UAE Investors Acquiring Indian Companies: CEPA Benefits & Deal Structure

Why UAE-India M&A Activity Is Accelerating

Bilateral trade between India and the UAE crossed USD 100.06 billion in FY 2024-25, a 19.6% year-on-year increase driven largely by the India-UAE Comprehensive Economic Partnership Agreement (CEPA) that entered into force on May 1, 2022. Cumulative UAE FDI into India reached USD 22.84 billion between April 2000 and March 2025, making the UAE India's seventh-largest overseas investor. More telling is the trajectory: FDI inflows from the UAE grew by nearly 75% post-CEPA, reflecting deeper investor confidence and a structural shift from trade-only relationships to equity ownership.

UAE investors — including sovereign wealth funds like ADIA, Mubadala, and ADQ, as well as family offices based in DIFC and ADGM — are increasingly pursuing outright acquisitions rather than minority stakes. The sectors attracting the most attention include infrastructure, financial services, real estate development, energy, pharmaceuticals, and technology. Understanding the regulatory framework, tax treaty advantages, and deal structuring options is critical for any UAE investor evaluating an Indian acquisition target.

India-UAE CEPA: What It Means for M&A

Investment Chapter Overview

Chapter 12 of the CEPA focuses on investment and trade facilitation. It establishes a UAE-India Technical Council to monitor trade and investment relations, identify opportunities, and facilitate consultations. However, it is important to note that Article 12.6 expressly excludes the investment chapter from any dispute settlement mechanism — making it facilitative rather than enforceable.

The 2024 Bilateral Investment Treaty

Separate from CEPA, India and the UAE signed a new Bilateral Investment Treaty (BIT) in February 2024, which came into force on August 31, 2024, for a 10-year period. The BIT provides substantive investor protections including fair and equitable treatment, protection against expropriation without compensation, and free transfer of investment-related payments. This is significant because India terminated most of its older BITs in 2017, and the UAE BIT is one of only a handful of new-generation treaties India has signed since then.

For UAE investors acquiring Indian companies, the BIT adds a layer of protection that investors from most other countries do not have — including access to investor-state dispute settlement (ISDS) mechanisms after exhausting local remedies for at least five years.

CEPA Tariff Benefits

While the CEPA's direct impact on M&A is through investment facilitation rather than tariff reduction, UAE investors acquiring Indian manufacturing companies benefit indirectly. CEPA provides duty-free access for 90% of Indian exports to the UAE, which improves the revenue potential of Indian portfolio companies exporting to the UAE market. This is particularly relevant for investments in pharmaceuticals, gems and jewellery, textiles, and engineering goods.

India-UAE DTAA: The Capital Gains Advantage

Article 13 — Capital Gains Treatment

The India-UAE DTAA contains one of the most favourable capital gains provisions of any Indian tax treaty. Under Article 13(4), gains from the sale of shares in an Indian company by a UAE resident may be taxed in India. However, Article 13(5) provides that gains from the alienation of any property other than those specifically mentioned in earlier paragraphs shall be taxable only in the state of the alienator's residence — i.e., the UAE.

Since the UAE has no personal income tax and a 0% corporate tax on most capital gains, structuring an acquisition through a UAE entity can result in significant tax savings on exit. However, investors must ensure they meet the DTAA beneficial ownership requirements and are not merely using a UAE shell entity to access treaty benefits — India's General Anti-Avoidance Rules (GAAR) and the Principal Purpose Test (PPT) under the Multilateral Instrument (MLI) apply.

Dividend Withholding

Under the India-UAE DTAA, withholding tax on dividends paid by an Indian company to a UAE resident is capped at 10% (compared to the domestic rate of 20% plus surcharge and cess). For UAE investors acquiring majority stakes, this significantly improves ongoing cash flow extraction.

Interest and Royalties

Interest income is subject to a maximum 12.5% withholding under the treaty (domestic rate: 20%). Royalties and fees for technical services are subject to 10% withholding. These reduced rates are relevant when structuring intercompany financing or IP licensing arrangements post-acquisition.

