Taxation of Capital Gains including indirect transfers

Transcription

1 Taxation of Capital Gains including indirect transfers CA Geeta Jani Date: 23

2 Contents Indirect transfer provisions under ITL FA 2012 FA 2015 Taxation of overseas dividend Indirect transfer taxation under treaties Assorted issues: Case studies 2 Taxation of Capital Gains including indirect transfers

3 Background 3

4 Background FA 2012 inserted Explanation 5 in S. 9(1) F Co (i) w.e.f. 1 April 1962: As per Explanation 5 an asset or capital asset, 100% Transfer being any share or interest in a company or entity registered or incorporated outside shall be deemed to be situated in if the SPV Outside share or interest derives, directly or indirectly, its value substantially from the assets located in Concerns raised by various stakeholders 100% Constitution of an Expert Committee under Chairmanship of Dr. Parthasarathi Shome I Co Certain recommendations considered in FA 2015 amendments 4 Taxation of Capital Gains including indirect transfers

5 Scope of look through provisions Exp. 5 to S.9(1)(i) covers share or interest in a company or entity registered or incorporated outside Share / interest fulfill should substantiality test in terms of value derivation from assets located in Company inter alia covers any body corporate incorporated outside Residential status of FCo / FE is not a relevant criterion Share can be equity, preference, with or without voting /special rights, ESPS, etc. Interest in a company should result in participation in ownership, capital, control or management (Shome Committee) Interest may cover convertible instruments, warrants, ESOPs issued by the company Entity registered or incorporated body corporate? Excludes unincorporated associations/general partnerships? 5 Taxation of Capital Gains including indirect transfers

6 Scope of look through provisions Share/interest needs to be in FCo / FE May not cover contractual/derivative rights though economic value thereof may depend on value of FCo / FE S.9(1)(i) applies to income Through or from asset or source of income in ; Through transfer of capital asset situated in Transferor may hold it as asset or capital asset CBDT Circular: Taxability of gains having economic nexus with irrespective of mode of realization and is in respect of income arising from indirect transfer of assets S.9(1)(i) does not apply to - Dividend declared and paid by FCo outside (Circular 4/ 2015) Receipt of gift/ benefit triggering S.56(2)(vii)/(viia) or S.2(24)(iv), salary taxation etc. 6 Taxation of Capital Gains including indirect transfers

7 FA 2015 amendments 7

8 FA 2015 amendments F Co Amendments intended to address concerns raised by various stakeholders Explanation 6 Explains substantial ; Transfer provides for substantial threshold limit 100% Explanation 7(a) Small shareholder exemption SPV Outside Explanation 7(b) Provides for proportionate basis of taxation S. 47(viab)/(vicc) Exemption on 100% amalgamation/demerger S. 285A Reporting obligation on n concerns I Co S. 271GA Penalty for failure to report u/s 285A 8 Taxation of Capital Gains including indirect transfers

9 S.9(1)(i) as amended w.e.f. A.Y Exp.5 r.w. Exp.6 to S.9(1)(i) outlines 100% 100% F Co SPV I Co Transfer Outside situations where foreign assets are deemed to be situated in Question to ask: Do shares/ interest in SPV derive value from assets located in? As per Exp. 6, indirect transfer provisions will apply only if, as on the specified date, the value of assets of SPV located in - > INR 10 Cr and Represents at least 50% of the value of total assets of SPV (clarificatory?) 9 Taxation of Capital Gains including indirect transfers

10 S.9(1)(i) as amended w.e.f. A.Y F Co Transfer A Share / interest deemed asset if A/B 50% FMV of assets (whether tangible or intangible) (held directly/ indirectly) located in 100% B FMV of all assets owned by SPV 100% SPV Outside FMV of assets is without reduction of liabilities, if any, in respect of assets FMV (e.g. DCF / NAV) to be determined in prescribed manner Taxation in proportion to the value of n assets (Prospective?) I Co Method for determining proportionality to be prescribed in the rules No impact on treaty relief 10 Taxation of Capital Gains including indirect transfers

