CA. Jayesh Thakur, PricewaterhouseCoopers 1

Transcription

1 Saturday, 22 LLP Taxation & Structuring of an Entity as WIRC ICAI 22 October, 2011 Jayesh Thakur WIRC Objective 2 Agenda Evolution of LLP in India Key Provisions of LLP in India Taxation of LLPs Migration Options Applicability of Wealth-tax LLP under Direct Taxes Code Case Studies Way Forward 3 PricewaterhouseCoopers 1

2 Saturday, 22 Evolution of LLP in India 1 4 Evolution of LLP law in India Based on recommendations of expert committees Naresh Chandra (2003) & J. J. Irani (2005); Concept paper was developed by MCA in 2006 LLP Bill, 2006 introduced in the Rajya Sabha on 15 Dec, 2006 & referred to the PSCF Revised Bill, namely the LLP Bill, 2008 introduced in the Rajya Sabha on 21 Oct, 2008 & passed on 24 Oct, 2008 LLP Act, 2008 notified on March 31, LLP Rules, 2009 notified on April 1, 2009 LLP Bill, 2008 gets President assent on 7 Jan, 2009 LLP Bill, 2008 passed by Lok Sabha on 12 December, 2008 Separate & official website for LLPs Key Provisions of LLP in India 2 6 PricewaterhouseCoopers 2

3 Saturday, 22 Key Provisions - Formation Formation of LLP LLP to be incorporated only for business purposes i.e. to earn profit (not for charitable purposes) LLP agreement Incorporation documents to be filed in prescribed forms with Registrar of LLP - the nodal agency Incorporation certificate conclusive evidence of incorporation / registration If agreement is silent about rights & duties of partners - First Schedule applicable 1 Deciding the partners and designated partners 6 Checking Obtaining the DPIN & Digital Signature Certificate2 Certificate of Formation of LLP Incorporation 5 Filing of Incorporation Document 4 the name availability 3 Drafting of LLP Agreement 7 Key Provisions - Contribution Form / Mode and Value of Contribution Contribution in cash or in kind, including - Tangible - Intangible - Service contracts, etc Monetary value recognised in books No minimum contribution concept Contribution to be per agreement Value of contribution in kind to be determined by value (CA, CWA or approved value) 8 Key provisions - Accounts Financial Reporting Accounts - Cash or Accrual System - Statutory Audit of LLP if, Turnover exceeds Rs 40 lakhs Contribution exceeds Rs 25 lakhs Solvency statement to be signed by Designated Partner Annual Return to be filed with Registrar of LLP - Company Secretary to certify the same Limited Financial Disclosures 9 PricewaterhouseCoopers 3

4 Saturday, 22 Key Provisions - Transfer of Rights Which partnership rights can be transferred? Economic rights: - includes share in the profits and losses of LLP, and to receive distributions in accordance with the LLP Agreement freely transferable Non-economic rights: - includes Day to day management of the LLP, and Control / decision making - not transferable Transfer of economic rights does not cause dissolution or winding-up 10 Key Provisions Conversion Conversion of Company / Partnership into LLP Who can convert - Partnership firm - Private company - Unlisted public company All partners / shareholders to become LLP partners In case of companies, no security interest in assets should subsist To comply with formalities prescribed by Registrar of LLP 11 Taxation of LLPs 3 12 PricewaterhouseCoopers 4

5 Saturday, 22 LLP v. Company as per existing provisions Particulars Current Practice DTC Company LLP Company LLP Net profit before tax Less: Income-tax (a) Profit after tax Less: Transfer to reserves Cash profit available for distribution (b) Net profit Total tax outflow (a + b) Distributed profit Direct Taxes Code Company v. LLP Income Tax Particulars Company LLP Tax Rate * 30% 30% Dividend Distribution Tax * 15% NIL MAT * 20% of book profit NIL Wealth Tax Liable to wealth tax No No Individual s net wealth to include Shares of Company - No Interest in LLP - No * Surcharge and cesses as not considered in above Table. 14 Tax Provisions in brief Taxation of LLP similar to Partnership i.e. non-transparent entity - LLP taxed at entity 30.9% - Share of partner from LLP exempt from tax Illustrative list of sections amended / applicable to LLP - Section 2(23) - Firm includes, Partner to include a partner of LLP - Section 2(31) Person includes firm which includes LLP - Section 10(2A) - Share of profits from LLP - Section 40(b)(v) - Remuneration to Partners - Section Signing of Return of Income - Section 167A Charge of tax in case of firm 15 PricewaterhouseCoopers 5