FEMA Regulatory Framework for UAE Acquisitions

FDI Route Determination

The first regulatory question in any acquisition by a UAE investor is whether the target company's sector falls under the automatic route or the government approval route. As of 2026, over 90% of sectors allow 100% FDI under the automatic route, including manufacturing, IT, renewable energy, e-commerce (marketplace model), and most services. Key restrictions relevant to UAE investors include:

• Insurance: Up to 100% with the condition that entire premium is invested in India (increased from 74% in Budget 2025)
• Defence: Up to 74% under automatic route; above 74% requires government approval with access to modern technology
• Multi-brand retail: 51% cap with government approval required
• Real estate: No FDI permitted in real estate business (buying/selling), but 100% allowed in construction development projects under automatic route
• Civil aviation: Up to 49% under automatic route; 100% for NRI/OCI investors

FEMA Pricing Norms

When acquiring shares in an unlisted Indian company from a resident seller, the UAE investor must pay at least the fair value determined using any internationally accepted pricing methodology on an arm's length basis. The valuation must be certified by a SEBI-registered Category I Merchant Banker or a Chartered Accountant. Common methods include DCF, comparable company multiples, and net asset value.

For listed companies, the acquisition price must comply with SEBI's pricing guidelines — typically the volume-weighted average price (VWAP) for bulk/block deals or the SEBI takeover code pricing for open offers.

Key Filings and Timelines

Deal Structuring for UAE Investors

Direct Acquisition vs. Holding Company Route

UAE investors have two primary structuring options:

Option 1: Direct acquisition from a UAE operating entity. This is straightforward but locks the investor into UAE-India treaty benefits for all future transactions. It works best for strategic investors with long-term operating intentions.

Option 2: DIFC/ADGM holding company. Setting up a special purpose vehicle in DIFC (Dubai International Financial Centre) or ADGM (Abu Dhabi Global Market) provides regulatory certainty, common-law legal framework, and easier repatriation. Both free zones offer 0% corporate tax, no restrictions on capital repatriation, and English common-law governance. This structure is preferred by PE funds and family offices because it separates Indian investment risk from the main business entity.

Share Purchase Agreement (SPA) Considerations

Key provisions in SPAs for UAE-India cross-border deals include:

• FEMA condition precedent: The SPA should make closing conditional on all FEMA approvals being obtained and pricing norms being satisfied
• Escrow arrangements: Given the 30-day FC-GPR filing deadline, purchase consideration is typically held in escrow until all regulatory filings are confirmed
• Indemnity for tax liabilities: Comprehensive tax indemnities covering pre-closing income tax, GST, and transfer pricing exposures
• Deferred consideration: Under FEMA, deferred consideration (including earn-outs) is permitted but must comply with specific RBI guidelines — typically up to 25% of total consideration can be deferred for up to 18 months
• Arbitration seat: Singapore or London arbitration is standard for UAE-India deals, providing neutral enforcement under the New York Convention

Valuation Methods

FEMA requires fair value determination using internationally accepted pricing methodologies. For UAE acquisitions, the most commonly used methods include:

• DCF (Discounted Cash Flow): Preferred for profitable operating companies with predictable cash flows
• Comparable Company Multiples: Revenue or EBITDA multiples from comparable listed Indian companies
• Net Asset Value: Typically used for asset-heavy companies (real estate, infrastructure)
• Replacement Cost: For manufacturing companies with significant plant and equipment

CCI Merger Approval Requirements

The Competition Commission of India (CCI) approval is required if the acquisition crosses specified thresholds:

• Asset threshold: Combined assets of the parties exceed INR 2,500 crore in India, or USD 1.25 billion globally (with at least INR 1,250 crore in India)
• Turnover threshold: Combined turnover exceeds INR 7,500 crore in India, or USD 3.75 billion globally (with at least INR 3,750 crore in India)
• Deal value threshold (DVT): Transaction value exceeds INR 2,000 crore where the target has substantial business operations in India

The de minimis exemption applies if the target's Indian assets are below INR 450 crore or turnover below INR 1,250 crore (revised thresholds effective until March 7, 2026). CCI review typically takes 30-45 working days for Phase I (green channel) clearance. Complex transactions requiring Phase II investigation can take up to 210 days.

