Taxation of Capital Gains including indirect transfers. Geeta Jani... · situations where foreign...
Transcript of Taxation of Capital Gains including indirect transfers. Geeta Jani... · situations where foreign...
Taxation of Capital Gains including indirect transfers
CA Geeta Jani
Date: 23 January 2016
2 January 20162 January 2016
Contents
► Indirect transfer provisions under ITL
► FA 2012
► FA 2015
► Taxation of overseas dividend
► Indirect transfer taxation under treaties
► Assorted issues: Case studies
Taxation of Capital Gains including indirect transfers
3 January 2016
Background
4 January 20164 January 2016
Background
► FA 2012 inserted Explanation 5 in S. 9(1)
(i) w.e.f. 1 April 1962:► As per Explanation 5 an asset or capital asset,
being any share or interest in a company or
entity registered or incorporated outside India
shall be deemed to be situated in India if the
share or interest derives, directly or indirectly, its
value substantially from the assets located in
India
► Concerns raised by various stakeholders► Constitution of an Expert Committee under
Chairmanship of Dr. Parthasarathi Shome
► Certain recommendations considered in FA
2015 amendmentsI Co
F Co
SPV
Outside India
India
100%
100%
Transfer
Taxation of Capital Gains including indirect transfers
5 January 20165 January 2016
Scope of “look through” provisions► Exp. 5 to S.9(1)(i) covers “share or interest in a company or entity
registered or incorporated outside India” ► Share / interest fulfill should “substantiality” test in terms of value
derivation from assets located in India► “Company” inter alia covers any body corporate incorporated outside
India► Residential status of FCo / FE is not a relevant criterion
► Share can be equity, preference, with or without voting /special rights, ESPS, etc.
► “Interest in a company” should result in participation in ownership, capital, control or management (Shome Committee)
► Interest may cover convertible instruments, warrants, ESOPs issued by the company
► “Entity registered or incorporated” ≈ body corporate? ► Excludes unincorporated associations/general partnerships?
Taxation of Capital Gains including indirect transfers
6 January 20166 January 2016
► “Share/interest” needs to be in FCo / FE► May not cover contractual/derivative rights though economic value thereof may
depend on value of FCo / FE
► S.9(1)(i) applies to income► Through or from asset or source of income in India;
► Through transfer of capital asset situated in India
► Transferor may hold it as ‘asset’ or ‘capital asset’
► CBDT Circular: Taxability of gains having economic nexus with India ‘irrespective of mode of realization’ and ‘is in respect of income arising from indirect transfer of assets’
► S.9(1)(i) does not apply to -► Dividend declared and paid by FCo outside India (Circular 4/ 2015)
► ‘Receipt’ of gift/ benefit triggering S.56(2)(vii)/(viia) or S.2(24)(iv), salary taxation etc.
Scope of “look through” provisions
Taxation of Capital Gains including indirect transfers
7 January 2016
FA 2015 amendments
8 January 20168 January 2016
FA 2015 amendments
Amendments intended to address
concerns raised by various stakeholders
► Explanation 6 – Explains “substantial”;
provides for substantial threshold limit
► Explanation 7(a) – Small shareholder
exemption
► Explanation 7(b) – Provides for
proportionate basis of taxation
► S. 47(viab)/(vicc) – Exemption on
amalgamation/demerger
► S. 285A – Reporting obligation on Indian
concerns
► S. 271GA – Penalty for failure to report u/s
285A
I Co
F Co
SPV
Outside India
India
100%
100%
Transfer
Taxation of Capital Gains including indirect transfers
9 January 20169 January 2016
S.9(1)(i) as amended w.e.f. A.Y. 2016-17
► Exp.5 r.w. Exp.6 to S.9(1)(i) outlines
situations where foreign assets are
deemed to be situated in India
► Question to ask: Do shares/ interest in
SPV derive value from assets located
in India?
► As per Exp. 6, indirect transfer
provisions will apply only if, as on the
“specified date”, the value of assets
of SPV located in India -► > INR 10 Cr and
► Represents at least 50% of the value of total
assets of SPV (clarificatory?)