6 Saturday, 22 Tax Provisions in brief Difference in LLP and Partnership - Section 44AD Presumptive tax not applicable to LLP - Section 167C Recovery of Tax Residential Status of - LLP is a resident of India except where control and management situated wholly outside India AMT provisions introduced - Total income as base and not book profit - Only Chapter VI-A/10AA deduction to be added - Dividends, exempt LTCGs, etc. not liable to AMT 16 Liability of partners Partners in LLP do not have joint and several liability - Except in accordance with section 167C Existing section 188A - Applicable to all partnerships (including LLPs) - Partners shall be jointly and severally liable for tax liability New section 167C specifically covers only LLPs in case of liquidation 17 Tax consequences of distribution Distribution of profits to partner not subject to tax in the hands of partner - Section 10(2A) of the Act Payment of salary/bonus to working partner - Taxable in the hands of nominee partner (in case of corporate member) as business income under section 28(v) of the Act 18 PricewaterhouseCoopers 6

7 Saturday, 22 Tax advantage Profit exempt in hands of partners No No Wealth tax - On LLP - On partners interest in assets of LLP 19 Compliance requirements Return of income to be filed before July 31 - September 30 in case tax audit provisions apply Section 184 to apply - Filing of LLP Agreement alongwith first return as well as every change in the constitution Tax audit mandatory if turnover in excess of Rs. 60 lakhs or professional fees in excess of Rs. 15 lakhs Section 140 Return to be signed by designated partner - In absence of designated partner, any other partner can sign 20 Migration Options 4 21 PricewaterhouseCoopers 7

8 Saturday, 22 Conversion to LLP Capital Gains Any profits or gains arising from the transfer of a capital asset Transfer includes - sale, - exchange - relinquishment of asset, - extinguishment of any rights therein, - compulsory acquisition thereof under any law Memorandum Explaining the provisions of Finance (No.2) Bill, Conversion from firm to LLP - No tax implications - Conversion from Company to LLP Silent Finance Act, Conversion from firm to LLP Silent - Conversion from Company to LLP - Silent 22 Conversion to LLP Capital Gains Memorandum Explaining the provisions of Finance Bill, 2010 Conversion from firm to LLP Silent Conversion from Company to LLP Tax free subject to conditions 23 Tax Exempt Transfer - Conditions Following transfers not to be regarded as transfer - section 47(xiiib) - Transfer of a capital asset or intangible asset by a private company or an unlisted public company to ; - Transfer of a share or shares held in a Company by a shareholder as a result of conversion of a Company into Conditions for tax exempt transfer - All the assets and liabilities transferred - Shareholders to become partner in the LLP in shareholding ratio - No other consideration to shareholders - Aggregate profit sharing ratio of erstwhile shareholders > 50% for 5 years - Total Sales, turnover or gross receipts in business in any of the three preceding previous years not to exceed Rs.6 million - No distribution of pre-conversion accumulated profits for 3 years. 24 PricewaterhouseCoopers 8

