www.pwc.com Holding Company Structures and Cross Border Finance WIRC 13
India Inbound Activity Source: GT Deal tracker Inbound Deals FY11 142 deals worth US$ 29 bn CAGR of 39% in terms of volume and 172% in terms of value Slide 2
India Inbound Trend 2% 2% 1% 3% 3% 6% 4% 5% 18% 56% 100% 90% 80% 70% 60% 50% 33 13 1 22 11 Oil & Gas Engineering Banking & Financial Services Manufacturing Electricals & Electronics Telecom IT & ITeS Pharma, Healthcare & Biotech Steel Others 40% 30% 20% 10% 0% 4 29 13 16 9 2007 2008 2009 2010 2011 Inbound Outbound Inbound deals are outperforming the outbound ones Slide 3
India SWOT Cost competitiveness Demographics Young and educated workforce Political Paralysis Lack of governance and transparency Lack of infrastructure Strength Weakness Threat Opportunity Credit rating downgrades Weakening Rupee Corruption Transitioning towards open economy High potential of growing market Slide 4
India Entry Strategy
Inbound Structuring Key Considerations Exit Options Entity Option in India Repatriation Tax liability Inbound structuring SPV jurisdiction Funding Withholding tax and credits Regulatory Upfront planning is key; unfolding can be painful Slide 6
Investment Structure : Direct Route v/s SPV Route F Co F Co Outside India Outside India India Outside India India SPV / Hold Co Tax efficient jurisdiction Indian Co Indian Co F Co to directly invest in Indian Co F Co to set up an SPV in a tax efficient jurisdiction to invest in Indian Co Slide 7
Investment Structure : Joint Venture SPV Route F Co/ NRI JV Partner Outside India Tax efficient jurisdiction SPV / Hold Co OR Outside India India JV Partner Indian Co Slide 8
Comparison Direct v/s SPV Route Direct investment Easy and quick to implement Simple structure and reduced set-up / administrative costs SPV Route Tax efficient Flexible structure Accumulate funds offshore Upfront taxation of income No flexibility Flexibility of cash movement? Managing multiple entities - set-up / administrative costs Complex Demonstration of substance is crucial Slide 9
Identifying the Jurisdiction
SPV Considerations Corporate Tax rate Ease of access to debt and equity capital Taxation of dividend/ interest Tax Haven/ Black listed Countries Withholding tax on dividend/ interest Treaty network Capital gain tax on transfer of investments / shareholding Cost of setting up and administration Thin Cap rules Other considerations like political stability, banking facility etc. Slide 11
SPV Jurisdictions Mauritius Netherlands Singapore Cyprus Luxembourg UAE Tax Havens BVI/ Cayman Slide 12
Hold Co/ SPV Jurisdictions Investment in India through Corporate tax rate Capital Gains taxability in India Capital Gains taxability overseas Cyprus 10% Not Taxable Not Taxable Singapore 17% Not Taxable Not Taxable Netherlands 25% Luxembourg 28.8% Taxable if 10% or more shares are sold to Indian Resident Taxable @ 20%/ 30% Not Taxable Participation Exemption Not Taxable Participation Exemption Mauritius 15% Not Taxable Not Taxable Dividend taxability overseas Not Taxable as per domestic laws Not Taxable (Foreign Sourced Income exemption on fulfilment of certain conditions) Not Taxable Participation Exemption Not Taxable Participation Exemption Not Taxable due to Underlying Tax Credit Slide 13
Basic Transaction Structure
Transaction Structure Business Acquisition Share Acquisition F Co. F Co. SPV Existing Shareholders of Target I Co. SPV Target I Co I Co. 1 Purchase of shares Purchase of business Target I Co Slide 15
Funding the SPV
Funding Options Regulatory Challenge Tax Efficiency Slide 17
Funding Instruments Classification Funding Instruments Exchange Control Income Tax Equity Shares Equity Equity CCPS Equity Equity CCD Equity Debt RPS/ OCPS Debt Equity ECB/ Loans/ Debt/ OCD/ PCD Debt Debt Slide 18
Funding Instruments Comparison Particulars Equity Debt Withdrawal of funds No Lock-in Minimum lock-in period of 5 years (For amount above USD 20 million) End use restriction None Not permitted for working capital / general corporate purposes / repayment of existing rupee loans (except recent liberalisation for infra sector) Rate of interest / dividends In most cases, higher than Debt Max limit 350 bps + LIBOR (For 3 to 5 yrs debt) 500 bps + LIBOR (For debt over 5 yrs) DDT/ WHT in India DDT @ 16.23% Subject to WHT Deductibility Dividend not tax deductible Interest tax deductible Ease of Repatriation Difficult Easy Transfer Pricing Applicable Applicable on interest Slide 19
