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Inbound investment re-organisation - Indian Tax and regulatory issues

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Foreign companies keep on reorganizing their investments. Under the Indian tax laws, transfer of shares of an Indian company can trigger taxable gains even when the transfer is within the same group. …

Foreign companies keep on reorganizing their investments. Under the Indian tax laws, transfer of shares of an Indian company can trigger taxable gains even when the transfer is within the same group. This is subject to certain exemptions.

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  • 1. Inbound Investment Reorganisation India Ajay Kumar and Richa Sawhney Danta Transaction Services August, 2013
  • 2. Table of Contents • Typical Structure • Modes of Intra Group Re-organisation ‒ Direct transfer of shares of Indian Company ‒ Indirect transfer of shares of Indian Company • Comparative Analysis • Annexures • About Author • Disclaimer August 2013 www.TransactionStructuring.Com 2
  • 3. Typical Structure August 2013 www.TransactionStructuring.Com 3
  • 4. Typical Structure F Co Hold Co • A Foreign Company (F Co) • Holding shares of an Indian unlisted Company (I Co) Outside India India I Co August 2013 • Through a Holding Company (Hold Co) situated outside India www.TransactionStructuring.Com 4
  • 5. Table of Contents • Typical Structure • Modes of Intra Group Re-organisation ‒ Direct transfer of shares of Indian Company ‒ Indirect transfer of shares of Indian Company • Comparative Analysis • Annexures • About Author • Disclaimer August 2013 www.TransactionStructuring.Com 5
  • 6. Modes of Intra Group Reorganisation August 2013 www.TransactionStructuring.Com 6
  • 7. Modes of Intra group Re-organisation • Direct transfer of shares of I Co ‒ Sale for a consideration ‒ Transfer without consideration (Gift) ‒ Contribution in exchange for issue of shares ‒ Merger of offshore Hold Co ‒ Demerger of the offshore Hold Co ‒ Liquidation of I Co ‒ Merger of Hold Co with I Co • Indirect transfer of shares of I Co August 2013 www.TransactionStructuring.Com 7
  • 8. Structure 1 – Transfer for a Consideration • Of I Co To another group company overseas (Hold Co1) • Hold Co1 • • Hold Co Hold Co transfers shares For a consideration Transfer of shares for consideration Outside India India I Co August 2013 www.TransactionStructuring.Com 8
  • 9. Tax Implications • Sale of shares of I Co by Hold Co to Hold Co1 is liable to capital gains tax in India. • Capital gains are taxable to Hold Co at 40%/20%/10% (plus applicable surcharge and cess) depending upon various considerations. Refer Annexure 1 for details. • Capital gains may not be taxable subject to exemption provided in the relevant Double Tax Avoidance Agreement (DTAA) between India and the Hold Co country. Mauritius, Cyprus, the Netherlands and Singapore DTAAs provide for an exemption in such cases subject to certain conditions. Refer Annexure 2 for details. August 2013 www.TransactionStructuring.Com 9
  • 10. Tax Implications • Transfer Pricing (TP) provisions would apply with regard to the valuation of the sale consideration. Generally DCF based market valuation is followed. • Transfer of shares of I Co beyond a certain percentage may result in lapse of unabsorbed losses of I Co. Refer Annexure 1 for details. • The Hold Co1 would need to register with the Indian tax authorities and comply with Withholding Tax (WHT) requirements on payments to be made to the Hold Co. Refer Annexure 3 for WHT compliance requirements. August 2013 www.TransactionStructuring.Com 10
  • 11. Tax Implications • However, Hold Co is ultimately responsible for its income tax liability. • Where the Hold Co1 has not withheld adequate taxes, for whatever reason, Hold Co would need to pay taxes by way of advance tax and comply with other requirements. Refer Annexure 4 for details. • Even in circumstances where such transfer is not subject to tax in India due to DTAA benefit, a recent notification issued in 2013 by the income tax authorities has made it mandatory to file income tax returns in India (Notification 34/2013 dated May 1, 2013). August 2013 www.TransactionStructuring.Com 11
  • 12. Other Considerations • Stamp duty – Stamp duty is applicable at 0.25% of the value of share transferred, if shares are held in physical form. No stamp duty is levied if shares are held in demat form (e-form). • Exchange Control - Transfer of shares between two nonresidents for a consideration is under automatic route and does not require any approval or reporting from Indian exchange control perspective. However Hold Co1 needs to ensure that purchase of shares is within the existing FDI norms and guidelines. ‒ For instance, with regard to investment in construction/ development of townships, housing etc., original investment cannot be repatriated before a period of three years from completion of minimum capitalisation conditions. However, the investor may be permitted to exit earlier with prior approval of the Government through the Foreign Investment Promotion Board (FIPB). August 2013 www.TransactionStructuring.Com 12
