Case studies International Taxation - Business Re-organisation and Share Transfers CHYTHANYA K.K., B. Com, FCA, LLB Chythanya Law Chambers Advocates #1109, 9 th Main, Vijayanagar, Between Metro Pillar 303 and 304 Bangalore - 40, Karnataka, India. chyti@clclawyers.com, 09844114184
Case 1 Amalgamation of foreign companies
Case 1 Facts 1. A Co and B Co, engaged in the business of banking in Italy 2. A Co has PE in India. 3. Said PE is a captive unit engaged in the business of provision of information technology services 4. A Co mergers with B Co 5. B Co, amalgamated company, held 20 percent shares in A Co prior to amalgamation 6. Assets of PE consist of both immovable and movable properties.
Case 1 Issues 1. What capital assets are involved in the above transactions? 2. Is there a transfer? If yes, transfer of what capital asset and by whom to whom? 3. If there is a transfer of one or more capital assets, how do you determine the full value consideration? 4. If the capital gain, if any, is exigible to tax under the IT Act, does the DTA mitigate the hardship in any manner? 5. What are TP and GAAR implications?
Case 1 Relevant provisions 1. The Income-tax Act, 1961 1. Section 2(1B) 2. Section 2(19AA) 3. Section 2(14) 4. Section 2(47) 5. Section 5 6. Section 9 7. Section 45 8. Section 46 9. Section 47 10.Section 50D 11.Chapter X and X-A 2. Double Taxation Avoidance Agreement between India and Italy Relevant articles
Case 2 Tax implications on investment in shares of overseas subsidiary
Case 2 Facts 1. I Co, India, invests in the share capital of its overseas subsidiary F Co (US). 2. Details of shares of F Co: Par value: USD 10 FMV as per Rule 11UA: USD 25 Issue Price: Situation A: USD 15 Situation B: USD 35
Case 2 Issues 1. Is section 56(2)(viia) applicable to I Co under Situation A? 2. Is section 56(2)(viib) to F Co under Situation B? 3. Do transfer pricing provisions apply to the above case? 4. Does DTA help overcome section 56(2)(viia)/(viib)? 5. Will the answer be different if F Co is a company listed overseas? 6. Will your answers vary if F Co. is situated in Mauritius? 7. What is your answer if F Co invests in shares of I Co?
Case 2 Relevant provisions 1. The Income-tax Act, 1961 1. Section 5 2. Section 6 3. Section 9 4. Section 56(1)(viib) 5. Section 56(1)(viia) 6. Chapter X and X-A 2. Double Taxation Avoidance Agreement 1. Between India and US. Relevant Articles 2. Assuming that F Co is based out of Mauritius DTAA between India and Mauritius. Relevant Articles
Case 3 Corporate restructuring
Case 3 Facts 1. M Co, Indian company, is engaged in 2 segments i.e trading activity and provision of service. 2. T Co, Indian Company, is engaged in manufacturing activity. 3. Both the companies are part of global conglomerate and ultimate parent company P Co., being common. 4. T Co is directly held by P Co.. 5. M Co is held by wholly owned subsidiary of parent company WOS (P Co. and WOS are based out of Germany) (cont..)
Case 3 Facts (cont..) 6. M Co and T Co are sitting on huge accumulated losses and unabsorbed depreciation. 7. A significant portion of accumulated loss may be lapsing shortly.
Case 3 Issues What is the most efficient form of restructuring keeping in mind section 72A, section 79, GAAR and Transfer Pricing?
Case 3 Relevant provisions The Income-tax Act, 1961 1. Section 2(1B) 2. Section 2(19AA) 3. Section 2(14) 4. Section 2(18) 5. Section 2(47) 6. Section 5 7. Section 9 8. Section 45 9. Section 46 10.Section 47 11.Section 72A 12.Section 79 13.Chapter X and X-A Double Taxation Avoidance Agreement between India and Germany Relevant articles The Companies Act Relevant provisions
Case 4 Transfer of shares
Case 4 Facts 1. M Co, Indian company, is engaged in 2 segments i.e trading activity and provision of service. 2. T Co, Indian Company, is engaged in manufacturing activity. 3. Both the companies are part of global conglomerate and ultimate parent company P Co., being common. 4. T Co is directly held by P Co.. 5. M Co is held by wholly owned subsidiary of parent company WOS (P Co. and WOS are based out of Germany) (cont..)