Tax Planning for UAE Investors

Corporate Tax on Indian Operations

Post-acquisition, the Indian target company will pay corporate tax at the applicable domestic rate. For companies opting for the new tax regime under Section 115BAA, the effective rate is approximately 25.17% (22% base rate + 10% surcharge + 4% cess). Companies not opting for this regime pay 30% plus surcharge and cess (effective rate approximately 34.94%).

Exit Tax Planning

The India-UAE DTAA's capital gains treatment under Article 13 makes exit planning critical. To claim treaty benefits:

• The UAE entity must be the beneficial owner of the shares — not a conduit
• The entity must have commercial substance in the UAE (office, employees, decision-making)
• A valid Tax Residency Certificate (TRC) must be obtained from the UAE Federal Tax Authority
• Form 15CA/15CB must be filed before any remittance of sale proceeds

Transfer Pricing Compliance

Post-acquisition intercompany transactions between the UAE parent and Indian subsidiary must comply with India's transfer pricing regulations under Section 92 of the Income Tax Act. This includes maintaining contemporaneous documentation (TP study) for all cross-border transactions — management fees, royalties, intercompany loans, and purchases/sales of goods or services.

Step-by-Step Acquisition Process

1. Preliminary assessment: Determine FDI route (automatic vs. government approval), sectoral cap compliance, and Press Note 3 applicability (for entities with beneficial ownership from countries sharing a land border with India — not applicable to UAE)
2. Due diligence: Conduct legal, financial, tax, and FEMA due diligence. Focus areas include pending litigation, tax demands, FEMA compliance history, labour law compliance, and environmental clearances
3. Valuation: Engage a SEBI-registered Category I Merchant Banker or CA to determine fair value under FEMA pricing norms
4. Negotiate and execute SPA: Include FEMA conditions precedent, regulatory approvals, tax indemnities, and Singapore/London arbitration clause
5. CCI notification: File CCI notification if thresholds are triggered (typically 30 working days for Phase I clearance)
6. Government approval: If the sector requires government route approval, file application with the competent authority through the Foreign Investment Facilitation Portal (FIFP)
7. Complete share transfer: Execute share transfer deeds, update the target company's register of members, and issue new share certificates
8. RBI reporting: File Form FC-TRS within 60 days of share transfer on the RBI FIRMS portal through the Authorized Dealer bank
9. Post-acquisition compliance: File updated FLA Return by July 15, update ROC filings (DIR-12 for director changes, MGT-14 for board resolutions), and begin transfer pricing documentation

Common Structuring Mistakes by UAE Investors

• Using a shell entity without substance: India's GAAR provisions can deny treaty benefits if the UAE holding entity lacks commercial substance — office space, employees, and genuine decision-making activity are essential
• Ignoring demat requirements: Since 2023, all private limited companies receiving FDI must issue shares in dematerialized form only. Ensure the UAE investor opens a demat account linked to an Indian PAN before closing
• Missing the FC-TRS deadline: The 60-day filing window starts from the date of transfer, not closing. Late filing penalties start at 1% of the investment amount per month
• Overlooking stamp duty: Share transfers attract stamp duty of 0.015% on delivery-based transfers (demat). Off-market transfers may attract higher rates depending on the state
• Inadequate TP documentation: Post-acquisition management fees, royalties, and cost-sharing arrangements must be at arm's length from day one — not structured after the first year's audit

Key Takeaways

• CEPA and the 2024 BIT create a favourable investment framework for UAE investors, with trade facilitation under CEPA and investor protection under the BIT providing a dual layer of support that investors from most other countries lack
• The India-UAE DTAA offers significant capital gains advantages under Article 13, but claiming these benefits requires genuine substance in the UAE entity, a valid TRC, and compliance with Form 15CA/15CB procedures
• FEMA compliance is the binding constraint: Fair value determination, pricing norms, FC-GPR/FC-TRS filings, and sectoral cap compliance must be handled meticulously — penalties for non-compliance are steep and can delay or block the transaction
• DIFC/ADGM holding structures are preferred by sophisticated UAE investors for their common-law framework, tax neutrality, and ease of capital repatriation
• Post-acquisition transfer pricing compliance is non-negotiable: India's transfer pricing regime is among the most litigated in the world — establish arm's length pricing and contemporaneous documentation from the start