11 Specified date 11

12 Specified date & its significance What is specified date? 100% F Co Transfer End of the accounting period of SPV preceding the date of transfer or But, date of transfer, if book value of assets of SPV as on date of transfer exceeds book value at preceding accounting year end date by 15% 100% SPV I Co Outside What is accounting period? Generally, period of 12 months ending on preceding 31 March If SPV regularly adopts other accounting period for tax compliance in its country of residence or for shareholders reporting, such other date preceding date is the accounting period Accounting period can be shorter than 12 months in year of formation or cessation 12 Taxation of Capital Gains including indirect transfers

13 Specified date & its significance Illustration: Date of transfer is 1 July 2016 Determining book value: Requires preparation of balance sheet of SPV as of date of transfer adopting same accounting principles applicable to SPV Book value net worth Specified date relevant for determining if substantial value ( 50%) test fulfilled Actual taxation however proportional gain attributable to n assets as of the date of transfer Particulars Situation 1 Situation 2 Situation 3 BV of FCo as of BV of FCo as of Whether exceeds 15% of BV as of Yes No No Specified date for substantiality test Date of transfer can be 364 days away from specified date!! 13 Taxation of Capital Gains including indirect transfers

14 Specified date & its significance Illustration: Date of transfer is 1 July 2016 Particulars Situation 1 Situation 2 BV of FCo as of BV of FCo as of Whether exceeds 15% of BV as of No No Specified date for substantiality test % of value derivation from assets As of (specified date) 45% 55% As of % 45% Is transaction taxable? No Yes Proportion of taxation NIL 45% 14 Taxation of Capital Gains including indirect transfers

15 Meaning of assets located in? Which assets are located in? F Co Transfer the assets in owned by ICo ( n assets ) excluding overseas assets; or SPV 1 Outside SPV 2 the shares of ICo held by SPV? Look through provisions need to be applied to determine economic nexus? Outside ICo Overseas Assets n Assets Overseas shares Look through to be restricted to determining entry point of assets? Shares of n Company admittedly an n asset. If SPV transfers shares of ICo, gains will capture appreciation attributable to n as also overseas assets. 15 Taxation of Capital Gains including indirect transfers

16 Impact of liabilities Shareholders Explanation 6(b) requires assets to be valued without reduction of liabilities Variation 1 No tax trigger even though commercially contributes substantially value of FCo: FCo Transfer of FCo shares Liabilities Overseas Assets Overseas Capital Assets Liabilities NIL 800 Total Total Value derivation Net worth Gross assets Ico 60% 33.33% Overseas assets 40% 66.67% Outside ICo Overseas Assets Variation 2 Unjustifiable tax trigger even though commercially does not contribute substantial value: Liabilities Overseas Assets Overseas Capital Assets Liabilities 800 NIL Total Total Value derivation Net worth Gross assets ICo 40% 66.67% Overseas assets 60% 33.33% 16 Taxation of Capital Gains including indirect transfers

17 Impact of liabilities Shareholders Transfer of FCo shares Explanation 6(b) to S.9(1)(i): (b) the value of an asset shall be the fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, determined in such manner as may be prescribed; FCo Which liabilities are to be ignored ambiguous: Outside SPV Overseas Assets Alt Particulars 1 Ignore liabilities incurred by the shareholder who transfers shares of FCo 2 Ignore liabilities incurred by ICo alone 3 Ignore liabilities incurred by FCo and SPV ICo 4 Ignore liabilities incurred by all the entities in the entire value chain i.e. FCo, SPV & ICo: 17 Taxation of Capital Gains including indirect transfers

18 Small shareholder exemption 18

19 Direct holding of assets by FCo/ FE Explanation 7(a)(i) to S.9(1)(i) Transfer of a share/interest in a FCo/ FE which directly owns the n assets and the transferor, either individually or along with its AEs*, - neither holds any right of control or management of the transferred FCo/ FE; nor holds voting power/ share capital/ interest > 5% of the total voting power or share capital of F Co/ FE Above conditions to be evaluated over 12 months preceding the date of transfer 5% interest in FCo/FE may still represent miniscule indirect interest of a shareholder in ICo Alternatively, FCo / FE may hold 100% of n assets * AE to be determined as per S.92A (TP provisions) 19 Taxation of Capital Gains including indirect transfers

