Increased globalisation and rapid moving operations have resulted in corporations leaving no stone unturned in attempting to match the demands of the global scenario. More specifically, the venture capital market has been encouraging Indian companies, start-ups to be precise, to align themselves with the world economy.

Even though India has been on the rise with major development in the terms of funding by venture capitals for start-ups, the United States of America ("USA") still remains unbeatable. This gap between USA and India is what has led Indian start-ups to utilise the phenomenon of a 'flip'. In a flip transaction, a company incorporated in India subsequently incorporates a new company in a foreign jurisdiction, with the intention to turn the newly incorporated foreign company into the holding company of the Indian company, which would then become the subsidiary company of an international holding. Such a transaction is popularly termed as the 'Delaware Flip', owing to the state of Delaware being the most common choice to set up such a foreign holding company.

Mechanisms of the Flip

A Delaware Flip may be implemented in various ways, including without limitation:

  1. Business transfer;
  2. Merger of an existing foreign company with a wholly owned subsidiary in India; or
  3. Share swap.

This article focuses on the share swap structure of the Delaware Flip.

In a share swap, the promotors of the Indian company first establish a foreign holding company ("HoldCo"). The shares of this HoldCo are then subscribed to by the Indian subsidiary company ("Subsidiary") on a 'swap' basis, i.e., the HoldCo holds 100% (one hundred percent) of the paid-up capital of the Subsidiary and the promotors of the Subsidiary hold 100% (one hundred percent) stake in the HoldCo. This essentially means that the shareholders of the Subsidiary become the shareholders of the HoldCo, and the HoldCo is converted into the holding company of the Subsidiary. This creates an extra layer between the promotors and the Subsidiary so that the promotors, instead of maintaining a direct stake in Subsidiary, do so with the help of the HoldCo.

For instance, Company A, a start-up with Indian promoters, seeks funding but is unable to achieve the desired results in the Indian market. To tackle this, the promotors of the Indian start-up incorporate Company B in Delaware, USA (or in any other favourable jurisdiction) in which they become the promoters and begin to hold controlling interest.

Subsequently, the foreign Company B and the promoters enter into a "share swap" agreement, through which, Company B buys all the shares of Company A from the promoters and in return, issues its own shares i.e., Company B's shares to the promoters.

While this share swap in a Delaware Flip helps the HoldCo as well as the Subsidiary to expand their presence and traction in foreign jurisdictions and in establishing a relaxed investment environment, it is important to understand and analyse the timing of initiating the Delaware Flip. Companies who opt for a Delaware Flip need to ensure that they have a stabilised and sustainable business model and that their business runs across more than one territory.

In addition to the swapping of shares and ownership, the intellectual property of the Subsidiary is also transferred to the HoldCo. It is pertinent to note that even though the transfer of a company's intellectual property ("IP") which is implementing the Delaware Flip is allowed under provisions of the Foreign Exchange Management Act, 1999, such transfer is subject to certain restrictions under the taxation laws and rules governing valuation in India. With respect to the issue of transfer pricing, while determining the value of the IP involved in the transaction, the fair market value of the IP will have to be taken into consideration. Additionally, any gains received through transfer of IP of a company involved in a flip structure transaction will attract the provisions of the Income Tax Act, 1961

Implications of the Flip

Firstly, the Delaware Flip includes both, taking money out of India, resulting in overseas direct investment ("ODI") and bringing it back in India, resulting in foreign direct investment ("FDI"). This leads to one of the most herculean challenges faced while considering the Delaware Flip i.e., round tipping, which means routing Indian money back into India, through various foreign, offshore vehicles, thus evading all liabilities. Until 2019, there was no stringent mechanism under the Indian law to deal with round tipping. However, in September 2019, the Reserve Bank of India ("RBI") released an FAQ allowing entities incorporated in India to establish Indian subsidiaries through an international wholly owned subsidiary, subject to prior approval from the RBI.1

Secondly, the Indian taxation structure is one of the most influential factors in leading Indian start-ups to consider the Delaware Flip. Exorbitant tax rates and hurdles in compliance with tax laws make the Delaware Flip sound extremely lucrative to the Indian start-ups. Further, under the Income Tax Act, 1962, the place of effective management ("POEM") test plays an integral part in identifying the tax incidence. The POEM test determines active foreign businesses, key managerial personnel, place where commercial decisions are taken, place where board meetings are conducted etc. This test was introduced with an intention to globally align Indian laws and prevent tax evasion by companies, despite being controlled and managed from India. Thus, under the POEM test, the HoldCo has the liability to ensure and to keep a check on its functioning in order to prevent it from being taxed in India.

Lastly, even though transfer of intellectual property (IP) of an Indian company considering the Delaware Flip is allowed, the different aspects pertaining to taxation as well as valuation need to be addressed adequately. From a transfer pricing point of view, the valuation has to be in accordance with the fair market value of the IP and the gains made on transfer of the IP shall also be subject to tax in India.


While the global front is shifting gears towards creating a more investor friendly environment, the Indian government has been shifting focus on the 'ease of doing business', the legislations have failed to find and strike the right balance between investor-friendly regime and economy revival. The Delaware Flip is a lucrative option for all companies looking to make their businesses more attractive for investors as well as have the flexibility of splitting its operations between two countries. However, a prime disadvantage of the same is analysing the tax implications laws applicable to it. A USA based entity named Y Combinator started shifting and 'flipping' Indian start-ups into American entities, essentially meaning that the Indian-registered entity would have to be 'flipped' into a wholly-owned subsidiary of a new USA based parent company. This resulted in Indian investors raising concerns with respect to the transfer of IP and the increase in administrative and legal costs in effectuating such transaction.2 Which is why, it becomes necessary to analyse the timing of the 'flip' before jumping the gun on any transaction!


1. Reserve Bank of India, Frequently Asked Questions – Overseas Direct Investments (Updated as on September 19, 2019) (Accessible on the website of Reserve Bank of India at

2. 'Is Y Combinator Causing Long-Term Damage To India's Tech Economy', S.H. Salman (Accessible at

Originally published 16 November, 2021

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.