Introduction
- The surge in cross-border M&A activity between the U.S. and India reflects a broader trend of global capital realignment and strategic expansion. In 2023 alone, India recorded over $85 billion in M&A deals, with the U.S. being a key contributor. This momentum is expected to grow stronger in 2025, driven by investor confidence, India’s digital economy, and favourable government reforms.
- In such a dynamic landscape, efficient deal structuring and thorough M&A due diligence have become critical. Improper valuation, tax exposure, or compliance gaps can derail a transaction or lead to post-deal losses. This is where due diligence plays a pivotal role—by identifying legal, financial, and regulatory risks early, it allows stakeholders to make informed decisions and negotiate effectively.
- The introduction of new safe harbour rules by Indian tax authorities further impacts valuation and transfer pricing, particularly for cross-border transactions. These rules aim to reduce litigation but require careful structuring to ensure tax efficiency and compliance.
- At this intersection of regulatory complexity and strategic opportunity, KNM delivers robust transaction advisory services, guiding clients through financial, tax, and legal due diligence. From deal structuring to compliance review, KNM ensures your M&A strategy is both opportunity-ready and risk-proof.
Key Drivers Behind US-India Cross-Border M&A
- India has emerged as one of the top destinations for U.S. investors seeking growth through cross-border mergers and acquisitions (M&A). A surge in startup innovation, expanding digital infrastructure, and government-led economic reforms have made India an attractive market for strategic acquisitions. At the heart of this momentum is the growing demand for transaction advisory services, which play a crucial role in identifying, evaluating, and structuring deals aligned with both financial and regulatory goals.
- The India–US Double Taxation Avoidance Agreement (DTAA) offers significant tax relief to U.S. companies, reducing the burden of withholding taxes and easing the repatriation of profits. Meanwhile, India’s liberalised FDI policy now allows up to 100% foreign ownership in most sectors under the automatic route, simplifying the company setup process and accelerating deal timelines.
- KNM’s transaction advisory services help U.S. clients by conducting due diligence, regulatory assessments, and post-merger integration planning. The firm acts as a local intelligence partner, navigating complex tax structures and compliance frameworks.
Key Factors Driving US-India M&A Growth
| Driver | Impact on M&A |
| High US investor interest | Increased deal volume in tech, pharma, and fintech sectors |
| India–US DTAA | Reduces double taxation and improves post-deal cash flow |
| Liberalised FDI regime | Faster company formation and majority ownership by foreign firms |
| KNM’s advisory support | Target identification, deal structuring, and due diligence |
2025 Safe Harbour Rules: Key Changes for US-India M&A Tax Efficiency
India’s updated 2025 Safe Harbour Rules mark a significant shift in the transfer pricing landscape, especially relevant for foreign companies setting up a company in India. These rules simplify compliance for eligible international transactions by pre-defining profit margins, thus reducing litigation and uncertainty.
What’s Changed?
- Revised Thresholds: The CBDT has updated margins for sectors like IT/ITES, KPO, and financial services. For instance, IT/ITES margins are revised to 16–18% from the earlier 17–20%.
- Interest Rates: Safe-harbour interest rates on intra-group loans have been aligned closer to global LIBOR/SOFR rates, making borrowing more realistic for MNCs.
- Applicability: The rules now distinctly address inbound vs. outbound transactions, ensuring clarity for both foreign companies operating in India and Indian firms with overseas affiliates.
- Documentation: Though simplified, documentation remains critical. Companies must meet the eligibility thresholds and maintain transaction-level proof of compliance.
Case in Point:
A U.S.-based IT firm with a captive center in Hyderabad opted for the new safe harbor margin for its software services. This helped it avoid prolonged transfer pricing audits while maintaining profitability. Similarly, a Dutch parent company revised its intercompany loan interest based on the updated rules, leading to smoother acceptance during assessment.
Tax Due Diligence in Cross-Border M&A
- Tax due diligence is a critical pillar in any cross-border M&A deal, especially in a jurisdiction like India, where the tax ecosystem is layered and evolving. A well-executed M&A due diligence uncovers hidden direct and indirect tax liabilities, such as unresolved TDS defaults, unclaimed input tax credits, or pending tax litigation, that could materially impact the valuation or future cash flows of the acquired entity.
