CA. Divakar Vijayasarathy Introduction Tax and Regulatory Regime in India Global Estate Tax Regime Possible Estate Planning Structures Practical Perspective to Estate Tax Planning 1
Death leads to movement of property from the deceased to their successors Succession could be testamentary or intestate Intestate succession could lead to appointment of an administrator Taxes shall be applicable on: Succession Appointment of administrator Transfer of property from administrator to ultimate successor 2
For tax parlance, death means: - Death of a living person - Prolonged absence of a living person. - Presumption based on period of absence & - Judicial review Succession law in most countries have multiple implications There could be a State/Provincial as well as a Central Legislature 3
Nature of Succession Law A single succession law applies throughout the country Existence of plural legislations where state/ province has the autonomy to legislate on succession laws Religion or Community based succession law Succession is governed by central laws however local law may govern successions regarding agriculture and farming Succession law applies through the metropolitan territory but special rules exist for overseas territories and overseas collectivities Countries Argentina, Brazil, Germany and Venezuela Australia, Canada, Mexico, UK and USA India and Spain Austria, Germany and India France and Denmark Broad classification: Law of ownership (identify assets that are owned by the deceased upon his death) Matrimonial Law Contract law (succession pacts) Succession laws are considered operational predominantly through two modes namely: - Direct transmission - Indirect transmission 4
Situation Principle of direct transmission from deceased to the heirs. Transfer is not assimilated to a sale and hence not regarded as a taxable event for capital gains purposes. Principle of indirect transmission under which assets, rights and obligations are first transferred from the deceased person to a personal representative and then the net assets are transferred to the legal heirs Countries France, Argentina,Belgium, Brazil, Chinese Taipei, Colombia, Czech Republic, Germany, Greece, Hungary, Korea, Italy, Japan, Luxembourg, Mexico, Peru, Poland, Switzerland and Uruguay Denmark,Norway, Sweden and all common law countries (Canada, Bhutan, New Zealand, Hongkong, Ireland etc) Taxation based on the domicile of the deceased In some countries residence must have been maintained for a certain period. (5 years in the case of Netherlands) In common law countries (also in Belgium, France, Ireland, Israel, Korea, Luxembourg and Ukraine), scope of residence or domicile based taxation is restricted only to immovable properties 5
Nationality based taxation (Croatia, Chinese Taipei, Germany, Greece, Italy, Japan, Poland, Portugal, Spain and Serbia) Multiple parameters being adopted by central and state legislature Type of Tax Description Countries Inheritance tax (IHT) Tax levied on the legal heir Luxembourg,, Czech Republic etc Estate tax (ETA) Tax levied on the estate France, Greece, Hungary, Italy, Norway, Poland, Netherlands, Chile, Croatia etc Capital gains Tax ETA and IHT Gift tax (in addition to IHT and ETA) Tax levied on transfer of estate ETA is levied based on the value of the estate Tax on receipt of estate without consideration Russia, Ukraine etc UK, Belgium, Chinese Taipei, Korea and Denmark France, Germany, Luxembourg, Italy, USA etc 6
Estate tax or Inheritance Tax is a tax levied at the time of death or succession. Such tax is levied on the value of estate of the deceased or donor. Some legislations levy capital gains tax at the time transfer of estate to successor. 7
Estate Duty Act 1953 was repealed w.e.f 16 th March 1985 Gift Tax Act was abolished by Finance Act 1998 w.e.f 1 st of October 1998. Finance Act (2)2004 introduced Sec 56(2)(v) for taxation of gifts subject to exceptions Wealth Tax is payable @ 1% on Net Wealth exceeding Rs 30 lacs. Hence there is no estate or inheritance tax payable in India Wealth of 1% is leviable on net wealth exceeding Rs 100 lacs effective 01-04- 2012 (as per DTC) 8
India is a safe place of Domicile There is no tax on succession hence it is always suggested to have India as an investment intermediary Investment outside India: Remittance up to USD 2,00,000 p.a permitted for specified transactions Specified transactions include: Investment in Foreign Securities Transfer of immovable property outside India Other respective guidelines need to be adhered at the time of investment. 9