20 Case study PCo transfer shares of FCo which is a listed company PCo FCo (Listed) 4% of voting and capital Transfer of shares of FCo PCo enjoys small shareholder exemption if in 12 months preceding the date of transfer, each of the following conditions is fulfilled PCo + AE of PCo, have no right of management, or control in relation to FCo PCo, and AE, hold 5% of voting power of FCo * PCo, together with AE, holds 5% of share capital of FCo ** Outside AE is as per S.92A of ITL Quantum of transaction immaterial Fco s listing makes no difference Branch Presence of right of management or control may disqualify even if shareholding or voting right is 5% Cases of veto or negative control to be examined * Could even be differential voting right ** Could cover all forms of capital 20 Taxation of Capital Gains including indirect transfers

21 Case study LLC FCo Mr. A Assignment of interest Outside Facts Mr. A is a member of LLC LLC is an incorporated entity Mr. A is entitled to 5% profit share but he is an operating member of LLC & has veto power in respect of most decision making Mr. A is not a director nor participates in management of FCo LLC may opt for pass through assessment in its tax jurisdiction but has opted for entity level assessment Mr. A assigns his interest to Mr. B and earns gain The only asset of each entity in the vertical structure is an underlying investment Issue Mr. A s interest in LLC represents interest in entity which is incorporated outside and hence covered by Explanation 5 to S.9(1)(i) Mr. A holds 5% profit share: small shareholder exemption available for the holding of 5%. ICo Exemption is breached if interest exceeds 5% However, exemption is not available as Mr. A is likely to be regarded as holding the right of management or control in relation to LLC 21 Taxation of Capital Gains including indirect transfers

22 Indirect holding of assets by FCo/ FE Explanation 7(a)(ii) to S.9(1)(i) Transfer of shares/interest in a FCo/ FE which indirectly owns the n assets and the transferor, either individually or along with its AEs*, - neither holds the right of control or management of FCo / FE; nor holds any rights in, or in relation to, F Co / FE which would entitle the transferor to exercise management or control in a company/entity which directly holds n assets; nor holds such % of voting power/ share capital/ interest in FCo/FE which results in holding (either individually or along with its AEs) voting power/ share capital/ interest > 5% of the total voting power or share capital of a company/entity which directly holds n assets Above conditions to be evaluated over 12 months preceding the date of transfer 5% interest in FCo/FE may still represent miniscule indirect interest of a shareholder in ICo * AE to be determined as per S.92A (TP provisions) 22 Taxation of Capital Gains including indirect transfers

23 Case study FCo Sub1 JVCo Sub2 ICo PCo Transfer 50% (b) 25% (c) 50% (d) 20% (a) 50% (e) Outside PCo effects transfer of 10% shares of FCo in Is PCo entitled to small shareholder exemption? Assumption: PCo together with AE, does not hold right of management or control in relation to FCo (being a company whose shares are transferred) PCo does not hold, by virtue of holding right in or in relation to FCo, direct/indirect right in management in or control in relation to Sub2 (being a company directly owning assets) But, PCo s derivative voting right or share capital holding in Sub2 exceeds 5% as under: Through Sub1 it is 20% of 50% of 50% (i.e. a x b x d) = Through JVCo it is 20% of 25% of 50% (i.e. a x c x e) = If 10% of shares in FCo are sold in February 2017, Total i.e. after 7.5% 12 months of first tranche transfer in, voting right or share capital % will be below 5% and at that stage, (i.e. second tranche) small shareholder exemption can be claimed 5.0% 2.5% 23 Taxation of Capital Gains including indirect transfers