  • 13. Structure 2 – Transfer without Consideration • Of I Co To another group company overseas (Hold Co1) • Hold Co1 • • Hold Co Hold Co transfers shares Without any consideration Transfer of shares without consideration Outside India India I Co August 2013 www.TransactionStructuring.Com 13
  • 14. Tax Implications • There are no Indian tax implications on Hold Co on transfer of shares of I Co by Hold Co to Hold Co1 without any consideration (Gift). • There have been advance rulings wherein gift of shares of Indian companies were held not taxable in the hands of Hold Co. • However, the recipient Hold Co1 is liable to pay tax at 40% (plus applicable surcharge and cess) on the value of shares received as gift. Such income is taxable in India under the head „income from other sources‟. • The valuation of the I Co is based on the Net Asset Value (NAV) approach as on the date of last audited balance sheet of I Co. DCF approach is not required. August 2013 www.TransactionStructuring.Com 14
  • 15. Tax Implications • DTAA benefit: ‒ Such income may not be taxable to Hold Co1 subject to exemption provided in the relevant DTAA between India and the Hold Co1 country. ‒ One needs to look at „other income‟ article of the DTAA. For example, India-Mauritius DTAA provides for such exemption. See Annexure 5 for details. • Hold Co1 would need to register with Indian tax authorities and pay taxes by way of advance tax in India. Refer Annexure 4 for details. August 2013 www.TransactionStructuring.Com 15
  • 16. Tax Implications • Transfer of shares of I Co may result in lapse of unabsorbed losses of I Co. Refer Annexure 1 for details. • In case of subsequent sale by the Hold Co1 of I Co shares, the cost of acquisition will be the valuation considered for taxation at the time of receipt of shares. However, the period of holding will be reckoned from the time it was acquired by the Hold Co. • Exchange Control - Transfer of shares without consideration is under automatic route and does not require any approval or reporting from the Indian exchange control perspective. August 2013 www.TransactionStructuring.Com 16
  • 17. Other Considerations • Stamp duty - would be payable at 0.25% of value of shares transferred if shares are held in physical form. No stamp duty if shares are held in demat form (e-form). • The value to be considered for stamp duty in case of gift has not been clearly defined in the legislation. Stamp duty can be paid based on the market value of share transferred. • Gift of shares may not attract any additional stamp duty in India, if the instrument of gift is not brought in India. August 2013 www.TransactionStructuring.Com 17
  • 18. Other Considerations • Gift of shares should be allowed under the local laws of the Hold Co country and also under the Charter of the Hold Co. • Local taxation, stamp duty and accounting aspects also need to be considered in the countries where Hold Co and Hold Co1 are registered. August 2013 www.TransactionStructuring.Com 18
  • 19. Structure 3 – Contribution in exchange • Of I Co To another group company overseas (Hold Co1) • Hold Co1 • • Hold Co Hold Co transfers shares In consideration for issue of shares by Hold Co1 to Hold Co Contribution in exchange for shares Outside India India I Co August 2013 www.TransactionStructuring.Com 19
  • 20. Tax Implications • All implications remains same as in case of Structure 1, where sale is for a consideration. • TP provisions would apply with regard to the valuation of the consideration for computing capital gains tax. Generally DCF based market valuation is followed. • The Hold Co is liable for capital gain tax on the transaction. No tax impact on Hold Co1. August 2013 www.TransactionStructuring.Com 20
  • 21. Tax Implications • At the time of subsequent sale by Hold Co1 of the shares of I Co, the valuation considered as sale consideration for tax purposes will be reckoned as cost of acquisition. • Period of holding of I Co shares by Hold Co1 will be reckoned from the date of exchange of shares only. • Transfer of shares of I Co can result in lapse of unabsorbed losses of I Co. Refer Annexure 1 for details. August 2013 www.TransactionStructuring.Com 21
  • 22. Structure 4 – Transfer pursuant to Merger • Transfer of shares of I Co • Hold Co1 Hold Co Pursuant to merger of Hold Co with another group company (Hold Co1) Merger Outside India India I Co August 2013 www.TransactionStructuring.Com 22
  • 23. Tax Implications • When shares of I Co are transferred by Hold Co to Hold Co1 in a scheme of merger, such transfer will not be liable to capital gains tax in India if: ‒ At least 25% of the shareholders of Hold Co continue to remain shareholders of Hold Co1,and ‒ Such transfer does not attract capital gains tax in the country in which Hold Co is incorporated. • Where the above conditions are not fulfilled, such transfer of shares would be subject to capital gains tax in the manner discussed in Structure 1, subject to any exemption under the DTAA. • Since merger will be happening outside India, the scheme of merger need not be in accordance with the Indian Companies Act requirements. However it would be essential to prove that the transfer is happening as a result of merger and is not a case of simpliciter transfer of shares. August 2013 www.TransactionStructuring.Com 23
