Seminar on Private Equity Challenges and Opportunities August 2014 1
Offshore Fund Structuring - Key Aspects 2
Typical Offshore Fund Structure General Partners Other Investors Overseas Tax Efficient Jurisdiction GAAR Impact - Substance Offshore Fund Manager Indirect Transfer Fund management services Management Fees & Carry Offshore Fund GAAR Impact - Taxability Carry Vehicle Investment Committee GAAR Impact and TRC appropriate commercial substance to be demonstrated Tax withholding on transfer to non-resident PE and arms length pricing Repatriation FPI FDI FVCI India Non-binding advisory services Investee Company 1 Investee Company 2 Investments Investee Company 3 Salary & Bonus (incl carry) Indian Advisory Company Income characterization 3
Key Aspects for Consideration in an Offshore Fund Structure Offshore Fund Structuring Key Tax and Regulatory Aspects Jurisdiction for establishing Fund / AMC Exit strategies Tax Residency / PE Carry / Management Fee Sharing Reward planning for Deal team Need for India Advisory Company / LLP Regulatory approvals Regulatory arbitrage and efficiency Tax efficiency on profit repatriation Revenue authorities approach Co-investment vs. Unified Ownership of India Advisory Company and entities Interplay between various entities 4
Domestic Fund Structuring - Key Aspects 5
Typical Domestic Fund Structure Liability as representative assessee Domestic Investors Trustee Trust taxation provisions AMC Settlor / Sponsor Investment Committee Tax withholding on transfer to non-resident Repatriation Income characterization AIF Investment Management Agreement and Sponsor contribution Investment in securities of unlisted companies or interest in LLP Management fees and carry Deductibility of fees and carry Investee Co 1 Investee Co 2 Investee Co 3 6
Key Aspects for Consideration in a Domestic Fund Structure Domestic Fund Structuring Key Tax and Regulatory Aspects Constitution of the Fund Trust / LLP Constitution of the Manager Company / LLP Carry structure for Manager employees Business Income v Capital gains Deductibility of expenses Differential fee / carry structures In case of Trust Determinate Status In case of Trust Permissibility to do downstream LLPs Companies Act Deposit regulations Deferral of taxability / withholding Reporting to investors Investment in Associates Prior investor approval 7
AIF Tax Considerations Trust Structure Category I AIF VCF (Pass through status - Income exempt u/s 10(23FB) of the Act) Category I (other than VCF), II and III AIF (Income not exempt u/s 10(23FB) of the Act) Income distributed taxable in hands of investors on accrual basis Other provisions of Act to apply No Contributions made No Settlement made to to trust revocable? trust revocable? Is it a discretionary or a determinate Trust? Yes Yes Income taxable in hands Income may be taxable Discretionary Determinate of contributors in hands of Settlor Income of the Trust would be charged to tax in hands of Trustee at MMR i.e. 33.99% Arguable that capital gains rate over-ride MMR provisions in case of discretionary trust Income of Trust would be taxed in hands of Trustee as representative assessee in like manner and to same extent as taxable in hands of beneficiaries In case of business income earned by the Trust, whole of income would be liable to tax at MMR Recent CBDT Circular to provide certainty but conditions difficult to fulfill To explore LLP model 8
Key Tax Developments impacting Private Equity 9
TTT OOOO AA PP P 22 410210242014 Key Tax Developments impacting Private Equity Period of holding to qualify as LTCA increased from 12 to 36 months for unlisted securities Income of FIIs / FPIs from transfer of securities to be characterized as capital gains F inance A ct A ( N o.), 2 2 2014 DDT to be calculated with reference to the gross amount of distributable dividends Advanced Pricing Mechanism introduced to bring certainty on transfer pricing matters No roll-back of provisions on taxation of indirect transfers o Fresh cases on indirect transfers to be scrutinized by a High Level Committee to be constituted by the CBDT before any action to be taken T P ransfer ricing Shell / Vodafone controversy Issue of shares at discount Issue of shares at huge premium subject to intense scrutiny Advanced Pricing Mechanism introduced to bring certainty on transfer pricing matters Finance Act (No.2), 2014 - Roll back mechanism provided in APA - terms of APA can be applied for future five years as well as preceding four years Zaheer Mauritius Gains arising on sale of equity shares and CCDs not taxable as interest income Recent CBDT Circular clarifying tax treatment in case of AIFs thers Domestic Funds are being treated as Association of Persons by Tax Authorities Several notices served for non filing of Return by Foreign Companies holding PAN Disallowance of interest on Inter Company Loans under 14A of the Act 10
TTT T YYY Y hank ou