I Co
F Co
SPV
Outside India
India
100%
100%
Transfer
Taxation of Capital Gains including indirect transfers
10 January 201610 January 2016
S.9(1)(i) as amended w.e.f. A.Y. 2016-17
► Share / interest deemed India asset if A/B ≥ 50%
► FMV of assets is without reduction of liabilities, if any, in respect of assets
► FMV (e.g. DCF / NAV) to be determined in prescribed manner
► Taxation in proportion to the value of Indian assets (Prospective?)► Method for determining proportionality to be
prescribed in the rules
► No impact on treaty relief
A FMV of assets (whether tangible or intangible)
(held directly/ indirectly) located in India
B FMV of all assets owned by SPV
I Co
F Co
SPV
Outside India
India
100%
100%
Transfer
Taxation of Capital Gains including indirect transfers
11 January 2016
Specified date
12 January 201612 January 2016
Specified date & its significance
► What is “specified date”?
► End of the “accounting period” of SPV
preceding the date of transfer or
► But, date of transfer, if book value of assets
of SPV as on date of transfer exceeds book
value at preceding accounting year end date by
15%
► What is “accounting period”?
► Generally, period of 12 months ending on
preceding 31 March
► If SPV regularly adopts other accounting period for
tax compliance in its country of residence or for
shareholders’ reporting, such other date preceding
date is the accounting period
► Accounting period can be shorter than 12
months in year of formation or cessation
I Co
F Co
SPV
Outside India
India
100%
100%
Transfer
Taxation of Capital Gains including indirect transfers
13 January 201613 January 2016
► Illustration: Date of transfer is 1 July 2016
► Determining book value:► Requires preparation of balance sheet of SPV as of date of transfer adopting same
accounting principles applicable to SPV
► Book value ≠ net worth
► Specified date relevant for determining if ‘substantial’ value (≥ 50%) test fulfilled
► Actual taxation however proportional gain attributable to Indian assets as of the date of transfer
► Date of transfer can be 364 days away from specified date!!
Specified date & its significance
Particulars Situation 1 Situation 2 Situation 3
BV of FCo as of 31.03.2016 1000 1000 1000
BV of FCo as of 01.07.2016 1200 1100 300
Whether exceeds 15% of BV as of 31.03.2016 Yes No No
Specified date for ‘substantiality’ test 01.07.2016 31.03.2016 31.03.2016
Taxation of Capital Gains including indirect transfers
14 January 201614 January 2016
► Illustration: Date of transfer is 1 July 2016
Specified date & its significance
Particulars Situation 1 Situation 2
BV of FCo as of 31.03.2016 1000 1000
BV of FCo as of 01.07.2016 1100 1100
Whether exceeds 15% of BV as of 31.03.2016 No No
Specified date for ‘substantiality’ test 31.03.2016 31.03.2016
% of value derivation from India assets
As of 31.03.2016 (specified date) 45% 55%
As of 01.07.2016 55% 45%
Is transaction taxable? No Yes
Proportion of taxation NIL 45%
Taxation of Capital Gains including indirect transfers
15 January 201615 January 2016
► Which “assets are located in India”?► the assets in India owned by ICo
(“Indian assets”) excluding overseas assets; or
► the “shares of ICo” held by SPV?
► ‘Look through’ provisions need to be applied to determine ‘economic nexus’?
► ‘Look through’ to be restricted to determining entry point of India assets? Shares of Indian Company admittedly an Indian asset.
► If SPV transfers shares of ICo, gains will capture appreciation attributable to Indian as also overseas assets.
Meaning of “assets located in India”?
Outside India
F Co
SPV 1
ICo
Outside India
India
Transfer
Overseas shares
Indian
Assets
Overseas
Assets
SPV 2
Taxation of Capital Gains including indirect transfers
16 January 201616 January 2016
Liabilities India Overseas Assets India OverseasCapital 600 400 Assets 600 1200Liabilities NIL 800 Total 600 1200 Total 600 1200
Value derivation Net worth Gross assetsIco 60% 33.33%Overseas assets 40% 66.67%
Variation 1 – No tax trigger even though commercially India contributes substantially value of FCo:
Impact of liabilities
FCo
ICo
Transfer of FCo shares
Outside India
India
Shareholders
Overseas
Assets
► Explanation 6(b) requires assets to be valued without reduction of liabilities
Variation 2 – Unjustifiable tax trigger even though commercially India does not contribute substantial value:
Liabilities India Overseas Assets India OverseasCapital 400 600 Assets 1200 600Liabilities 800 NIL Total 1200 600 Total 1200 600Value derivation Net worth Gross assetsICo 40% 66.67%Overseas assets 60% 33.33%
Taxation of Capital Gains including indirect transfers
17 January 201617 January 2016
Impact of liabilities