  • 24. Other Considerations • Exchange Control - Technically, transfer of shares of I Co pursuant to merger of Hold Co with Hold Co1 is not covered in the automatic route and therefore may require prior approval of the Reserve Bank of India (RBI). ‒ However, considering that when gift of shares by a non-resident to another non-resident does not require any approval, in our view, transfer pursuant to merger should not require approval from the RBI. • Stamp Duty - Liability to pay stamp duty on transfer of shares of I Co pursuant to merger overseas is a grey area. Practically, one can discharge stamp duty on the market value of shares transferred assuming it as a sale of shares. No stamp duty is to be paid if shares are in held in e-form. August 2013 www.TransactionStructuring.Com 24
  • 25. Structure 5 – Transfer pursuant to Demerger • Hold Co India • Into another group company (Hold Co1) • Resulting in transfer of shares of I Co Demerger Hold Co1 Outside India Demerger of „undertaking‟ of Hold Co comprising shares of I Co I Co August 2013 www.TransactionStructuring.Com 25
  • 26. Tax Implications • When shares of I Co are transferred by Hold Co to Hold Co1 in a scheme of demerger, such transfer will not be liable to capital gains tax in India if: ‒ The shareholders holding not less than 75% in value of the shares of Hold Co continues to remain shareholders of Hold Co1, and ‒ Such transfer does not attract capital gains tax in the country in which Hold Co is incorporated. • Where the above conditions are not fulfilled, such transfer of shares would be subject to capital gains tax in the manner discussed in Structure 1, subject to any exemption in the DTAA. • Since demerger will be happening outside India, the scheme of demerger need not be in accordance with the Indian Companies Act requirements. However it would be essential to prove that the transfer is happening as a result of de-merger and is not a case of simpliciter transfer of shares. August 2013 www.TransactionStructuring.Com 26
  • 27. Other Implications • Exchange Control - Technically, transfer of shares of I Co pursuant to de-merger of undertaking of Hold Co into Hold Co1 is not covered in the automatic route and therefore may require prior approval of the RBI. ‒ However, considering that when gift of shares by a non-resident to another non-resident does not require any approval, in our view, transfer pursuant to demerger should not require approval from RBI. • Stamp Duty - Liability to pay stamp duty on transfer of shares of I Co pursuant to de-merger overseas is a grey area. Practically, one can discharge stamp duty on the market value of shares transferred assuming it as a sale of shares. No stamp duty is payable if shares are held in e-form. August 2013 www.TransactionStructuring.Com 27
  • 28. Structure 6 – Liquidation of I Co • Distribution of assets and cash Liquidation of I Co in India • Hold Co Resulting in distribution of assets and cash to Hold Co Outside India India I Co (in liquidation) August 2013 www.TransactionStructuring.Com 28
  • 29. Tax Implications • The taxation in case of liquidation happens in the following manner: ‒ Where assets are distributed to the Hold Co, such distribution is not regarded as transfer of assets by I Co to Hold Co and therefore there are no capital gains tax implications on the I Co. ‒ Any distribution made by I Co to Hold Co, to the extent of accumulated reserves with I Co immediately before its liquidation, is considered as deemed dividend in the hands of Hold Co. ‒ Such deemed dividend is subject to dividend distribution tax at 15% (plus applicable surcharge and cess) to be paid by I Co. There is no further taxation in the hands of Hold Co of such dividend. ‒ Hold Co is liable to capital gains tax to the extent of difference between the sale consideration and cost of acquisition. Sale consideration means market value of assets plus cash received by Hold Co from I Co less the amount already assessed as deemed dividend. August 2013 www.TransactionStructuring.Com 29
  • 30. Other Implications • The banks are allowed to remit winding up proceeds of companies under liquidation, subject to payment of applicable taxes. • I Co is required to submit the following documents with bank: ‒ No objection or tax clearance certificate from income tax authorities for the remittance. ‒ Auditor's certificate confirming that all liabilities in India have been either fully paid or adequately provided for. ‒ Auditor's certificate to the effect that the liquidation is in accordance with the provisions of the Indian Companies Act. August 2013 www.TransactionStructuring.Com 30
