Tax Considerations in International Financing Transactions

Transcription

1 ICSI Seminar on Private Equity Catalyst To Economic Growth June 25, 2011, Hotel Le Meridien, Janpath, New Delhi Tax Considerations in International Financing Transactions Rupesh Jain Partner

2 Private Equity Lifecycle Tax perspective International Investor 1 Exploring investment friendly structures Jurisdictional analysis with reference to location of Target co Remittance of consideration to investor 4 Interest/ Dividends by Target company 2 Setting up the fund/structure Incorporation of Company, trusts, formation of fund, appointment of fund manager etc Target Company 3 Making investment Due diligence, negotiations, signing, payment of consideration etc Strategic investor/ipo/ JV partner 5 Exit Sale to JV partner, another investor, public offer etc. 2

3 Tax considerations/issues Selection of intermediary jurisdiction/structure Tax withholding issues at the time of acquisition of shares Taxability of income streams during holding period Taxability of income/ gains at the time of exit 3

4 Modes of investment Direct investment Holding Co Use of intermediary structure Holding Co Outside India Outside India India Indian Co Cyprus/ Mauritius/ Singapore/ Netherlands Investment Co (Debt) Investment Co (Equity) India Indian Co 4

5 Selection of intermediary jurisdiction : considerations Income streams certain jurisdictions vis à vis others offer advantages Scope and taxability of gains at the time of exit Foreign tax credit Underlying tax credit Limitation on Benefit (LOB) clause in tax treaties Anti treaty shopping rules in domestic laws Tax laws of foreign investor s home jurisdiction and taxability of income linkages with the intermediary jurisdiction; Tax treaty network of investor s home jurisdiction with intermediary jurisdictions. Some of the popular jurisdictions for inbound investment are Mauritius, Cyprus, Singapore and the Netherlands. 5

6 Use of intermediary jurisdiction Pros: Possibility of exemption from capital gains tax on sale of Indian Co s shares Beneficial provisions of Indian tax treaties with certain jurisdictions coupled with favorable domestic tax laws Cons: Issues emanating from indirect acquisition/disposal of business in India through intermediary entity; Intermediary Hold Co s eligibility to treaty benefits; General Anti Avoidance Rules (GAAR) in India expected to be in force from April 1, 2012 Involves administrative and compliance costs in the intermediary jurisdiction 6

7 Acquisition of shares withholding tax issue Issue of withholding tax relevant only if shares are acquired from an existing shareholder; not relevant in case of fresh subscription; Under Indian tax law, payer is required to withhold tax if the payee is a non resident and income is taxable in the hands of the payee; The acquirer is liable to withhold tax on consideration paid to the transferor and to deposit such tax in India; 7

8 Acquisition of shares withholding tax issue Whether the acquirer is liable to withhold tax, even if he is a non resident? Whether tax is liable to be withheld even if shares of an overseas entity are acquired, which directly or indirectly holds Indian company? [discussed later] How to determine quantum and rate of tax deduction: Issuance of Accountant s certificate [self determination] Application to Tax Officer u/s 195 Advance ruling Compliance burden on the acquirer 8

9 Taxability of investment income Interest income (interest on CCDs, convertible debt) Taxable in on gross basis in case of non resident recipient; Subject to benefits under Tax treaty Dividend income Dividends declared by Indian Company subject to dividend distribution tax; no further tax payable in India by the foreign shareholder 9

10 10 Tax issues at exit Modes of exit Transfer of shares to strategic investor Initial Public Offering Buyback of shares Capital gains on transfer of shares of an Indian company, liable to tax in India subject to Treaty benefit Section 9 (1) (i) of the Income Tax Act, 1961 provides that all income, accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any assets or source of income in India, or through the transfer of a capital asset situate in India shall be taxable in India What is transfer direct vs indirect transfer; whether indirect transfer covered [discussed later]

11 Tax issues at exit Tax rates no tax if shares are sold on a stock exchange [long term]; concessional rate of 15% for short term gains Off market sale of listed securities liable to (long term) or 40% (short term) Sale of unlisted shares (short term) and 20% (long term) for a foreign company Eligibility to Treaty benefits Tax residency certificate Fiscally transparent entity; LOB clause in Treaties* Treaty shopping looked at unfavorably by Indian Revenue Substance v form * For example, Singapore tax treaty benefit in relation to capital gains is not available to a conduit or shell company [i.e. an unlisted company whose total annual expenditure in Singapore is less than S$ 200,000 in immediately preceding period of 24 months from the date the gains arise] 11

12 Tax issues at exit Characterisation issue; whether income from sale of sharescapital gains or business income Characterisation determines the taxability and tax rates applicable to the income No clear guidelines under Income Tax Act, 1961; characterization depends on facts and intent of the party Direct Tax Code [draft] characterizes such income [in case of FIIs] as capital gains Deeming provisions in case of a gift or transfer below book value Gift not considered as transfer no tax for transferor If shares of a closely held company are transferred to another such company, recipient is liable to pay tax on the book value of shares as reduced by actual price paid; Whether applicable to transfer between two non residents Whether exemption can be claimed under Treaty provisions under Other income Article? Buyback may be subject to transfer pricing regulations; 12

13 Case study

14 Case Study Cayman/BVI/ Isle of Man Investment Co Cyprus/Mauritius/ Netherlands India Holding Co Multiple holding companies Indian Co [Operating entity] 100% holding Acquirer Transaction: Acquirer purchases shares of Investment Co from the Holding co. The objective is to acquire control of Indian Co s business Pursuant to the transaction, Indian Co,. changes its name to resemble the name of acquirer group and uses their brand; non-compete is executed with the seller; loan obligations are taken over etc. Issues: Can the acquirer be said to have acquired shares of Indian co? Can the acquirer be said to have acquired controlling interest in Indian Co and whether consideration can be split? [refer RKBK Fiscal Services: ITA no. 770/2010/KOL (Trib.) Slide I 14 14

15 Case Study contd. Cayman/BVI/ Isle of Man Investment Co Cyprus/Mauritius/ Netherlands India Holding Co Multiple holding companies Indian Co 100% holding Acquirer Issues: Whether it would matter if Investment Co or Multiple holding companies had invested in other jurisdictions? If so, what would be the threshold? [refer DTC threshhold*] Whether Holding Co can be considered as taxable in India? Whether acquirer is required to withhold tax and deposit the same in India? [Refer Vodafone International: 329 ITR 126 and Richter Holdings Ltd: 199 Taxman 70(Kar.)] Whether the position would change if Holding Co were located in Mauritius or any other country having favorable treaty with India? Whether it would matter if the Indian co. had not changed its name and not used the brand of the acquirer group? Slide I 15 15

16 Case Study contd. Cayman/BVI/ Isle of Man Investment Co Cyprus/Mauritius/ Netherlands India Holding Co Multiple holding companies Indian Co 100% holding Acquirer *DTC threshold : Under the proposed DTC, income from transfer, outside India, of any share or interest in a foreign company, is taxable in India if at any time in twelve months preceding the transfer, the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent. of the fair market value of all assets owned by the company; In case any income is taxable as aforesaid, the proportionate gains (i.e. capital gains * FMV of assets in India/FMV of total assets owned by that foreign company) would be taxable in India. Slide I 16 Slide I 16 16

17 Thank you Slide I 17 Slide I 17