- A key risk area is the Permanent Establishment (PE) exposure, which may arise when the foreign acquirer’s operations or contractual structures trigger tax presence in India. Without careful planning, such exposure could result in unanticipated income tax liabilities. Similarly, choosing between an asset purchase and a share purchase has significant GST and stamp duty implications. For instance, in an asset purchase, GST may be applicable on movable assets, while a share purchase typically avoids indirect taxes but may attract capital gains tax issues.
- KNM’s transaction advisory team offers comprehensive red-flag tax reports, flagging legacy issues and aligning the deal structure with Indian tax laws. For example, in a recent acquisition by a U.S.-based tech firm, KNM helped restructure the deal to avoid PE risk and optimize GST impact, saving the acquirer over ₹3 crore in potential liabilities.
FEMA & RBI Compliance Considerations
India’s regulatory framework for foreign investment is governed by the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India (RBI). Both play a pivotal role in ensuring that foreign investments and transactions are structured correctly, comply with sector-specific rules, and meet the nation’s financial stability goals.
- Sectoral Caps & Pricing Guidelines: Under FEMA, specific sectors in India have caps on foreign investment. These limits must be carefully adhered to when structuring Foreign Direct Investment (FDI) to ensure compliance. Additionally, pricing guidelines under FEMA must be followed during share transfers and acquisitions to maintain fairness and transparency in capital inflows.
- FDI and ODI Routes: Understanding the FDI (Foreign Direct Investment) and ODI (Overseas Direct Investment) routes is crucial for structuring investments. Incorrect routing or delays in regulatory approvals can lead to compliance issues, unnecessary delays, or even disapproval of investments.
- RBI Rules for Share Swaps & Capital Account Transactions: Compliance with the RBI guidelines on share swaps and capital account transactions is mandatory. This includes rules governing the pricing of shares in cross-border mergers and acquisitions.
Case Study: Successful M&A Execution via KNM
Setting up a company in India involves navigating complex tax, regulatory, and compliance requirements. Foreign companies, especially from the U.S., often face challenges related to entity structuring, FEMA guidelines, and due diligence. This case study highlights how KNM assisted a U.S.-based software firm in acquiring an Indian tech startup using safe harbor provisions and ensuring a seamless India entry strategy.
The client aimed to expand its global development capacity by acquiring a mid-sized Indian technology company. The acquisition required meticulous planning, financial structuring, and end-to-end regulatory compliance. KNM’s corporate advisory team stepped in to manage the entire M&A process.
Here’s how KNM delivered results:
- ✅ Conducted comprehensive due diligence, covering financial, legal, and operational risk assessments
- ✅ Advised on safe harbour provisions to minimize transfer pricing disputes
- ✅ Secured FEMA and RBI clearances for cross-border fund transfers
- ✅ Assisted in structuring the acquisition to optimize GST and corporate tax liabilities
- ✅ Managed post-acquisition integration for HR, finance, and IT systems
- ✅ Ensured full legal compliance under the Companies Act, SEBI, and MCA guidelines
Outcome:
The client received faster regulatory approvals, reduced tax exposure, and achieved full integration within 90 days, marking a successful India market entry.
Conclusion
With India’s cross-border M&A activity expected to cross $80 billion in 2025, the importance of precise due diligence has never been greater. One key development is the introduction of safe harbour rules, which aim to simplify transfer pricing in cross-border transactions. These rules, when applied correctly, reduce litigation risks and bring much-needed clarity in M&A tax structuring.
- However, the success of any merger or acquisition depends on more than just favorable policies. It requires comprehensive due diligence, not only to verify financials but to uncover hidden liabilities, evaluate regulatory exposure, and assess the strategic fit of the target company. Errors in this stage can result in post-deal disputes, tax penalties, and compliance failures, especially under India’s tightening regulatory regime led by the MCA, SEBI, RBI, and Income Tax Department.
- This is where KNM’s transaction advisory services add unmatched value. We help clients navigate complex tax laws, conduct forensic audits, structure the deal efficiently, and ensure full regulatory compliance across sectors.
- 📩 Planning to acquire or merge with an Indian company? Let KNM guide you through every step of the M&A journey. Reach out for a consultation and secure a risk-mitigated, tax-optimized deal.
Contact KNM India today!
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