  • 31. Structure 7 – Merger of Hold Co with I Co • Hold Co Outside India Issue of shares by I Co to F Co on merger Issue of shares by I Co • To shareholders of Hold Co (F Co) • On Merger of Hold Co with I Co • F Co Resulting in transfer of shareholding of I Co Merger India I Co August 2013 www.TransactionStructuring.Com 31
  • 32. Tax Implications • Any transfer of capital assets in a scheme of tax neutral merger of Hold Co with I Co is not considered a transfer from capital gains perspective and is not subject to tax. • Where the shareholder of Hold Co transfers shares held in Hold Co in lieu of shares allotted by I Co pursuant to merger is not considered a transfer from capital gains purposes and not subject to tax. • Therefore merger of Hold Co with I Co is tax neutral both for the company and the shareholders. • Please refer Annexure 6 for conditions to be fulfilled for a tax neutral merger. August 2013 www.TransactionStructuring.Com 32
  • 33. Other Considerations • Exchange Controls-There is no specific provision under the Indian exchange control regulations regarding allotment of shares where a foreign company merges with an Indian company. • Accordingly issue of shares to the shareholders of Hold Co (F Co) pursuant to merger of Hold Co with I Co would require approval from the FIPB and the RBI. • There is no specific provision regarding valuation of shares when a foreign company merges with an Indian company. • Practically, the valuation rules applicable for fresh issue of shares to a foreign company may be applied (i.e. Value shares at minimum DCF value). August 2013 www.TransactionStructuring.Com 33
  • 34. Structure 8 – Indirect transfer of shares Transfer of Hold Co shares Transfer of shares of Hold Co By F Co1 • To F Co2 • F Co2 • • F Co1 Resulting in indirect transfer of shares of I Co Hold Co Outside India India I Co August 2013 www.TransactionStructuring.Com 34
  • 35. Tax Implications • Supreme Court in case of Vodafone held that indirect transfer of shares of an Indian company was not taxable in India. • Consequent to the ruling, the income tax law was amended in 2012 to retrospectively bring such transactions under the tax net. • Accordingly, transfer of shares of Hold Co by F Co1 to F Co2 would be liable to capital gains tax in India provided Hold Co derives its value „substantially‟ from I Co. Refer Annexure 1 for details for capital gains tax. • There is no specific exemption for indirect transfers within the group. Therefore, companies should consider the possibility of tax on indirect transfers even when reorganisation is within the group. August 2013 www.TransactionStructuring.Com 35
  • 36. Withholding Tax Implications • Assuming that transfer of shares of Hold Co is taxable in India, F Co2 while making payment to F Co1, would be required to withhold Indian tax and deposit the same with the Indian tax authorities within stipulated time frame. Refer Annexure 3 for detailed compliance requirements. • Tax provision on indirect transfer does not override the provisions of DTAA with the foreign country. • Usually the capital gains resulting from indirect transfers are dealt with by residuary clause of the Capital Gain article which usually gives the right to tax to the country where alienator is resident of. Hence each DTAA would need to be reviewed to determine the tax consequences. August 2013 www.TransactionStructuring.Com 36
  • 37. Issues • The term substantially is not defined in the law, which leaves lot of ambiguity such as: ‒ Whether Hold Co deriving value of more than 50% from I Co is considered substantial? ‒ Whether Hold Co deriving value of more than 20% from I Co considered substantial (provided in various other provisions of the law)? • There is no claw back provision when eventually I Co is sold directly by F Co, i.e. taxes already paid on indirect transfer is not considered. August 2013 www.TransactionStructuring.Com 37
  • 38. Table of Contents • Typical Structure • Modes of Intra Group Re-organisation ‒ Direct transfer of shares of Indian Company ‒ Indirect transfer of shares of Indian Company • Comparative Analysis • Annexures • About Author • Disclaimer August 2013 www.TransactionStructuring.Com 38
  • 39. Comparative Analysis August 2013 www.TransactionStructuring.Com 39
  • 40. Comparative Analysis Particulars Taxability to Hold Co Taxability to Hold Co1 Tax Impact on the I Co Holding Period for the Hold Co1 Cost base in the hands of the Hold Co1 Stamp Duty Valuation Compliance Requirement for Hold Co Structure 1 Sale Capital gains at 40% / 20% / 10% (Refer Annexure 1) Nil August 2013 Structure 3 Exchange Nil Capital gains at 40% / 20% / 10% (Refer Annexure 1) Taxed as Income from Other Sources @ 40% Nil Loss not allowed to be carried forward (Refer Annexure 1) Loss not allowed to be Loss not allowed to be carried carried forward (Refer forward (Refer Annexure 1) Annexure 1) Includes holding period of From date of purchase From date of exchange Hold Co Sale consideration for Value considered for Value considered for taxation transfer of shares exchange 0.25% of sale value 0.25% of value of shares 0.25% of exchange value (NIL if held in e-form) (NIL if held in e-form) (NIL if held in e-form) NAV based on last audited DCF based market valuation DCF based market valuation balance sheet Register, Pay Taxes and File Return (Refer Annexure 4) Compliance Requirements Withholding tax (Refer for Hold Co1 Annexure 3) TP Compliance Requirements Structure 2 Gift Applicable (Refer Annexure 4) Nil Register, Pay Taxes and File Return (Refer Annexure 4) Register, Pay Taxes and File Withholding tax (Refer Return (Refer Annexure 4) Annexure 3) N/A www.TransactionStructuring.Com Applicable (Refer Annexure 4) 40
