A European technology group identified a high-growth acquisition target in India. The deal was time-sensitive. The group's existing holding structure had been designed for Western markets. It created an immediate risk of double taxation, inefficient repatriation of profits, and unnecessary exposure under India's corporate income tax rules. Without restructuring, the opportunity would cost substantially more than projected – and potentially become unviable.
This case study describes how Ferraz &. Whitmore advised on an inbound investment structure in India, combining tax treaty optimisation. Corporate law compliance under Indian legislation. Additionally, regulatory clearance from the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). The engagement ran over approximately five months and resolved three distinct structural problems before completion.
The following sections cover the client's profile and challenge, the legal strategy adopted, the key milestones and complications, and three transferable lessons for international investors considering similar cross-border transactions into India.
Client profile and the structural challenge
The client was a mid-sized technology group headquartered in a European civil law jurisdiction. It held investments across Asia through a single intermediate holding company registered in a jurisdiction with limited tax treaty coverage relative to India.
The target was an Indian private limited company operating in the software services sector. The acquisition was structured as a primary investment plus a secondary purchase of shares from existing shareholders. Both legs carried distinct regulatory requirements under India's foreign direct investment rules and under Indian corporate legislation, specifically the Companies Act 2013.
Three structural problems emerged during due diligence. First, the existing holding entity would be subject to withholding tax on dividend repatriation at a rate that significantly exceeded what was available under an applicable tax treaty between India and other European jurisdictions. Second, the structure risked creating a permanent establishment in India for the European parent, triggering Indian corporate income tax on income attributed to that presence. Third, the share purchase from existing Indian shareholders required compliance with pricing norms under foreign exchange legislation – norms that are enforced by the RBI and that had recently been updated.
The client's in-house team had not encountered India's layered regulatory system before. They underestimated how closely Indian tax legislation, corporate legislation, and foreign exchange rules interact. Each layer is enforced by a different authority: tax authorities for corporate income tax and withholding tax matters, the RBI for capital account transactions, and SEBI for any listed-company dimensions. Misalignment across these layers can delay closing by months or expose the acquirer to penalties after completion.
Our tax law practice in India was engaged to redesign the holding structure, obtain required regulatory approvals, and manage the cross-border coordination with local Indian counsel.
Legal strategy: instruments, sequence, and rationale
The strategy rested on three parallel work-streams, each addressing one of the structural problems identified during due diligence.
Work-stream one: tax treaty positioning. The team analysed the treaty network available to the client group. A jurisdiction with a strong bilateral tax treaty with India. providing reduced withholding tax rates on dividends and an effective exemption for capital gains in defined circumstances. was identified as the appropriate intermediate holding location. The new holding entity was incorporated there before any transaction documents were executed. This sequencing was critical. Indian tax authorities apply a tax residency test and a substance-over-form analysis to treaty claims. An entity incorporated immediately before a transaction, with no commercial substance, attracts scrutiny under India's general anti-avoidance rules. The client was advised to establish genuine economic substance in the new holding jurisdiction – including local directors, a management presence, and documented commercial rationale – well before any dividend flow or exit event.
Work-stream two: permanent establishment risk mitigation. The European parent's senior executives were scheduled to conduct extended business activity in India during the post-acquisition integration period. Under Indian tax legislation, sustained management activity by foreign parent employees on Indian soil can constitute a permanent establishment, triggering corporate income tax on attributed profits. The team drafted a clear protocol governing which activities could be conducted in India, which required to be conducted remotely, and how decisions were to be documented. This protocol was incorporated into the group's internal governance policy and communicated to the Indian subsidiary's board.
Work-stream three: RBI and SEBI compliance for the share purchase. The secondary purchase from existing Indian shareholders required a valuation certificate prepared by a registered Indian valuer and submission of filings to the RBI within prescribed deadlines. The pricing of the shares had to fall within the range established under foreign exchange legislation – neither above the ceiling applicable to the seller nor below the floor applicable to the buyer. These rules, while well-established, are frequently misapplied by foreign buyers who treat the valuation as a negotiating tool rather than a regulatory constraint. Our team coordinated directly with local counsel to ensure the valuation report was prepared on the correct basis and submitted within the mandatory reporting window. For the corporate governance dimension, compliance with the Companies Act 2013 – including board resolutions, shareholder approvals, and filings with the Registrar of Companies (RoC) – was mapped out and executed in parallel. Any dispute arising from the transaction documents was subject to arbitration under the Arbitration and Conciliation Act. With a neutral seat outside India. This we recommended as standard practice for cross-border investment agreements of this type.
For related structural considerations in other high-growth markets, our analysis of a comparable investment structuring matter in the UAE illustrates how similar multi-layer challenges arise across different regulatory systems.
Key milestones and complications encountered
The engagement proceeded in five phases over approximately twenty weeks.