9 Saturday, 22 Withdrawal of Exemption Withdrawal of exemption on failure to meet conditions - Taxable in hands of successor LLP/shareholders - Taxable in year in which conditions are not met 25 Some more provisions MAT credit available to a predecessor company shall not be allowed to the successor LLP Business losses and unabsorbed depreciation allowed to be carried forward to be set-off by the LLP Deduction in respect of unamortized expenditure on voluntary retirement scheme will be allowed in the hands of LLP from the year of conversion for the unexpired period Cost of acquisition of capital asset for LLP deemed to be the cost for which predecessor company acquired it Actual cost of block of assets for successor LLP shall be written down value of the block of assets in the case of predecessor on the date of conversion Cost of acquisition of capital asset (being rights of a partner) deemed to be cost of acquisition to him of the share or shares in the company immediately before conversion 26 Non-compliant conversion consequence No capital gains tax to be levied in case of conversion on following grounds - Transfer involves two parties - No incoming consideration qua the transferor - No conveyance of property executable in favor of limited company - Vesting of property is not consequent or incidental to a transfer - Cloak given to firm is replaced by a different cloak - Same firm is treated as company - only a change in the legal form Failure of computation mechanism full value of consideration is the price bargained by the parties and cannot be construed as the market value No tax implications would arise on conversion 27 PricewaterhouseCoopers 9

10 Saturday, 22 Non-compliant conversion consequence Analogy may be drawn from judicial precedents - CIT v. Texspin Engg. and Mfg. Works (263 ITR 345) - ACIT v. Unity Care and Health Services (106 TTJ 1086) - M/s Umicore Finance Luxembourg, In re (2010-TIOL-15-ARA-IT) Factors to tax conversion : - Existence of two parties on the date of transfer - Actual flow of consideration Both factors absent in case of conversion 28 Availability/continuity of tax incentives to LLP Availability/continuity of tax incentives/tax holidays to LLP Benefits attached to undertaking v Benefits attached to Company Circular No. F No.15/5/63 in the context of section 84 - The Board agrees that the benefit of s. 84 of the IT Act, 1961, attaches to the undertaking and not to the owner thereof. The successor will be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a running concern Judicial Pronouncements - Mohan Dairy v. Dy CIT (90 TTJ 403) - CIT v. Tyresoles Goa Pvt. Ltd. (213 ITR 660) - ITO v. Hindustan Petroleum Corpn. Ltd. (16 ITD 574) - DCIT v. B.R. Industries Ltd. (96 TTJ 962) 29 Applicability of Wealth-tax 5 30 PricewaterhouseCoopers 10

11 Saturday, 22 Applicability of wealth tax to LLP Wealth tax payable by - Individual; - HUF, and - Company LLP not covered in charging section No wealth tax 31 Applicability of wealth tax to partners of LLP Value of the partner s interest in the assets of the firm included in the net wealth of the partner in their individual capacity. - Covers individual partners as a partnership firm is not treated as a separate legal entity and the assets in the partnership firm belong to the partners - Unlike partnership firm, is treated as a separate legal entity and the assets in do not belong to the partners of the LLP Partners not liable to pay wealth tax on the assets owned by the LLP 32 LLP under Direct Taxes Code 6 33 PricewaterhouseCoopers 11

12 Saturday, 22 Taxability under DTC LLPs, partnership firms and AoP/ BoI treated as unincorporated bodies and taxed as separate entities Tax rate 30% Partner s share not taxed in its hands No MAT No Salary, bonus, commission to working partners and interest to all partners fully deductible Presumptive taxation available Slide 34 Case Studies 7 35 CS1 Promoter in Listed Company & LLP Rejig Existing Structure Promoter Shareholders Holding Companies Listed Company 36 PricewaterhouseCoopers 12

13 Saturday, 22 CS1 Promoter in Listed Company & LLP Rejig Solution Partners No LLP Listed Company Promoter holding 34% (Rs. 778 Crores) out of 45% (Rs.1030 Crores) transferred to LLP RIL Share Capital Rs Crores (Dividend 70% i.e Rs Crores) Tax Efficient LLP Structure 37 CS2 Real Estate investment Existing Structure Shareholders Company Property Leased 38 CS2 Real Estate investment Possibility Partners No LLP Property Leased Tax Efficient LLP Structure for Rent earning company 39 PricewaterhouseCoopers 13