  • 41. Comparative Analysis Structure 4 Eligible Merger Structure 5 Eligible Demerger Structure 7 Hold Co & I Co Merger Taxability to Hold Co NIL NIL NIL Taxability to Hold Co1/ F Co NIL NIL NIL Tax Impact on the I Co NIL NIL Particulars Holding Period for the Hold Co1/ F Co Cost base in the hands of the Hold Co1/ F Co Stamp Duty Valuation Compliance Requirements for Hold Co/ Hold Co1 Withholding Tax Requirements for Hold Co1 TP Compliance Requirements August 2013 Not specifically provided to include holding period of Hold Co Same as cost in the hands Not specifically provided as of Hold Co cost in the hands of Hold Co 0.25% of value of shares 0.25% of value of shares (NIL if held in e-form) (NIL if held in e-form) Includes holding period of Hold Co N/A RBI Approval may be required NIL RBI Approval may be required Loss not allowed to be carried forward Includes holding period of Hold Co Same as cost in the hands of Hold Co 0.25% of value of shares (NIL if held in e-form) Ideally DCF valuation FIPB and RBI Approval required NIL NIL NIL NIL NIL NIL www.TransactionStructuring.Com 41
  • 42. Comparative Analysis Particulars Taxability to Hold Co Taxability to F Co/ F Co1 Tax impact on I Co Structure 6 I Co Liquidation Structure 8 Indirect Transfer Capital Gains on market value of assets plus cash received less amount assessed as divided and cost of acquisition of shares Nil Nil Dividend distribution tax at 15% to the extent of accumulated reserves Capital Gains at 40% / 20% / 10% (Refer Annexure 1) NIL Holding Period for F Co/ F Co2 N/A From the date of purchase Cost base to F Co/ F Co2 N/A Sale consideration for transfer Stamp Duty N/A Valuation N/A Compliance for Hold Co Register, Pay Taxes and File Return (Refer Annexure 4) Compliance for F Co/ F Co1/ F Co2 N/A TP Compliance NIL August 2013 www.TransactionStructuring.Com N/A DCF based market valuation Nil Withholding tax for F Co2 OR F Co1 to Register, Pay Taxes and File Return (Refer Annexure 3 & 4) Applicable (Refer Annexure 4) 42
  • 43. Table of Contents • Typical Structures • Modes of Intra Group Re-organisation ‒ Direct transfer of shares of Indian Company ‒ Indirect transfer of shares of Indian Company • Comparative Analysis • Annexures • About Author • Disclaimer August 2013 www.TransactionStructuring.Com 43
  • 44. Annexures August 2013 www.TransactionStructuring.Com 44
  • 45. Annexure 1 - Capital Gains Tax Rates • Capital gains arising to a foreign company on sale of shares of an Indian company are taxable at following rates: ‒ 40% (plus applicable surcharge and cess), where shares are held for a period of less than 12 months. ‒ 20% (plus applicable surcharge and cess), where shares are held for a period of 12 months or more and benefit of forex fluctuation or indexation is taken. ‒ 10% (plus applicable surcharge and cess), where shares are held for a period of 12 months or more and benefit of forex fluctuation or indexation is not taken. August 2013 www.TransactionStructuring.Com 45
  • 46. Annexure 1- Capital Gains Computation Capital gains arising to a foreign company on sale of shares of an Indian company are computed in the following manner: Full Value of consideration received or accrued, subject to XXX any TP adjustment Less: Cost of acquisition and improvement XX Less: Expenditure incurred wholly and exclusively in XX XX connection with such transfer Capital gains (Long term or short term) August 2013 www.TransactionStructuring.Com X 46
  • 47. Annexure 1- Forex benefit • Capital gains arising to a foreign company from the transfer of shares of an Indian company is computed: ‒ By converting the cost of acquisition, expenditure incurred and the full value of the consideration received or accruing as a result of the transfer; ‒ Into the same foreign currency as was initially utilised in the purchase of the shares; and ‒ The capital gains so computed in such foreign currency is reconverted into Indian currency. August 2013 www.TransactionStructuring.Com 47
  • 48. Annexure 1- Capital Gains Exemption • A foreign company (Seller) can invest the sale proceeds and get exemption from capital gains provided following conditions are fulfilled: ‒ The seller held the shares of Indian company for 12 months or more before the transfer. ‒ Amount of capital gains is invested in the long term bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (RECL) within 6 months of transfer of shares. ‒ Such bonds are not sold by the seller within 3 years of acquisition. ‒ If the amount invested in long term bonds is more than the capital gains, then the full capital gains is exempt otherwise the proportionate amount is exempt ‒ The maximum exemption from capital gains is INR 5 million in a year. August 2013 www.TransactionStructuring.Com 48