Investment in foreign securities permitted for a resident in India and a company registered in India. The investee company must be listed and fulfill the conditions prescribed. Investment subject to limits prescribed. ODI possible through a Joint Venture of Wholly Owned Subsidiary outside India Total financial commitment of the Indian Party not to exceed 400% of net worth (200% in case of partnership firms) Investments in Nepal can be made only in Rupees Investment in Pakistan is not permitted 10
JV or WOS must be engaged in a bonafide business Indian Party (IP) is not mentioned in any caution/ defaulters list of RBI. IP routes all the transactions through an authorised dealer and fulfills the compliance procedures prescribed. Investment through miscellaneous remittance of upto USD 200,000 permissible per year per resident individual. 11
Permissible through proceeds in RFC account. Permissible if foreign exchange was earned when assessee was a resident outside India. Miscellaneous remittance route adopted in most circumstances. In any other case, approval is required. 12
Domicile/citizen based estate taxation. Estate includes all tangible and intangible property. Assets considered at retail value on succession Estate Tax Rate : 55% (proposed for 2011) Estate tax applies on: Assets at US US Citizens Non resident citizens Non resident and non citizens Full / proportionate tax credit is available if there is another estate transfer within 10 years. 13
Direct legacy to a spouse who is a US citizen is exempt. Basic exemption of USD 1.0 MM (2011 onwards)- reduced from USD 3.5 MM in 2009. Estate tax was temporarily repealed for the year 2010 Year Exclusion Amount 2001 $675,000 55% 2002 $1 million 50% 2003 $1 million 49% 2004 $1.5 million 48% 2005 $1.5 million 47% 2006 $2 million 46% 2007 $2 million 45% 2008 $2 million 45% 2009 $3.5 million 45% Max/Top tax rate 2010 * Repealed * 0% * 2011 $1 million 55% 14
There is no estate tax or inheritance tax on death One of the few OECD countries which does not have an estate tax However capital gains tax may arise on death or succession Roll over benefits are available on capital gains arising on death Roll over benefits not available for tax advantaged entities (tae) Tae includes individual or entity who is a foreign resident In case of assets held abroad, succeeded by a non resident capital gains tax shall arise on death - Possibility of double taxation cannot be ruled out (refer illustration) 15
. Australian Resident (A) Owns a property in France Capital gains tax shall apply on the deceased final tax return Property inherited by a non resident Australian on death of (A) Estate taxes apply on death or absence of an individual Rate of tax varies from 5% to 45% based on the value of the transfer and relationship Estate tax applies on all the following situations: Deceased is a French resident Successor is a French resident Property is in France 16
Succession of family business has exemptions upto 75% of the estate value subject to conditions Capital gains tax also arises on deathhowever the same is deferred in most circumstances Huge possibility of double taxation in case of assets held abroad. Huge possibility of double taxation in case of assets held abroad. Belgian Resident (A) Owns a shares of a French Company Estate / Gift tax shall apply in both France and Belgium Property inherited by a French resident on death of (A) 17
There are no estate and inheritance taxes in Canada. Death and consequent movement of property is regarded as transfer in the hands of the deceased Exceptions include transfer to a spouse/ spousal trust Capital gains arises on death of an individual Taxes are levied by Provincial and Federal Governments Rates of taxation of capital gains vary from: Federal tax : 15% to 29% Provincial tax : 4% to 17% Tax credit is available on capital gains paid abroad on inheritence 18
No credit is available for ET/ IHT paid abroad. Possibility of double taxation is very high DTAA available with US and France. Hague Convention on the Law Applicable to Succession to the Estates of Deceased Persons (1989) Conflicts of Laws relating to the Form of Testamentary Dispositions (1961) Convention Concerning the International Administration of the Estates of Deceased Persons (1973) 19
UNIDROIT Convention providing a Uniform Law on the Form of an International Will (1973) Regional conventions between Nordic countries (1934) and certain Latin American countries 20
Private Investment Trust Investment holding companies Multi - Layered holding Structuring investment options The best planning structure is possible prior to making an investment Trusts are regarded as separate legal entities in most tax jurisdictions Family members are beneficiaries Death of a members reduces the number of beneficiaries Multiple trusts can be created to suite domestic regulations Estate and inheritance tax can be avoided 21