Weeks one to three focused on due diligence findings, structural options analysis, and the decision to incorporate the new intermediate holding entity. The primary complication at this stage was timeline pressure: the sellers had set a deadline for execution of the term sheet. The new holding entity needed to be incorporated and receive initial capitalisation before that deadline, or the treaty positioning would be unavailable for the first transaction. This was achieved, but required simultaneous action across three jurisdictions.
Weeks four to eight covered the drafting and negotiation of transaction documents, including share purchase agreements for both the primary and secondary legs. A complication arose in the secondary purchase: one of the selling shareholders was a non-resident Indian (NRI), introducing an additional layer of foreign exchange compliance distinct from the rules governing resident Indian sellers. This required separate analysis under the relevant provisions of India's foreign exchange legislation and a separate RBI filing pathway.
Weeks nine to thirteen involved the regulatory filings. The RBI reporting obligation has a fixed post-transaction window. Any delay in completing the valuation and filing process after funds are remitted can result in penalties, even if the underlying transaction is otherwise compliant. The team tracked each filing date carefully and coordinated remittance timing with the client's treasury function to ensure all submissions fell within the required window.
Weeks fourteen to seventeen addressed post-closing corporate housekeeping under the Companies Act 2013: updating the register of members. Issuing share certificates, filing statutory returns with the RoC. Additionally, convening the first post-acquisition board meeting with the reconstituted board. The National Company Law Tribunal (NCLT) was not involved at this stage. As the transaction did not involve a merger or scheme of arrangement. but we noted its role as the primary forum for any future structural reorganisation within India.
Weeks eighteen to twenty focused on the permanent establishment protocol, substance documentation for the new holding entity, and a final review of the group's consolidated tax position. By the end of this phase, the client had a holding structure that was defensible under India's general anti-avoidance rules, treaty-compliant for future dividend repatriation, and fully documented for RBI and RoC purposes.
To explore how similar corporate structuring issues are handled for the Indian market more broadly, see our overview of corporate law advisory in India.
To discuss a comparable inbound investment situation and explore legal options for your structure in India, schedule a consultation at info@ferrazwhitmore.com.
Three transferable lessons for cross-border investors
Lesson one: treaty positioning must precede transaction execution, not follow it. Indian tax authorities scrutinise the timing and substance of treaty claims closely. A holding entity inserted into the structure after term sheet execution is vulnerable to challenge under anti-avoidance rules. The substance requirement – local directors, documented board activity, genuine management presence – must be established before the first dividend or disposal event. Investors who treat treaty optimisation as a post-closing administrative step frequently find it unavailable when they need it most.
Lesson two: India's regulatory layers are enforced by different authorities with different timelines. Corporate income tax, withholding tax, foreign exchange compliance, and corporate governance obligations each sit with a different authority. These authorities do not coordinate with each other on behalf of the investor. Missing the RBI reporting window after a share transfer does not become visible to the RBI until an audit or subsequent transaction triggers a review. but the penalty accrues from the date of the missed filing. International investors accustomed to single-window compliance systems consistently underestimate this fragmentation. A coordinated compliance calendar, managed across all relevant authorities, is not optional – it is fundamental to avoiding post-closing liability.
Lesson three: the permanent establishment risk is behavioural, not just structural. Restructuring the holding chain addresses the formal ownership question. It does not address the risk created by senior foreign executives conducting substantive management activity on Indian soil. Indian tax legislation attributes profits to a permanent establishment based on the functional reality of where decisions are made and where key personnel operate. Post-acquisition integration periods are particularly high-risk: foreign parent executives typically spend extended time at the Indian subsidiary, often making decisions that formally belong to the local board. A governance protocol that clearly delineates which activities require physical presence in India – and which must be conducted remotely – is a practical, low-cost safeguard with significant tax exposure implications.
For a tailored strategy on inbound investment structuring and tax optimisation in India, reach out to info@ferrazwhitmore.com.
About Ferraz & Whitmore
Ferraz & Whitmore is an international law firm based in Lisbon, advising business clients across 46 jurisdictions. Our Asia-Pacific practice supports international investors, technology companies, and institutional funds on inbound investment structuring, tax treaty positioning, and corporate governance compliance in India and across the region. Engaging a lawyer in India with cross-border experience – particularly one who can coordinate between European holding structures and Indian regulatory requirements – is essential for transactions of this type. As an international law firm handling cross-border matters for investors entering India. We combine Portuguese civil law expertise with English common law tradition to deliver integrated solutions across corporate legislation, foreign exchange rules, and tax law. Our team includes practitioners with experience before RBI, SEBI, and NCLT processes, and we work closely with local Indian counsel to manage multi-authority compliance calendars. To discuss how inbound investment structuring applies to your situation in India, contact us at info@ferrazwhitmore.com.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.