  • 49. Annexure 1- Carry forward of Loss by I Co • Where shareholding of an Indian Private Limited Company has changed during the financial year, loss incurred prior to the financial year cannot be set off or carried forward, unless: ‒ Not less than 51% of the voting power as on the last day of the financial year was beneficially held by the same persons, ‒ Who held not less than 51% of the voting power as on the last day of the year in which the loss was incurred. • There is no impact on unabsorbed depreciation. August 2013 www.TransactionStructuring.Com 49
  • 50. Annexure 1- Carry forward of Loss by I Co • However, where the change in shareholding of the Indian Company is consequent to merger or demerger of the foreign parent, loss can be carried forward if: ‒ 51% of the shareholders of the amalgamating foreign company continue to be shareholders of amalgamated foreign company; or ‒ 51% of the shareholders of the demerged foreign company continue to be shareholders of the resulting foreign company. August 2013 www.TransactionStructuring.Com 50
  • 51. Annexure 2 - DTAA ARTICLE 13 - Capital Gains: India – Mauritius DTAA 1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is situated. 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 together with the whole enterprise) or of such a fixed base, may be taxed in that other State. 3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and 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 derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in that State. 5. For the purposes of this article, the term “alienation” means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States. August 2013 www.TransactionStructuring.Com 51
  • 52. Annexure 2- DTAA ARTICLE 13 - Capital Gains: India – Cyprus DTAA 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 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 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 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 any property other than that mentioned in paragraphs 1, 2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident. August 2013 www.TransactionStructuring.Com 52
  • 53. Annexure 2- DTAA ARTICLE 13 - Capital Gains: India – Singapore DTAA 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 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 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 or aircraft shall be taxable only in the Contracting State of which the alienator is a resident. 4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State. August 2013 www.TransactionStructuring.Com 53
  • 54. Annexure 2- DTAA ARTICLE 13 - Capital Gains - India – Netherlands DTAA 1. Gains derived by a resident of one of the States from the alienation of immovable property referred to in Article 6 and situated in the other 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 one of the States has in the other State or of movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing independent personal services, including such gains from the alienation of such 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 State in which the place of effective management of the enterprise is situated. For the purposes of this paragraph, the provisions of paragraph 3 of Article 8A shall apply. 4. Gains derived by a resident of one of the States from the alienation of shares (other than shares quoted on an approved stock exchange) forming part of a substantial interest in the capital stock of a company which is a resident of the other State, the value of which shares is derived principally from immovable property situated in that other State other than property in which the business of the company was carried on, may be taxed in that other State. A substantial interest exists when the resident owns 25 per cent or more of the shares of the capital stock of a company. August 2013 www.TransactionStructuring.Com 54
  • 55. Annexure 2- DTAA ARTICLE 13 - Capital Gains - India – Netherlands DTAA 5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the State of which the alienator is a resident. However, gains from the alienation of shares issued by a company resident in the other State which shares form part of at least a 10 per cent interest in the capital stock of that company, may be taxed in that other State if the alienation takes place to a resident of that other State. However, such gains shall remain taxable only in the State of which the alienator is a resident if such gains are realised in the course of a corporate organisation, reorganization, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 per cent of the capital of the other. 6. The provisions of paragraph 3 shall not affect the right of each of the States to levy according to its own law at tax on gains from the alienation of shares or „jouissance‟ rights in a company, the capital of which is wholly or partly divided into shares and which under the laws of that State is a resident of that State, derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State in the course of the last five years preceding the alienation of the shares or „jouissance‟ rights. August 2013 www.TransactionStructuring.Com 55