FCo
SPV
ICo
Transfer of FCo shares
Outside India
India
Shareholders
Overseas
Assets
► Explanation 6(b) to S.9(1)(i):
“(b) the value of an asset shall be the fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, determined in such manner as may be prescribed;”
► Which liabilities are to be ignored ambiguous:
Alt Particulars
1 Ignore liabilities incurred by the shareholder who transfers shares of FCo
2 Ignore liabilities incurred by ICo alone
3 Ignore liabilities incurred by FCo and SPV
4 Ignore liabilities incurred by all the entities in the entire value chain i.e. FCo, SPV & ICo:
Taxation of Capital Gains including indirect transfers
18 January 2016
Small shareholder exemption
19 January 201619 January 2016
► Explanation 7(a)(i) to S.9(1)(i)
► Transfer of a share/interest in a FCo/ FE which directly owns the
Indian assets and the transferor, either individually or along with its
AEs*, -► neither holds any right of control or management of the transferred FCo/ FE;
► nor holds voting power/ share capital/ interest > 5% of the total voting power or
share capital of F Co/ FE
► Above conditions to be evaluated over 12 months preceding the date
of transfer
► 5% interest in FCo/FE may still represent miniscule indirect interest
of a shareholder in ICo
► Alternatively, FCo / FE may hold 100% of Indian assets
Direct holding of India assets by FCo/ FE
* AE to be determined as per S.92A (TP provisions)
Taxation of Capital Gains including indirect transfers
20 January 201620 January 2016
Case study
► PCo transfer shares of FCo which is a listed company
► PCo enjoys ‘small’ shareholder exemption if in 12 months preceding the date of transfer, each of the following conditions is fulfilled
► PCo + AE of PCo, have no right of management, or control in relation to FCo
► PCo, and AE, hold ≤ 5% of voting power of FCo*
► PCo, together with AE, holds ≤ 5% of share capital of FCo**
► AE is as per S.92A of ITL
► Quantum of transaction immaterial
► Fco’s listing makes no difference
► Presence of right of management or control may disqualify even if shareholding or voting right is ≤ 5%
► Cases of veto or negative control to be examined
* Could even be differential voting right
** Could cover all forms of capital
FCo (Listed)
PCoTransfer of
shares of FCo
Branch
Outside India
India
4% of voting and capital
Taxation of Capital Gains including indirect transfers
21 January 201621 January 2016
Case studyFacts►Mr. A is a member of LLC►LLC is an incorporated entity►Mr. A is entitled to 5% profit share but he is an operating member of LLC & has veto power in respect of most decision making►Mr. A is not a director nor participates in management of FCo►LLC ‘may’ opt for pass through assessment in its tax jurisdiction but has opted for entity level assessment►Mr. A assigns his interest to Mr. B and earns gain►The only asset of each entity in the vertical structure is an underlying investment
Issue►Mr. A’s interest in LLC represents interest in entity which is incorporated outside India and hence covered by Explanation 5 to S.9(1)(i)►Mr. A holds 5% profit share: ‘small shareholder’ exemption available for the holding of 5%.
► Exemption is breached if interest exceeds 5%
►However, exemption is not available as Mr. A is likely to be regarded as holding the right of management or control in relation to LLC
LLC
FCo
ICo
Assignment of interest
Mr. A
Outside India
India
Taxation of Capital Gains including indirect transfers
22 January 201622 January 2016
► Explanation 7(a)(ii) to S.9(1)(i)
► Transfer of shares/interest in a FCo/ FE which indirectly owns the Indian assets and the transferor, either individually or along with its AEs*, -► neither holds the right of control or management of FCo / FE;
► nor holds any rights in, or in relation to, F Co / FE which would entitle the transferor to exercise management or control in a company/entity which directly holds Indian assets;
► nor holds such % of voting power/ share capital/ interest in FCo/FE which results in holding (either individually or along with its AEs) voting power/ share capital/ interest > 5% of the total voting power or share capital of a company/entity which directly holds Indian assets
► Above conditions to be evaluated over 12 months preceding the date of transfer
► 5% interest in FCo/FE may still represent miniscule indirect interest of a shareholder in ICo
Indirect holding of India assets by FCo/ FE
* AE to be determined as per S.92A (TP provisions)
Taxation of Capital Gains including indirect transfers
23 January 201623 January 2016
► PCo effects transfer of 10% shares of FCo in January 2016
► Is PCo entitled to small shareholder exemption?