24 Case study PCo 10% FCo1 50% FCo2 Transfer of shares of FCo1 Company whose shares are transferred PCo transfers shares of FCo1 PCo can enjoy small shareholder protection if in 12 months preceding date of transfer all following conditions are fulfilled by PCo together with AE, Has no right of management or control in relation to FCo1 Has no right in or in relation to FCo1 which gives him right of management or control in relation to FCo3 by virtue of any right in or in relation to FCo1 Holds 10% of voting power of FCo 1 such that derivative voting right in FCo3 is 5% (10% X 50% X 100%) Holds 10% of share capital of FCo 1 such that derivative share capital in FCo3 is 5% 100% FCo3 Company directly owing It is not material that I Co may be a listed company and FCo3 may hold very small percentage of ICo and that direct transfer of shares of ICo by FCo3 on Stock Exchange may Outside be tax exempt 1% In the given illustration, as a variation, if PCo holds 5% of ICo (Listed) share capital of FCo1 and AE of P Co holds another 6% of share capital in FCo1, small shareholder exemption is not available for PCo s transfer of shares of FCo1. 24 Taxation of Capital Gains including indirect transfers

25 Overseas merger/ demerger 25

26 Tax neutrality for foreign merger/demerger involving direct / indirect transfer S.47(via) and (vic) apply to direct transfer of shares of n company in case of amalgamation/demerger of two foreign companies Cost and holding period substitution granted to amalgamated company/ resulting company Introduction of S.47 (viab)/(vicc) to neutralise indirect transfer for - Amalgamating foreign company Demerger involving two foreign companies Exemption for foreign amalgamating company (F Co) if 25% parity of shareholding continues in amalgamated company F Co triggers no tax in its country of incorporation Exemption for foreign demerged company (F Co) if 75% parity of shareholding continues in resulting company F Co triggers no tax in its country of incorporation Demerger need not be u/s 391/394 of Cos Act, 1956 No tax neutrality however for shareholder of the amalgamating / demerged company 26 Taxation of Capital Gains including indirect transfers

27 Direct transfer of shares of ICo Direct transfer of shares of ICo upon Shareholders Issuance of shares of FCo2 amalgamation of FCo1 with FCo2 In terms of existing provisions under S.47(via), FCo1 gets exemption upon its merger with FCo2, subject to FCo1 FCo2 Continuity of 25% of shareholding and No taxation in the jurisdiction of FCo1 Amalgamation No protection to shareholder of Outside amalgamating company (FCo1) Exemption available to shareholders ICo u/s. 47(vii), if amalgamated company is an n company FA 2015 amendment deals with indirect transfer cases 27 Taxation of Capital Gains including indirect transfers

28 Indirect transfer of shares of ICo Shareholders Issuance of shares of FCo2 In terms of S.47(viab), FCo1 gets exemption upon its merger with FCo2, subject to - Continuity of 25% of shareholding and FCO1 FCo2 No taxation in the jurisdiction of FCo1 No protection to shareholder of Amalgamation amalgamating company (FCo1) also? SPV Outside Amendment exempts transfer of shares of SPV which derive value from ICo ICo Exemption available to shareholders u/s. 47(vii), if amalgamated company is an n company 28 Taxation of Capital Gains including indirect transfers

29 Overseas amalgamation of WOS with its parent 100% FCo group owns ICo shares which are held through a vertical holding structure FCo2 is merged with FCo3 Merger is tax exempt in FCo2 jurisdiction 100% Merger Merger involves direct and indirect transfer of I Co shares FCo2 enjoys exemption u/s 47(via) and 47(viab) respectively in respect of transfer of I Co and F Co1 shares Outside No Consideration to FCo3 but mere cancellation of its shares in FCo2 Assets vesting in FCo3 in its capacity of amalgamated company and not as consideration for transfer of FCo2 shares? 29 Taxation of Capital Gains including indirect transfers