  • 56. Annexure 3 - Withholding Tax Requirements • Tax is required to be deducted on any payment made by any person to a foreign company, where the payment is chargeable to tax in India. • Taxes have to be withheld at the rates in force i.e. as per the Income tax Act, 1961 (IT Act) or as per the relevant DTAA, whichever is beneficial to the taxpayer. • Therefore the Transferee Co is liable to deduct the capital gains tax payable in India while making payment of consideration for transfer of shares to the Transferor Co. • Capital Gains Tax is determined in the manner provided in Annexure 1 • Where the Transferor Hold Co does not have a Permanent Account Number (PAN) in India, a minimum tax of 20% of the amount paid (sale consideration) needs to be withheld by the Transferee Co. August 2013 www.TransactionStructuring.Com 56
  • 57. Annexure 3 - Withholding Tax Requirements • Transferee Co needs to do the following compliances in India: ‒ Register with the Indian tax authorities and obtain a Tax Deduction Account Number (TAN). ‒ Remit the tax withheld to the Government by way of an e-payment or electronic transfer within one week from the last day of the month in which deduction is made. ‒ Exchange Rate on the day on which TDS is required to be deducted has to be considered. ‒ File TDS Return (Form 27Q) within 15 days from the end of the quarter in which deduction was made (one month and 15 days in case it is the last quarter). ‒ Issue WHT certificate (Form 16A) to the Transferor Hold Co certifying the taxes withheld on its behalf within 15 days from the due date for filing returns (i.e 30 days from the end of the quarter). August 2013 www.TransactionStructuring.Com 57
  • 58. Annexure 4 - Compliances (PAN) • A foreign company having taxable income in India is required to obtain a Permanent Account Number (PAN Number: a ten-digit alphanumeric identifier) from the income tax authorities of India. • Application for allotment of PAN is made in form 49AA for non residents. The following documents have to be included: • Copy of Certificate of Registration issued in the country where the applicant is located, duly attested by „Apostille‟ (in respect of the countries which are signatories to the Hague Convention of 1961) or by the Indian Embassy or High Commission or Consulate in the country where the foreign company is located. • Copy of registration certificate issued in India or of approval granted to set up office in India by Indian Authorities. • It is mandatory to quote PAN on all communications with the income tax authorities and in the return of income. August 2013 www.TransactionStructuring.Com 58
  • 59. Annexure 4 - Compliances (Advance Tax) • Advance Tax or „Pay as you earn‟ tax is liable to be paid at the time the income is earned, i.e. during the year, rather than paying the full amount at the end of the year. • Companies are liable to pay advance tax in the following instalments: Timeline On or before Jun 15 On or before Sep15 On or before Dec15 On or before Mar15 Minimum Aggregate Payment at least 15% of total annual tax at least 45% of total annual tax at least 75% of total annual tax 100% of the total annual tax • Annual tax liability for this purpose computed net of WHT i.e. any sum already paid / expected to be paid by way of WHT will be reduced from the taxes due and advance tax is determined only on the balance tax payable. August 2013 www.TransactionStructuring.Com 59
  • 60. Annexure 4 - Compliances (Advance Tax) • Interest is payable at the rate of 1% p.m. for deferring the payment / non-payment of advance taxes. • Amount of advance tax liability is determined based on estimated income and estimated WHT. However, for the purposes of computing actual dues and interest on deferment / non-payment at the end of the year, actual assessed tax is considered. • Although advance tax is liable to be paid on all incomes including Capital Gains, it is practically not possible to estimate the Capital Gains which may arise in a year. • Therefore, the entire amount of tax payable on such capital gains shall be paid along with the remaining instalments or before the end of the year. August 2013 www.TransactionStructuring.Com 60
  • 61. Annexure 4 - Compliances (Return of Income) • It is compulsory for every company to furnish return of income. • Foreign companies are required to file their return of income in respect of income earned in a particular financial year in form ITR-6 through the efiling (electronic) mode. • Even in circumstances where such transfer is not subject to tax in India due to DTAA benefit, a recent notification issued in 2013 by the income tax authorities has made it mandatory to file income tax returns in India (Notification 34/2013 dated May 1, 2013). • The following due dates are applicable for filing return of income: ‒ ‒ • Where TP provisions are applicable : November 30 In other cases : September 30 The return of income should be digitally signed by the Authorised Signatory. August 2013 www.TransactionStructuring.Com 61
