Meaning
A tax liability risk emerges when the transfer of shares in a foreign entity derives its value substantially from assets located in India. The India Section 9 exposure triggers tax obligations for non-resident sellers under the Indian Income Tax Act if the underlying local assets exceed specific statutory thresholds. This rule applies even if the transaction occurs entirely outside Indian territory.
Asset Valuation
Foreign shares are deemed to derive value from local assets if those assets represent more than fifty percent of the total corporate value. The valuation must be calculated according to prescribed tax methods on specified dates prior to the transaction. This calculation determines whether the gains are subject to withholding tax by the buyer.
Indemnity Protection
Buyers of foreign holding companies typically demand broad tax indemnities from the seller to cover potential Indian tax assessments. The purchase agreement often includes a dedicated reserve account or an escrow to secure these indemnity claims. This structure protects the buyer from unexpected tax demands and interest penalties from the Indian government.
These provisions are heavily negotiated because the tax authority can audit and recharacterize such transactions many years after the initial deal closes.
Legal Consequence
Failure to declare the transfer and pay the tax leads to severe consequences for both parties. The buyer can be held liable as an assessee in default for failing to withhold the tax at source. This status exposes the buyer to collection actions against their Indian assets and reputational damage in the local market.