30 Reporting obligations and penal consequences 30

31 Reporting obligation u/s 285A Shares of FCo may derive value substantially from located asset [as referred to in Explanation 5 to S.9(1)(i)] FCo may directly or indirectly hold assets in i.e. through, or in, an n concern FCo may hold assets in directly or FCo may hold assets in through an n concern or FCo may hold assets in in n concern Form of reporting and time limit of reporting to be prescribed. The documents to be furnished also to be prescribed Since information is to be furnished for determination of income u/s. 9(1)(i); obligation of reporting may be after transaction is completed Reporting obligation on n concern if assets held through or in n concern Obligation is for determination of income accruing or arising u/s. 9(1)(i) Is reporting required if transaction is exempt? The date from which reporting obligation arises? 31 Taxation of Capital Gains including indirect transfers

32 Penalty u/s.271ga Penalty on n concern for failure to furnish information / documents u/s. 285A Penalty is 2% of the transaction value if transaction has effect of directly or indirectly transferring right of management or control in relation to n concern In other cases, penalty is INR 500,000 Transfer of change in management or control* : What is threshold 51% or 26%? Ability to block critical decisions? Change in control, if it arises independent of transfer of share in a foreign company or interest in a foreign entity should not trigger penalty as the obligation of reporting is for the purpose of determination of income arising u/s. 9(1)(i) Test, for example, issuance of rights shares by FCo which may not be subscribed to by all the existing shareholders Management and control needs to be seen qua the n concern - though, the change may occur oven as a consequence of transfer to an associate or the group concern Change of shareholding in the vertical structure (such that, the ultimate parent and immediate shareholder of n concern remain unchanged ) may not trigger in direct or indirect transfer of the right of management or control in relation to I Co * Positive control? Negative Control? 32 Taxation of Capital Gains including indirect transfers

33 Case study FCo1 FCo2 FCo3 Transfer Transfer of shares FCo3 by FCo2 in favour of FCo1 may trigger S.9(1)(i) tax implications ICo may trigger reporting obligation u/s. 285A Does transfer have effect of direct or indirect transfer of right of management or control in relation to ICo? Right of management or control is ordinarily with the Board of Directors and/or shareholders of the company. The right of management or control of FCo4 remains unchanged Penalty of Rs. 500,000? Outside FCo4 ICo What if FCo3 had contractual right to manage / control I Co? Is change in ownership of FCo3 leads to change of control or management in relation to I Co? What if F Co 2 effects gift or enjoys treaty protection in terms of? 33 Taxation of Capital Gains including indirect transfers

34 Payment of foreign dividend [Circular 4/2015] 34

35 Taxation of dividend paid by F Co FCo1 100% Div 4 Explanation 5 applies, creates a fiction: share / interest in F Co / FE is deemed to have been situated in Issue debated : Is dividend paid by F Co / FE from deemed source of income in? Circular No. 4 of 2015 FCo2 100% FCo3 100% Div 3 Div 2 S. 9(1)(i) amendment clarifies source rule of taxation in respect of gains from indirect transfer and is restricted in its applicability to transfer Declaration of dividend by F Co does not have effect of transfer of underlying assets Accordingly, dividends declared and paid outside by F Co not covered by s. 9(1)(i) Circular refers to dividend declared and paid FCo4 No taxation in respect of: Outside ICo Div 1 Interim or final dividend; Dividend paid in kind; Dividend paid out of share as premium (or any capital reserve) as permitted under corporate law of F Co 35 Taxation of Capital Gains including indirect transfers

36 Applicability to dividend in kind SPV 1 derives substantial value from n assets and is covered by explanation 5 to S.9(1)(i) P CO SPV 1 Dividend in the form of SPV2 shares Jurisdiction of SPV 1 permits distribution of dividend in kind, in the form of investment SPV 1 distributes investment in shares of SPV 2(and indirectly I Co) as dividend to shareholder, i.e. P Co Outside SPV 2 I Co Such distribution is characterised as dividend for tax purposes in SPV 1 s jurisdiction Application of Circular 4 of 2015: Distribution of shares treated as dividend for the purpose of the ITA if SPV 1 s jurisdiction characterises the same as dividend in terms of its tax laws Distribution of dividend in kind, i.e. shares of SPV 2, deemed as dividend u/s 2(22)(a) to the extent of accumulated profits of SPV 1 Circular 4 benefit can be applied, covers deemed dividend 36 Taxation of Capital Gains including indirect transfers