  • 62. Annexure 4 - Compliances (Return of Income) • If a return is submitted after the due date, the consequences are: ‒ The taxpayer will be liable to pay penal interest @1% per month or part of the month of delay (calculated on taxes due and unpaid). ‒ A penalty of Rs 5,000 may be imposed if return is submitted after one year from the end of the financial year. ‒ If the return of loss is submitted after the due date, losses including capital losses, cannot be carried forward. The unabsorbed depreciation can however be carried forward. ‒ If the return is submitted late deductions allowable under certain sections will not be available. August 2013 www.TransactionStructuring.Com 62
  • 63. Annexure D - Compliances (Transfer Pricing) • Every person who enters into an international transaction with an associated enterprise is required to maintain prescribed information and documents. • Various types of information to be maintained in respect of an international transaction, the associated enterprise and the TP method including ownership structure, profile of the group, nature and quantum of transaction, FAR analysis etc. • The prescribed information and documents are required to be maintained for a period of 8 years. • Detailed documentation is not required where the transaction value does not exceed INR 10 million. However, information necessary to substantiate the transfer price used needs to be maintained. August 2013 www.TransactionStructuring.Com 63
  • 64. Annexure 5 – Other Income Article in DTAA ARTICLE 22 - Other income: India – Mauritius DTAA 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. August 2013 www.TransactionStructuring.Com 64
  • 65. Annexure 6 - Amalgamation • According to the IT Act , amalgamation in relation to companies means: ‐ The merger of one or more companies with another company, or ‐ The merger of two or more companies to form one company. • The company or companies which so merge are referred to as the amalgamating company. • The company with which they merge or which is formed as a result of the merger is referred to as the amalgamated company. August 2013 www.TransactionStructuring.Com 65
  • 66. Annexure 6 - Amalgamation • Conditions to be satisfied for tax neutral merger: ‒ All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation. ‒ All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation. ‒ Shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company by virtue of the amalgamation. ‒ For reckoning the above shareholding, shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary are excluded. August 2013 www.TransactionStructuring.Com 66
  • 67. About Authors Ajay Kumar is an international tax expert with over 18 years of experience in advising clients on various cross border transactions. As partner of PwC for over 8 years, he has led several practices within PwC including Outbound Investment Advisory and Global Tax Compliance. He has advised clients on various international taxation matters both for greenfield and brownfield projects. He spearheaded lobbying initiative of PwC in 2010 when Direct Taxes Code was introduced in the Indian fiscal system. He was the Chairman of Taxation committee of American Chamber of Commerce in 2011. He is also the founder of the world's first ever packaged consulting platform, TransactionStructuring.Com created for cross border transactions. Richa Sawhney is an International tax expert with over 16 years of experience in tax and regulatory matters. She has been associated with organisations such as PwC and Deloitte for about 12 years. As part of PwC Knowledge Management, Centre of Excellence and L&E initiatives, she has been actively involved in monitoring, analysing key tax policy developments and making representations to the concerned authorities. She has been involved in developing position papers on emerging tax issues, thought leadership publications on policy developments such as GAAR, and several other PwC publications such as the PwC Master Guides, Annual Budget Reports and Doing Business in India Reports. She has also been part of PwC's lobbying initiatives on Direct Taxes Code, LLPs and Withholding Tax matters. August 2013 www.TransactionStructuring.Com 67
  • 68. Disclaimer This product has been prepared by Authors exclusively for Danta Transaction Services Private Limited (Company) to be published on TransactionStructuring.Com for explaining the topic in a generic manner. This is not meant to provide any advice or recommendation to anyone. Neither Company nor the Authors is responsible to any one for taking or not taking any action based on the content of this product. The readers are advised to seek advice from their own consultants. All rights reserved. August 2013 www.TransactionStructuring.Com 68

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