Structuring Indian Investments Brenden Saldanha India Tax Desk, New York

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1 Structuring Indian Investments Brenden Saldanha India Tax Desk, New York 25 May 2011

2 Overview of taxation in India Indian Co s income taxed at 32.45% US Co United States Interest / Dividends / Capital gains India Ind Co Additional taxation upon repatriation/exit from Indian investments Dividends Ind Co: Distribution tax of 16.22% on amount distributed Recipient: Exempt from Indian tax Interest Ind Co: Deduction available (32.45% tax break) Recipient: Taxable at 21.01% (foreign currency loan) or 42.02% (rupee loan) Capital gains Ind Co: No tax impact. Reduction in share capital if shares bought back from shareholder Recipient: Taxable at 21.01% (shares held for more than 12 months) or 42.02% (held for 12 months or less) Based on commercial aspects, an appropriate intermediary holding company would help in reducing overall tax costs Page 2

3 Structuring investment into India Intermediary Holding Companies Netherlands Cyprus Intermediary Holding Company Jurisdiction Mauritius Singapore Page 3

4 Evaluation of using the intermediary structure: Taxation of income in India Parameter Netherlands Mauritius Singapore Cyprus Capital gains taxation (under relevant tax treaty) Dividend distribution tax cost Interest tax cost (under relevant tax treaty) NIL (only if transferred to a non-india resident or forms part of a reorganization - buyback not considered as a reorganization) 16.22% (cannot be reduced as cash repatriation by way of buyback of shares by Ind Co not possible See Note below) NIL 16.22% (can be avoided as buyback of shares by Ind Co would qualify for tax exemption as capital gains See Note below) 10% 21.01% (foreign currency loan) / 42.02% (rupee loan) NIL - subject to Singapore Co not being set-up solely for treaty benefits; and Annual expenditure is at least SGD 200,000 in preceding 24 months from date on which the gains arise 16.22% (can be avoided as buyback of shares by Ind Co would qualify for tax exemption as capital gains See Note below) NIL 16.22% 15% 10% (can be avoided as buyback of shares by Ind Co would qualify for tax exemption as capital gains See Note below) Note: Dividend Distribution Tax (DDT) is applicable only on specified distributions qualifying as dividends. Income received on share buy-back or redemption of shares is deemed to be capital gains in India. Accordingly, repatriation of capital/profits by way of a buy-back of shares would not be subject to the DDT of 16.22%. Page 4

5 Investing via Netherlands US Netherlands India US Co Dutch BV Ind Co Structure description Benefits US Co invests in Ind Co through Dutch tax resident BV Co India-Netherlands tax treaty provides for exemption from capital gains tax in India except where the transferee is resident in India Transfer to non-indian resident investors would be exempt from tax in India Limitations Cash repatriation by way of buy back of shares would attract capital gains taxation in India as the transferee (ie Ind Co) would be resident in India DDT cost would not be mitigated Supports exit planning only Page 5

6 Investing via Mauritius/Cyprus/Singapore Structure description US US Co Benefits US Co invests in Ind Co through a Mauritius/Cypriot/Singapore subsidiary of a Dutch BV Netherlands Dutch BV Tax treaty with each of these countries provides for exemption from capital gains tax in India, subject to fulfillment of certain conditions Buy-back of shares by Ind Co would be deemed to be capital gains, exempt from tax in India Mauritius/ Cyprus/ Singapore Hold Co Buy Back at Fair Value Limitations Amount of buy-back restricted under Indian corporate laws Introduction of Anti-Avoidance Rules India Ind Co Supports DDT planning as well as exit planning Page 6

7 Holding company structure for India FAQs Is Mauritius no longer a good jurisdiction to invest in India? Has India-Mauritius treaty been renegotiated? How would Draft Direct Tax Code Bill impact investments into India from Hold Cos? Singapore or Mauritius? Better jurisdiction? Are there any other jurisdictions? What are the substance requirements? What should companies do with Mauritius holding companies set up for India? Answers to some of the above questions would present time sensitive planning opportunities for foreign companies invested in India Page 7

8 Thank You