Case 4 Facts (cont..) 6. M Co and T Co are sitting on huge accumulated losses and unabsorbed depreciation. 7. A significant portion of accumulated loss may be lapsing shortly. 8. In addition to corporate restructuring, in order to achieve linear share holding in M Co., the following options are considered; A. P Co. would transfer its shares in T Co., to WOS before restructuring B. WOS would transfer its shares in M Co., to P Co., before restructuring
Case 4 Issues 1. Which option is more efficient? 2. Do you suggest any other option?
Case 4 Relevant provisions The Income-tax Act, 1961 1. Section 2(1B) 2. Section 2(19AA) 3. Section 2(14) 4. Section 2(18) 5. Section 2(47) 6. Section 5 7. Section 9 8. Section 45 9. Section 46 10.Section 47 11.Section 72A 12.Section 79 13.Chapter X and X-A Double Taxation Avoidance Agreement between India and Germany Relevant articles The Companies Act Relevant provisions
DTAA between India and Italy ARTICLE 14 - CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State. 5. Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State. 6. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident.
DTAA between India and Italy ARTICLE 25 - NON-DISCRIMINATION 1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under the same conditions are or may be subjected. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. 3. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to persons not resident in that State any personal allowances, reliefs and reductions for taxation purposes which are by law available only to persons who are so resident. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions. 5. 5. In this Article, the term "taxation" means taxes which are the subject of this Convention.
DTAA between India and Mauritius ARTICLE 22 OTHER INCOME 1. Subject to the provisions of paragraph (2) of this article, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Convention, shall be taxable only in that Contracting State. 2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. 3. (3) Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of Convention and arising in the other Contracting State may also be taxed in that other State. Paragraph 3 inserted by Notification No. SO 2680(E) {NO.68/2016 (F.No.500/3/2012-FTD-II)}, dated 10-8-2016, w.r.e.f. 19-7-2016.
DTAA between India and US ARTICLE 23 OTHER INCOME 1. Subject to the provisions of paragraph 2, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6 [Income from Immovable Property (Real Property)], if the beneficial owner of the income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the income is attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. 3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention and arising in the other Contracting State may also be taxed in that other State.
DTAA between India and Germany ARTICLE 13 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. Gains from the alienation of shares in a company which is a resident of a Contracting State may be taxed in that State. 5. Gains from the alienation of any property other than that referred to in paragraphs 1 to 4 shall be taxable only in the Contracting State of which the alienator is a resident.
The Companies Act, 2013 Section 2(68) private company means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles, (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that (A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company;
The Companies Act, 2013 Section 2(71) public company means a company which (a) is not a private company; (b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed: Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles ;
The Companies Act, 2013 Section 2(87) subsidiary company or subsidiary, in relation to any other company (that is to say the holding company), means a company in which the holding company (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. Explanation. For the purposes of this clause, (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression company includes any body corporate; (d) layer in relation to a holding company means its subsidiary or subsidiaries;
The Income-tax Act, 1961 Section 2(18) "company in which the public are substantially interested" a company is said to be a company in which the public are substantially interested (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely : (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ; (B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. Explanation. In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words