37 Applicability to deemed dividend Outside P Co SPV 1 SPV 2 I Co Liquidation proceeds SPV 1 derives substantial value from through ICo and is covered by explanation 5 to S.9(1)(i) SPV 1 has accumulated profits SPV 1 is liquidated and investment in shares of SPV 2 (and indirectly I Co) is distributed to shareholder, i.e.p Co Distribution to the extent of accumulated profits treated as deemed dividend taxable under S.2(22)(c) of ITA; balance distribution taxable as capital gains Application of Circular 4 of 2015: Liquidation regarded as transfer effected by the shareholder of an asset which is deemed to be situated in To the extent, distribution upon liquidation is characterised as dividend, is benefit of CBDT Circular 4 available 37 Taxation of Capital Gains including indirect transfers

38 Case Studies 38

39 Sequencing of the transactions F Co and its promoters are from non-treaty Promoters F Co 1000 Transfer favourable jurisdiction(s) Value of Sing Co is 60% of overall F Co value triggering proportionate tax liability in upon exit at F Co level Alt : 1 Promoters transfer shares of F Co Sing Co Others Triggers proportionate tax in as F Co is covered by Explanation 5 to S.9(1)(i) Outside ICo Alt : 2 Sing Co to dispose of shares of I Co and claims treaty exemption F Co / promoters to dispose of residue post above sale 39 Taxation of Capital Gains including indirect transfers

40 Computation of capital gain FCo had invested $100 in SPV shares 4 years back FCo may be trigger POEM based residency in 100% 100% FCo SPV ICo Transfer of SPV shares FCo transfers shares of SPV for $1000 Capital gains computation in the hands of FCo: Gains proportionate to assets taxable in Cost of acquisition of ICo not relevant Capital gains to be calculated in $ terms under Rule 115 First proviso to S.48 does not apply Indexation benefit applies Purchaser has TDS obligation u/s. 195 for payments to FCo though tax resident; likewise, S.112(c)(iii) 10% taxation benefit applies even if FCo is POEM resident TDS is w.r.t. actual tax liability of payee (refer Circular No. 3 of 2015) 40 Taxation of Capital Gains including indirect transfers

41 Impact of preferential allotment FCo1 90% (24%) Outside 100% SPV ICo FCo2 10% (76%) F Co1 and F Co2 are foreign companies operative in different jurisdictions hold shares of SPV SPV is covered by Explanation 5 to s. 9(1)(i) desired to be held primarily by F Co2 SPV makes preferential allotment to F Co2 at fair value Post preferential allotment, F Co2 will hold 76% of expanded capital base of SPV Issues Does preferential allotment result in transfer? Does it result in creation of interest in control and management held by F Co1 or SPV? Is F Co1 triggering tax in? Is there any reporting obligation on I Co? 41 Taxation of Capital Gains including indirect transfers

42 Gift of foreign shares FCo1 and FCo2 are sister subsidiaries 100% FCo1 PCo FCo2 100% FCo1 is 100% parent of SPV SPV has presence in and holds ICo shares and other n assets For synergy and as part of global reorganization, FCo1 gifts shares of SPV to FCo2 100% gift Tax implications for FCo1 S.47(iii) exemption? SPV S.50D applicability TP applicability Outside 100% Tax implications for FCo2 / PCo Evaluate S.56(2(viia), S.2(24)(iv); S.2(22) Is reporting required u/s. 285A? By whom? ICo n operative assets Penalty quantum u/s. 271GA if I Co / n concern in default? 42 Taxation of Capital Gains including indirect transfers

