Tax Implications on SPAC: To SPAC or Not To SPAC?

[By Devarsh Shah and Dharmvir Brahmbhatt]

The authors are students at the Gujarat National Law University.



SPAC Listings have witnessed a massive global revival in recent times. With around 250 listings, SPACs raised nearly $ 80 billion in the United States in 2020 and has been growing since. Not just in the United States, but in India too, SPAC listings have resurged. Recently an Indian company, ReNew Power sought listing on NASDAQ through SPAC. Many others like Flipkart and Grofers are considering SPAC Listing in the near future. The sudden strong re-emergence of SPACs in India has ignited several deliberations in the legal fraternity. The biggest example of the same is the recent consultation paper issued by the International Financial Services Centre Authority (IFSCA) of India (regulator of the GIFT City International Financial Services Centre) which provides for SPAC listings in the IFSC.

In essence, SPAC refers to a Special Purpose Acquisition Company which is a ‘blank cheque entity’ floated to raise capital through Initial Public Offer (IPO). It is essentially a shell corporation established with the sole purpose of acquiring an undisclosed operating company. After the IPO, a target is identified and with the approval of shareholders of the SPAC, it is acquired by way of a reverse merger, which is also called a de-SPAC transaction. A SPAC is preferred over a direct listing because it is a faster way of going public. Yet another significant reason for Indian companies is an easy access to foreign capital markets.

While, at first, SPAC listings may seem to be very fascinating, the regulatory framework in India is not very conducive for the same. Restrictions contained under various FEMA regulations and RBI guidelines pose a severe threat to the viability of SPAC listings for Indian companies. To add to that, an SPAC listing entails a severe tax burden upon the Indian company and its shareholders. The present article makes an attempt to analyse tax considerations involved in an SPAC Listing.  The ensuing section deals with various tax implications for effecting a SPAC Listing of an Indian Company which is followed by a discussion regarding tax liability once a de-SPAC transaction is concluded. The concluding part of the article examines the economic viability of SPAC listings in light of the available alternatives for Indian companies.

Tax Considerations in a SPAC Listing

Capital Gains under Income Tax Act

As noted earlier, a de-SPAC transaction in almost all cases is concluded by way of a reverse merger of the Indian Target with the SPAC entity. Since an Indian target company merges into the foreign SPAC entity, the merger is in the nature of a Cross-Border Outbound merger. While, in normal cases, mergers and amalgamations are tax neutral under the Income Tax Act, 1961, this is not the case for Outbound Mergers. Section 47 of the Act enumerates those transactions which are not regarded as a ‘transfer’ for the purpose of the levy of capital gains.

Clause vi of Section 47 of the Act exempts any transfer of a capital asset by the amalgamating company to the amalgamated company provided that it is an Indian company. However, in a de-SPAC transaction, the amalgamated company in all cases would be a foreign entity and hence Section 47 will not come to the rescue of the Indian target. Furthermore, transfer of a capital asset below the stamp duty value shall attract the rigors of Section 50C of the Act. Hence capital assets ought to be transferred at a fair value, which, in almost all cases, would be higher than the cost of acquisition thereby attracting a Capital Gains tax.

Even the shareholders of the Indian target are not spared. Section 47 clause vii exempts the transfer of shares in a scheme of amalgamation if the amalgamated company is an Indian company. Further, the minimum acquisition value of shares by the SPAC entity should be the fair market value of the shares of the Indian Target. If the acquisition value is less than the fair market value, then the anti-abuse provision under Section 50CA gets triggered. Fair Market Value is expected to be much higher than the cost of acquisition and hence there is a significant tax liability upon the shareholders of the Indian Target.

Stamp Duty

The Levy of stamp duty on mergers is perhaps another significant hurdle for a SPAC listing. As held by the Supreme Court in Hindustan Lever Ltd v. State of Maharashtra, it is the scheme effecting the merger (order of the court/tribunal) which is an instrument under the Stamp Act. It is not necessary that there is a real transfer of property. Furthermore, valuation for the purpose of stamp duty has to be determined on the basis of shares/other consideration to the transferor company (Li Taka Pharmaceuticals Ltd v. State of Maharashtra). Since a merger cannot be concluded without court approval, stamp duty is inevitably attracted. Therefore, even though, there is no real transfer of assets in a de-SPAC transaction, it is leviable to stamp duty.

Tax Implications post de-SPAC transaction.

Permanent Establishment and its Taxability

Once the merger has been effected, the Indian target loses its legal identity and becomes a branch/permanent establishment of the SPAC which is essentially a foreign entity. The creation of a permanent establishment is one of the most critical facets of international taxation. As a general rule, the profits of a foreign company are taxable in India only if such a company has a permanent establishment in India. Further, the income attributable to only such permanent establishment is taxed. The definition of a permanent establishment can be made out by a co-joint reading of Section 92F(iiia) and 92F(iii) of the Income Tax Act which defines the term as a fixed place of business through which the business of the enterprise is wholly or partly carried on.

As noted earlier, once the de-SPAC transaction is concluded, Indian Target loses its legal existence in India and hence becomes a permanent establishment of the foreign SPAC entity. It is pertinent to note that such a foreign entity (SPAC entity) has no real operations and all incomes accrue only from the Indian permanent establishment. This is where the real problem lies. Permanent Establishment is subject to a 40% tax rate as against the normal rate of 30% (or lower, depending upon the company). Considering that the Indian Target company which after being acquired by SPAC will have to pay 40% tax on its net income as compared to a 30% tax (or lower), the obvious question that arises is whether the additional tax being paid by the Indian Target company for listing on a foreign stock exchange is an equitable trade-off since a more economical way to list on the foreign exchange may be available?

Taxability of other incomes of SPAC entity

Aside from the taxability of the Indian branch as a PE of SPAC in India, it will be important to check and make sure that SPAC’s “place of effective management” (“POEM”) is not in India. While, in most of the cases, the resultant foreign entity will not have any other business except for its establishment in India, but in case it has some other income, POEM assumes significance. SPAC’s POEM could be found in India if its managerial staff is based in India, or if key management decisions affecting SPAC are made by SPAC’s directors or officers when they are based in India during a financial year. If SPAC’s POEM is found to be in India, it will be considered a tax resident in India and will be subject to Indian taxes on its worldwide earnings.


From the discussion above one can irrefutably conclude that there is a need for careful consideration by the target company as to whether SPAC Listing is necessary as a significant additional burden is imposed upon the entity on account of taxation. However, one can also not deny the fact that a foreign listing opens up a host of opportunities for the company to grow. The popularity of SPAC can be primarily attributed to its fast and easy access to foreign capital markets and more importantly to the cheap capital that these markets offer

That being said the authors are of the opinion that there is a more economical way to list on a foreign stock exchange than the SPAC route. The recent 2020 amendment to the Companies Act, 2013 permitting direct cross-border listing (yet to be notified) of Indian Companies has been applauded by many. This route gives companies an opportunity to list on foreign exchanges without bearing the additional burden of taxes. The only impediment in following this route to list on foreign exchanges is that it is time-consuming and involves exhaustive compliances. As against this, in a SPAC listing, the Indian target does not undertake any significant compliance while keeping its entire focus on its primary operations. While SPAC remains to be an easier route to access global markets, it has its own set of disadvantages in form of higher tax considerations. On the other hand, a direct cross-border listing involves exhaustive compliance in the pre-listing phase but it does not suffer from the vice of excessive taxation.

Ultimately it is for the company wishing to list on the foreign stock exchange to decide which route has to be taken and it goes without saying that a lot has to be weighed in before coming to such a decision.

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