14 Saturday, 22 CS3 Double Existing Structure Individuals 100% Intermediary Co. <51% Operating Co. 40 CS3 Double Possibility Individuals No 100% LLP <51% Operating Co. No / Deemed dividend/ income/ no cash trap Significant Tax Savings 41 CS4 Triple Existing Structure Individuals 100% Intermediary Co. 1 >51% Intermediary Co. 2 >51% Operating Co. 42 PricewaterhouseCoopers 14

15 Saturday, 22...CS4 Triple Possibility A Individuals No 100% LLP No >51% Intermediary Co. 2 >51% Operating Co. 43 CS4 Triple Possibility B Individuals No 100% LLP >51% Operating Co. No double / Deemed dividend/ income/ no cash trap Significant Tax Savings 44 CS5 Multiple Existing Structure Individuals 100% Intermediary Co. 1 Intermediary Co. 2 Intermediary Co. 2 >51% Operating Co. 45 PricewaterhouseCoopers 15

16 Saturday, 22...CS5 Multiple Possibility A Individuals No 100% Intermediary Co. 2 >51% Operating Co. 46 CS5 Multiple Possibility B Individuals No 100% LLP >51% Operating Co. No / Deemed dividend/ income/ no cash trap Significant Tax Savings 47 CS6 Repatriation of Surplus Cash Existing Structure Individuals Operating Co. 48 PricewaterhouseCoopers 16

17 Saturday, 22 CS6 Repatriation of Surplus Cash Possibility Individuals No 100% LLP Drivers No - Comparatively Low Tax Cost No cash trap Accumulated cash and reserves Can be distributed without tax Solution Convert Operating Company into LLP - Alternatively, a new LLP can acquire the assets/ business from the Operating Co. on slump sale basis at book value/ tax written down value* * Cash flow and Stamp duty implications needs to be evaluated on case to case basis 49 CS7 Joint Venture Structure Existing Structure JV Partner JV Partner JV Co. 50 CS7 Joint Venture Structure Possibility JV Partner JV Partner No No LLP Solution Convert JV company into LLP Savings of cost Alternatively, a new LLP can acquire the shares/ assets/ business from the Operating Co. on slump sale basis at book value/ tax written down value In case JV Partners are companies, they can also be converted into LLP* * Cash flow and Stamp duty implications needs to be evaluated on case to case basis 51 PricewaterhouseCoopers 17

18 Saturday, 22 CS8 Listed Companies with Projects / SPV s Existing Model Listed Companies Project Co.1 Project Co.2 Project Co.3 52 CS8 Listed Companies with Projects / SPV s Possible Model Listed Companies LLP 1* LLP 2 * LLP 3* LLP will undertake projects More tax efficient repatriation without MAT outflow 53 CS9 Consortiums / Joint ventures Existing Model Foreign Co Outside India Direct India Joint venture Joint Venture (JV) Partner Company / Unincorporated JV 54 PricewaterhouseCoopers 18

19 Saturday, 22 CS9 Consortiums / Joint ventures Possible Model Foreign Co Outside India Direct India Indian Hold Co* Indirect Joint venture JV Partner LLP will undertake projects Tax efficient structure 55 CS10 Transition of Existing Structure Option 1 Merger of Co into a New Co and Subsequently Conversion into LLP 1 New company formed New Company 2 Merger of Existing Company into New Co Existing Company 3 New Company to convert into LLP LLP Can be achieved in 4-6 months in a tax neutral manner 56 CS10 Transition of Existing Structure Option 2 De-merger of Co into a New Co and subsequently Conversion into LLP 1 Company with different businesses Existing Company 2 Business transferred to a New Company New Co. 3 New Company to convert into LLP LLP Can be achieved in 4-6 months in a tax neutral way 57 PricewaterhouseCoopers 19

20 Saturday, 22 Way Forward 8 58 Conclusion LLP structure to provide substantial tax and cash flow advantage over company structure Existing projects can be converted into LLP structure New projects may be directly set up in 59 Thank You 2011 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, refers to PricewaterhouseCoopers Private Limited (a limited liability company in India), which is a member firm of PricewaterhouseCoopers International Limited (IL), each member firm of which is a separate legal entity. PricewaterhouseCoopers 20