43 Treaty interplay 43

44 Relief under a DTAA Parent Co Buyer HoldCo ICo Transfer of HoldCo s shares SHCo jurisdiction HoldCo jurisdiction Assumptions Parent Co holds shares as an investment ICo does not hold immovable property in, either directly or indirectly Key points Some DTAAs have specific provisions to capture this, requires a separate examination DTAA with the Buyer s jurisdiction not relevant Buyer does not earn income/gains DTAA with HoldCo s jurisdiction not relevant HoldCo can be located in any jurisdiction, this does not impact the analysis DTAA with Parent Co s jurisdiction relevant Parent Co is the alienator, earning capital gains 44 Taxation of Capital Gains including indirect transfers

45 Relief under a DTAA Parent Co Buyer HoldCo ICo Transfer of HoldCo s shares SHCo jurisdiction HoldCo jurisdiction Categories of Parent Co treaties (illustrative): Category Right to tax Treaty examples 1 Exclusive taxation right to COR with/ without conditions about LOB, subject to tax, transfer to NR Mauritius, Netherlands, Singapore 2 Taxation as per domestic law UK, USA 3 Source taxation in restricted to shares of n resident Company 4 Treaty permits taxation of indirect transfer 5 Absence of capital gain Article but presence of other income Article in the treaty Germany, Switzerland, Luxembourg South Africa, Israel Malaysia, Nepal 45 Taxation of Capital Gains including indirect transfers

46 Indirect transfer of immovable property FCo (Treaty resident) Transfer of SPV shares taxable in if SPV consists, directly or indirectly, principally of immovable property (IP) in [Article 13.4 of UN MC] Meaning of IP to be taken as per Article 6(2) Transfer of SPV shares As per Article 6(2), IP includes SPV 100% IP as per the domestic laws (not only tax laws) of (i.e. the source country); property accessory to IP; Outside 100% rights to which the provisions of general law respecting landed property apply; usufruct of IP, etc. n domestic laws define IP widely to include benefits to arise out of land, right of way, etc. ICo Executes infrastructure project UN MC clarifies principally to mean 50% value threshold No source taxation if IP used for business purposes [e.g. UN MC, -Netherlands treaty] 46 Taxation of Capital Gains including indirect transfers

47 Benefits under Singapore treaty: Impact of modified Mauritius treaty Singapore Sing Entity (SE) (FII) SE is a treaty resident of Singapore and fulfils motive and objective test of LOB Alienator based taxation in Article 13.4 of I-S treaty is co-terminus with alienator based taxation in I-M treaty Equity / Preference shares I Co 1 I Co 2 CCDs MF MF Units Any amendment in I-M treaty to take away alienator based taxation will but, will restore earlier I-S treaty granting limited source based taxation Taxation of various instruments as per earlier I-S treaty: Shares of ICo taxable in Any instruments, like MF units, CCDs taxable in Singapore; no requirement to satisfy LOB rule 47 Taxation of Capital Gains including indirect transfers

48 Direct Transfer of Shares USA Mr. Patel (NRI) ICo Mr. Patel subscribed to 1 L shares of ICo at par value (value = INR 1 cr.) on 30 April 2004 He remitted US$ to subscribe to ICo ICo shares are transferred in for INR 2 Cr to a resident of Mr. Patel notes the following: Year Exchange rate Cost Inflation Index [CII] $ INR $ INR Fluctuation 54% 113% Indexation results in capital loss but the first proviso results in gain! Is there option for Mr. Patel to opt out of first proviso and claim indexation benefit? 48 Taxation of Capital Gains including indirect transfers

49 Questions? 49 Taxation of Capital Gains including indirect transfers

50 Thank You! This Presentation is intended to provide certain general information existing as at the time of production. This Presentation does not purport to identify all the issues or developments. This presentation should neither be regarded as comprehensive nor sufficient for the purposes of decision-making. The presenter does not take any responsibility for accuracy of contents. The presenter does not undertake any legal liability for any of the contents in this presentation. The information provided is not, nor is it intended to be an advice on any matter and should not be relied on as such. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of the presenter, this document may not be quoted in whole or in part or otherwise. 50