Private Specific Trusts : Shares of the members are determinate Private Discretionary Trusts: Shares of the members are not determinate. Trust has Business Income Trust does not have Business Income Maximum Marginal Rate: 30% Tax rate applicable to each beneficiary Alternatively- Assessing Officer can assess the income in the hands of the beneficiaries At rates of an AoP if: -Trust is declared by Will - It is exclusively for the benefit of any dependant relative - The trust is the only trust declared by the settlor 22
. Trust has Business Income Trust does not have Business Income At rates of an AoP if: -Trust is declared by Will - It is exclusively for the benefit of any dependant relative or - The trust is the only trust declared by the settlor Maximum Marginal Rate At rates of an AoP if: -The income of none of the beneficiaries does not exceed basic exemption limit -None of the beneficiaries are beneficiaries in any other trust -Trust is declared by Will - It is exclusively for the benefit of any dependant relative - The trust is the only trust declared by the settlor No tax shall be assessable on the grantor However where the trust is for the immediate or deferred of the spouse and minor child the individual shall be liable to tax to the extent of their share of income from the trust. 23
Income Slab Upto Rs 1,60,000 Tax Rates Nil Above Rs 1,60,000 upto Rs 5,00,000 10% Above Rs 5,00,000 upto Rs 8,00,000 20% Above Rs 8,00,000 30% Note: - Rates as applicable for Previous year 2010-11 - Cess of 3% shall be levied over and above the tax rates -Where shares of members are indeterminate, the trust shall be chargeable to tax at maximum marginal rate or at such higher rates Where shares are determinate- Sec 67A: Share of each beneficiary shall be proportionately computed Income shall be part of the personal income under the respective heads of income 24
Situation Income Taxability AoP is taxed at Maximum Marginal Rate AoP taxed as per slab rates AoP is not liable for tax Not included in total income No tax liability Included in total income No tax liability Included in total income Tax shall apply. Family in India Forms an Investment Trust in India or abroad Multiple trusts can be created for investments in different jurisdictions Makes an Investment abroad in the name of the trust 25
Investment is made in the shares of a Holding Company which in turns makes an investment in the ultimate asset. Holding company should be located in a country where IHT/ ET is minimal or absent eg: India In the event of death of a share holder, the shares are transferred to the nominee or legal heir of the deceased in the country of incorporation of the holding company. The legal owner of the asset still remains the holding company. 26
Executed in 2009 Family in India Invests in shares of an Indian Holding Company US, at present, does not have the Look Through provisions for Estate Taxes Makes an Investment at US Benefits: Ownership remains with the Indian company irrespective of death of the promoters No estate tax upon succession Disadvantages: Huge capital gains liability if the asset is ultimately sold at the US 27
Situs of taxation (source vs residence) Economic double taxation (IHT / ETA vs WT) Taxation of transfer from administrator (Canada) Varying definitions of spouse in different legislations 28
Coordination with Global tax professionals Estate planning to be undertaken prior to investment Constant change in estate tax laws and limits Planning holds good for laws prevailing at the time of structuring. Planning comes at a cost ie certain benefits are restricted to estate tax payers eg: US Pluralism of succession laws of both countries 29
Top management salaried employees (CFOs, CEOs, CIOs ) Medium and Large scale exporters and importers Industrialists, Film stars, Directors Other High Net worth Individual (net worth exceeding Rs 20 crores) Identify the possible tax cost in India Discuss with the destination professionals Manage the complete foreign exchange compliance at the time of investment Explore the possibility of ODI and ECB (outside India for investment in a third country) Maintain the structure and alter to suit changing tax laws. 30
. Legal Advisor Abroad Financial Advisor Abroad Indian CA Indian Client and his family Legal Counsel in India Activity Determination of Taxation Cost in India Basis of Payout Per Opinion/ Transaction Determination of FEMA regulations Structuring the transaction in consultation with foreign professionals Per Opinion/ Transaction Fixed fee plus per hour engagement if it exceeds certain stipulated hours agreed upon Maintaining the structure including regulatory updates Fixed Annual fee 31
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