Posted by : CS K. K. Agrawal Oct 31, 2011

The government may impose tax on companies giving guarantees for overseas acquisitions. The Income-Tax Department reasons that corporate guarantees are given at a cost. 

Typically, a charge or fee is payable if a company gives a guarantee to unrelated parties. 




However, when such guarantees are given to an associated enterprise or a related party for the purpose of an acquisition, the parties involved make adjustmentsAs a result of this adjustment, the charges payable on such guarantees, "become invisible," the authorities say leading to a loss of revenue for the government. "We have brought such (corporate) guarantees under the transfer pricing net of the Income-Tax Act,"

"We have identified a number of intangible transactions and corporate guarantees given to associated enterprises for acquiring companies abroad is one of them. 

How corporate guarantee works. 


A company floats an overseas special purpose vehicle (SPV) which raises money for completing the acquisition. Since the SPV does not have any asset or revenue stream it relies on a guarantee by the parent. 

The tax department has now started to view the guarantees as a service provided by the parent to the international subsidiary which is making the acquisition. The charges payable for such guarantees are calculated and added to the income of the party concerned. 

SAFE HARBOUR RULES : The department has levied a guarantee charge of 2.4% of the total loan amount taken for the acquisition, benchmarked on the commission typically charged by banks for providing guarantees. 

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