The Central Board of Direct Taxes (CBDT) recently introduced significant amendments to Rule 11UA through Notification No. 81/2023, impacting the valuation procedures for investments in closely held companies. These changes, effective from September 25, 2023, are pivotal in determining the applicability of Angel Tax to start-ups, encompassing excess share application money or premium received from non-resident investors.

Expanding Scope: Non-Resident Investor Considerations

A noteworthy adjustment includes the extension of Angel Tax to cover excess share application money or premium received from non-resident investors. This shift underscores the importance of carefully evaluating the fair market value (FMV) of unlisted equity shares and convertible preference shares (CCPS) to avoid tax implications.

Revamped Valuation Guidelines: Rule 11UA Revisions

The revised Rule 11UA offers a comprehensive framework for assessing FMV, departing from the earlier focus on only two methods. Now, the valuation landscape includes five additional approaches for determining the FMV of unlisted equity shares and CCPS, providing more nuanced and accurate assessments.

Benchmarking Innovations: VC Funds, Notified Entities, and More

Introducing benchmarking with shares issued to Venture Capital (VC) Funds, VC Companies, Specified Funds, and Notified Entities, the regulatory update offers alternative reference points for determining FMV. This innovative approach aligns with the diverse nature of investments and enhances the accuracy of valuation methods.

Ensuring Currency and Safe Harbor Limits

Recognizing the dynamic nature of valuation, the revised rules mandate that Merchant Banker reports should not be older than 90 days, ensuring the relevance and accuracy of the valuation process. Additionally, a safe harbor limit of 10% provides a threshold for unquoted equity shares or CCPS issuance, offering a buffer to accommodate minor disparities between the issue price and FMV.

Strategic Considerations for Unlisted Companies

Unlisted companies now face a nuanced valuation landscape, necessitating careful consideration of the methods and benchmarks that best align with their circumstances. These changes aim to streamline the valuation process, promoting transparency, and ensuring fair assessments in compliance with the revised regulatory framework.