or indirectly, its value substantially from assets in India. This can tax gains from transferring shares of a foreign company that holds Indian assets.
Thresholds (Explanations 6 & 7). The “substantial value” test is met if, on the specified date:
Application to the merger. In an amalgamation, shares of the amalgamating foreign company are extinguished—this is a transfer. If the thresholds are met, indirect transfer provisions may be triggered.
Rule 11UB (FMV determination).
Rule 11UC (Attribution to India).
Only the proportionate gain linked to Indian assets is taxable in India:
Taxable Gain = Total Gain × (FMV of Indian Assets / FMV of All Assets).
If the transferor doesn’t provide information, the AO may estimate.
Section 47(viab) can exempt transfers in a foreign amalgamation even when the foreign company derives substantial value from Indian assets—but the CBDT has clarified that this relief does not extend to the shareholders of the amalgamating foreign company (i.e., the parent shareholder whose shares are extinguished). Thus, if the 50%/INR 100 million tests are met, proportionate gains in the hands of the shareholder can still be taxable in India under the indirect transfer rules.
Even where domestic law points to taxability, treaty protection can prevail. For the India–Italy context, the position in your note is that indirect transfer gains are exempt under the treaty, subject to standard documentation such as TRC and Form 10F to support eligibility.
Practical point: Maintain early coordination with local counsel to confirm the overseas tax treatment and compile treaty documents in time with the transaction steps.
Indian concern’s obligations (ABC Pvt Ltd)
Transferor’s obligations (Ultimate Foreign Co.)
Penalties for non-compliance (section 271GA).
These obligations may apply even if the gain isn’t taxable in India due to treaty relief (the reporting regime can still bite if thresholds are met).
If Foreign Co transfers ABC Pvt Ltd shares other than by merger/amalgamation, the direct transfer exemption won’t apply—Indian capital gains tax can arise regardless of deal size since the asset transferred is shares of an Indian company.