The Companies Act, 2013 Section 465. (1) The Companies Act, 1956 and the Registration of Companies (Sikkim) Act, 1961 (hereafter in this section referred to as the repealed enactments) shall stand repealed: Provided that the provisions of Part IX A of the Companies Act, 1956 shall be applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been repealed until a special Act is enacted for Producer Companies: Provided further that until a date is notified by the Central Government under subsection (1) of Section 434 for transfer of all matters, proceedings or cases to the Tribunal, the provisions of the Companies Act, 1956 in regard to the jurisdiction, powers, authority and functions of the Board of Company Law Administration and court shall continue to apply as if the Companies Act, 1956 has not been repealed: Provided also that provisions of the Companies Act, 1956 referred in the notification issued under section 67 of the Limited Liability Partnership Act, 2008 shall, until the relevant notification under such section applying relevant corresponding provisions of this Act to limited liability partnerships is issued, continue to apply as if the Companies Act, 1956 has not been repealed (2)... (g) the incorporation of companies registered under the repealed enactments shall continue to be valid and the provisions of this Act shall apply to such companies as if they were registered
The Companies Act, 1956 Section 2(7) "body corporate" or "corporation" includes a company incorporated outside India but does not include - (a) a corporation sole ; (b) a co-operative society registered under any law relating to co-operative societies ; and (c) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf ; Section 2(10) "company" means a company as defined in section 3 ; Section 2(19) "holding company" means a holding company within the meaning of section 4 ; Section 2(35) "private company" means a private company as defined in section 3 ; Section 2(37) "public company" means a public company as defined in section 3 ; Section 2(47) "subsidiary company" or "subsidiary" means a subsidiary company within the meaning of section 4 ;
The Companies Act, 1956 3. DEFINITIONS OF "COMPANY", "EXISTING COMPANY", "PRIVATE COMPANY" AND "PUBLIC COMPANY (1) In this Act, unless the context otherwise requires, the expressions "company", "existing company", "private company" and "public company", shall, subject to the provisions of sub-section (2), have the meanings specified below: - (i) "company" means a company formed and registered under this Act or an existing company as defined in clause (ii); (ii) "existing company. (iii) "private company" 1[means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by is articles, -] (a) restricts the right to transfer its shares, if any ; (b) limits the number of its members to fifty not including - (i) (ii) persons who are in the employment of the company ; and persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased ; and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company ; (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:] Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member ;
The Companies Act, 1956 3. DEFINITIONS OF "COMPANY", "EXISTING COMPANY", "PRIVATE COMPANY" AND "PUBLIC COMPANY (1). (iv) "public company" means a company which - (a) is not a private company ; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed ; (c) is a private company which is a subsidiary of a company which is not a private company.] (2) Unless the context otherwise requires, the following companies shall not be included within the scope of any of the expressions defined in clauses (i) to (iv) of sub-section (1), and such companies shall be deemed, for the purposes of this Act, to have been formed and registered outside India : (a) a company the registered office whereof is in Burma, Aden or Pakistan and which immediately before the separation of that country from India was a company as defined in clause (i) of sub-section (1) ; (b) [Omitted by the J&K (Extension of Laws) Act, 1956]. (3) Every private company, existing on the commencement of the Companies (Amendment) Act, 2000, with a paidup capital of less than one lakh rupees shall, within a period of two years from such commencement, enhance its paidup capital to one lakh rupees. (4).. (5) (6)
The Companies Act, 1956 4. MEANING OF "HOLDING COMPANY" AND "SUBSIDIARY" (1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if, - (a) that other controls the composition of its Board of directors ; or (b) that other - (i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company ; (ii) where the first-mentioned company is any other company, holds more than half in nominal value of its equity share capital ; or (c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary. ILLUSTRATION Company B is a subsidiary of Company A, and Company C is a subsidiary of Company B. Company C is a subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c) above, and so on.
The Companies Act, 1956 4. MEANING OF "HOLDING COMPANY" AND "SUBSIDIARY" (1)... (2)... (3).. (4) For the purposes of this Act, a company shall be deemed to be the holding company of another if, but only if, that other is its subsidiary. (5) In this section, the expression "company" includes any body corporate, and the expression "equity share capital" has the same meaning as in sub-section (2) of section 85. (6) In the case of a body corporate which is incorporated in a country outside India, a subsidiary or holding company of the body corporate under the law of such country shall be deemed to be a subsidiary or holding company of the body corporate within the meaning and for the purposes of this Act also, whether the requirements of this section are fulfilled or not. (7) A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India. Case 3 / Case 4
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