Will a cross-border share swap trigger tax in India?

I am a non-resident Indian (NRI) and hold shares in a US-based company whose parent is in India. I’ve been informed that, as part of a restructuring, the Indian parent is offering existing shareholders of its US subsidiary the option to either exit or exchange their US shares for shares in the Indian company. If I opt for the share swap, will this trigger any tax liability in India? Will I be required to file a tax return in India for this transaction?

-Name withheld on request

As a non-resident under Indian tax law, capital gains from the sale of foreign company shares are generally not taxable in India, unless those shares derive substantial value from assets located in India. This is typically the case if:

•  Indian assets exceed ₹10 crore in value, and
• These assets constitute at least 50% of the total asset base of the US company.

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If both thresholds are met, the US company’s shares are deemed to be situated in India, and any gains from their transfer may be taxable in India. However, most foreign subsidiaries don’t hold substantial Indian assets, so this provision usually doesn’t apply. You should review the asset structure of the US company to confirm.

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If you opt for the share swap and receive shares of the Indian parent in exchange, this typically does not trigger tax in India, unless the swap is structured in a way that gives you Indian shares at a discount to their fair market value (FMV). Under Indian tax rules, if the FMV of the Indian shares exceeds what you effectively pay (through your US shares) by more than ₹50,000, the entire difference could be taxable as income.

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From a regulatory standpoint, cross-border share swaps like this are now permitted under India’s foreign exchange laws (post-August 2024 reforms). As a non-resident, you won’t have to comply with these regulations. The onus is on the Indian company to follow the required procedures and obtain valuations from authorized valuers to determine the swap ratio.

Harshal Bhuta, Partner, P. R. Bhuta & Co. CAs