Acquisition Structures Debt Throughout Debt Interest on debt F Co Commercial understanding Whether Promoters want to exit? Low equity High Debt Interest on debt What kind of debt instrument can be used at SPV and I Co1 level? SPV Low equity High Debt Interest on debt Will Interest paid by I Co1 and SPV be allowed as deduction? Target I Co Purchase of business I Co 1 What should be the rate of interest on the debt instrument? Thin capitalisation rules in SPV Slide 20
Acquisition Structures Debt and Equity Debt Interest on debt Debt / Equity F Co SPV Interest / Dividend / Buyback Commercial understanding Whether Promoters want to exit? What kind of debt instrument can be used at SPV and I Co1 level? Will Interest paid by I Co1 and SPV be allowed as deduction? Debt / Equity Interest / Dividend / Buyback What should be the rate of interest on the debt instrument? Target I Co I Co 1 Thin capitalisation rules in SPV Purchase of business Capital gains on buyback of shares DDT / WHT on payment of dividend Slide 21
Limitation of Benefits
LOB clause Meaning LOB clause limits the benefits of the Treaty to legitimate residents Intended to prevent treaty shopping and tax avoidance LOB clause in a treaty is designed to test the substance of a claimant to the Treaty LOB articles in Treaties vary significantly between each tax treaty in terms of conditions and complexity LOB clause denies treaty benefits if the person is not a qualified person (resident) Several safe harbor tests are set out, which if met will result in Treaty benefit Slide 23
Some Indian Treaties with LOB clause USA UAE Singapore Luxembourg Kuwait Saudi Arabia Mexico Iceland Armenia Namibia Slide 24
India US DTAA LOB clause A person (other than an individual) resident of a Contracting State and deriving income from the other Contracting State shall be entitled under this Convention to relief from taxation in that other Contracting State only if Ownership test more than 50% of the shares of each class is owned, directly or indirectly by: one or more individual residents of one of the Contracting States; one of the Contracting States; or its political subdivisions; or local authorities; or other individuals subject to tax in either Contracting State or their worldwide incomes, or citizens of the United States Base erosion test income of such person is not used in substantial part, directly or indirectly, to meet liabilities (including liabilities for interest or royalties) to persons who are not residents of one of the Contracting States Slide 25
India US DTAA LOB clause The LOB clause shall not apply If the income is derived in connection with, or is incidental to, the active conduct of a trade or business other than the business of making or managing investments, unless these activities are banking or insurance activities carried on by a bank or insurance company If the person deriving the income is a company listed on: NASDAQ; any stock exchange registered with the SEC as a national securities exchange; any stock exchange which is recognized under the SCRA, 1956; and any other stock exchange agreed upon by the competent authorities of the Contracting States Slide 26
India Singapore DTAA LOB clause A resident of a Contracting State shall not be entitled to the benefits of Article I of this Protocol if its affairs were arranged with the primary purpose to take advantage of the benefits in Article 1 of this Protocol A shell or conduit company shall not be entitled to the benefits if: Negligible or nil business operations; No real and continuous business activities; Total annual expenditure is less than S$ 200,000 in last 24 months before the date gains arise A company is not a shell / conduit company if: It is listed on a recognised stock exchange; or Total annual expenditure is more than S$ 200,000 in last 24 months before the date gains arise Slide 27
Thank You 2012 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers, a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.