Tax Insurance: A Safety Net for Startup Homecoming

 

Startup ecosystem is vital to every economy for driving innovation, generation of employment, expanding consumer markets and ultimately boosting economic growth. Recognising the crucial role of the startups, the Government of India (GOI) is actively working to create a growth environment by providing infrastructure, tax and operational incentives, and by increasing operational flexibility to support and nurture startups across the country.

For many Indian Fintech and IT startups it is typical to set up their holding companies in the US and operating companies based in India. The primary drivers of this trend can be attributed towards the matured technology ecosystem (which is a magnet for global investors), higher valuations and a credibility boost by virtue of having a US address. Additionally, the developed capital market in the US makes the exit of early investors much smoother through IPO or secondary acquisitions.

Many founders have also considered other foreign jurisdictions like Singapore and the Cayman Islands to establish their holding companies. These countries are popular primarily for offering business-friendly tax regimes, streamlined regulatory frameworks, and generally easier compliance requirements. In short, setting up in these locations has been considered a strategic move for startups aiming to attract international capital and scale globally.

However, now the trend appears to be changing. India is ambitiously targeting a $5 trillion economy by 2027, with aspirations to reach $7 trillion by 2030¹. India is in the phase of unlocking its growth story. India’s capital market is witnessing robust expansion. Notably, Indian retail investors now play a much larger role in the capital market. In the first seven months of 2025, India Inc. witnessed approximately 175 IPOs. The Indian market is now offering valuations and public listing opportunities on par with other global jurisdictions. At the same time, India’s consumer base is growing, with customers increasingly willing to pay a premium for quality products and experiences.

Further, to boost the startup ecosystem, the GOI developed a flagship initiative — ‘Startup India’. Under this program, the GOI offered regulatory and operational flexibility to startups. The GOI also provided certain tax and operational incentives to provide a boost to startup ecosystem such as:

• Deletion of Angel tax provision from the Income-tax Act, 1961 (‘Act’)
• Provision of tax holiday under the Act to eligible startups
• Harmonising the income-tax rate on long-term capital gains earned on sale of unlisted securities
• Allowing different organisations such as insurance companies and the Employees Provident Fund Organisation to invest in AIFs/Fund of Fund structures where the ultimate beneficiary of capital would be the startup
• Widened scope of inbound regulations
• Other flexible rules from corporate law and Exchange control perspectives

 

With increased government support and abundant growth prospects, many of the challenges that previously drove startups to incorporate abroad are being addressed. Consequently, a growing number of startups with overseas holding companies are now considering a return to India — a process commonly referred to as ‘reverse flipping’.

Typically, reverse flipping involves an inbound merger, where the foreign holding company merges with its Indian subsidiary. Post merger, the Indian entity becomes the surviving company. Consequent to the merger, the shareholders of the foreign holding company become the shareholders of the surviving Indian company. An alternative approach to reverse flipping involves the use of Share Swaps. Under this approach, shareholders of the foreign entity exchange their shares for shares in an Indian company. As a result, the Indian entity assumes the role of the parent entity.

Given that a reverse flip involves entities across two jurisdictions, it presents significant tax and regulatory challenges for both the former parent and subsidiary company, as well as their shareholders. Each country has its own legal and tax framework governing amalgamations. Some of the challenges faced in reverse flipping are listed below:

Regulatory restriction on cross border merger

• Certain jurisdictions may not permit a merger of the entity set up in that country with the other country.

 

Exit taxes

• Certain jurisdictions impose exit taxes when a domestic entity amalgamates with any other foreign entity.
• Taxes are dependent on the valuation mechanism, a process that is inherently subjective.

 

Questions on availability of past losses for set off

• Due to change in shareholding, there may be complications in the carry forward and set off of existing losses by the Indian company and foreign company, which can further increase tax leakage.

 

Ultimately, the financial burden arising from these tax leakages must be borne by both the companies and their shareholders. There are a few examples in the market where companies have incurred substantial tax costs while reverse flipping. In such cases, it becomes significantly important to look at risk mitigation products such as tax insurance, for the interest of investors. There are insurers in the market who offer customised policy solutions designed to cover a company’s tax risks to a certain extent.

 

How Aon Can Help

Aon can facilitate connections with insurers who offer coverage to help in mitigating potential tax risks. Such insurance products can benefit both companies and their shareholders, especially given the complex challenges involved in reverse flipping. By addressing potential tax exposures, Aon can help in removing a significant hurdle in the relocation process, ultimately supporting both founders and investors in safeguarding against tax leakages and presenting value for both shareholders and the companies.

 

For additional information about Aon’s M&A Transaction Advisory Services, contact:

Lee Xianwei
Head of Aon M&A and Transaction Solutions, Asia
[email protected]

Vikas Pareek
Head, Transactional Solutions, India
[email protected]

Sayali Kulkarni
AVP, Transaction Liability Insurance, India
[email protected]

 

^[1] Government of India, Press Information Bureau, India Becoming An Economic Powerhouse, June 2025