Assumption:
► PCo together with AE, does not hold right of management or
control in relation to FCo (being a company whose shares are
transferred)
► PCo does not hold, by virtue of holding right in or in relation to
FCo, direct/indirect right in management in or control in relation
to Sub2 (being a company directly owning India assets)
► But, PCo’s derivative voting right or share capital holding in
Sub2 exceeds 5% as under:
► If 10% of shares in FCo are sold in February 2017, i.e. after 12
months of first tranche transfer in January 2016, voting right or
share capital % will be below 5% and at that stage, (i.e. second
tranche) small shareholder exemption can be claimed
FCo
JVCoSub1
PCo
Sub2
ICo
50% (b) 25% (c)
50% (d)
50% (e)
20% (a)
Transfer
Outside India
India
Case study
Through Sub1 it is 20% of 50% of 50% (i.e. a x b x d) =
5.0%
Through JVCo it is 20% of 25% of 50% (i.e. a x c x e) =
2.5%
Total 7.5%
Taxation of Capital Gains including indirect transfers
24 January 201624 January 2016
► PCo transfers shares of FCo1
► PCo can enjoy small shareholder protection if in 12 months preceding date of transfer all following conditions are fulfilled by PCo together with AE,
► Has no right of management or control in relation to FCo1
► Has no right in or in relation to FCo1 which gives him right of management or control in relation to FCo3 by virtue of any right in or in relation to FCo1
► Holds ≤ 10% of voting power of FCo 1 such that derivative voting right in FCo3 is ≤ 5% (10% X 50% X 100%)
► Holds ≤10% of share capital of FCo 1 such that derivative share capital in FCo3 is ≤ 5%
► It is not material that I Co may be a listed company and
FCo3 may hold very small percentage of ICo and that direct
transfer of shares of ICo by FCo3 on Stock Exchange may
be tax exempt
► In the given illustration, as a variation, if PCo holds 5% of
share capital of FCo1 and AE of P Co holds another 6% of
share capital in FCo1, small shareholder exemption is not
available for PCo’s transfer of shares of FCo1.
Transfer of shares of FCo1
FCo1
ICo (Listed)
FCo2
FCo3
PCo
≤10%
50%
100%
1%
Company whose shares are transferred
Company directly owing India
Outside India
India
Case study
Taxation of Capital Gains including indirect transfers
25 January 2016
Overseas merger/ demerger
26 January 201626 January 2016
Tax neutrality for foreign merger/demerger involving direct / indirect transfer► S.47(via) and (vic) apply to direct transfer of shares of Indian company in case of
amalgamation/demerger of two foreign companies
► Cost and holding period substitution granted to amalgamated company/ resulting
company
► Introduction of S.47 (viab)/(vicc) to neutralise ‘indirect transfer’ for -
► Amalgamating foreign company
► Demerger involving two foreign companies
► Exemption for foreign amalgamating company (F Co) if
► 25% parity of shareholding continues in amalgamated company
► F Co triggers no tax in its country of incorporation
► Exemption for foreign demerged company (F Co) if
► 75% parity of shareholding continues in resulting company
► F Co triggers no tax in its country of incorporation
► Demerger need not be u/s 391/394 of Cos Act, 1956
► No tax neutrality however for shareholder of the amalgamating / demerged company
Taxation of Capital Gains including indirect transfers
27 January 201627 January 2016
Direct transfer of shares of ICo
► Direct transfer of shares of ICo upon
amalgamation of FCo1 with FCo2
► In terms of existing provisions under
S.47(via), FCo1 gets exemption upon
its merger with FCo2, subject to –
► Continuity of 25% of shareholding and
► No taxation in the jurisdiction of FCo1
► No protection to shareholder of
amalgamating company (FCo1)
► Exemption available to shareholders
u/s. 47(vii), if amalgamated company is
an Indian company
► FA 2015 amendment deals with
indirect transfer cases
Amalgamation
FCo1
ICo
FCo2
Outside India
India
Issuance of shares of FCo2Shareholders
Taxation of Capital Gains including indirect transfers
28 January 201628 January 2016
Indirect transfer of shares of ICo
► In terms of S.47(viab), FCo1 gets
exemption upon its merger with FCo2,
subject to -
► Continuity of 25% of shareholding and
► No taxation in the jurisdiction of FCo1
► No protection to shareholder of
amalgamating company (FCo1) also?
► Amendment exempts transfer of
shares of SPV which derive value from
ICo
► Exemption available to shareholders
u/s. 47(vii), if amalgamated company
is an Indian company
Amalgamation
FCO1
SPV
ICo
FCo2
Issuance of shares of FCo2
Outside India
India
Shareholders
Taxation of Capital Gains including indirect transfers
29 January 201629 January 2016
Overseas amalgamation of WOS with its parent
► FCo group owns ICo shares which are held
through a vertical holding structure
► FCo2 is merged with FCo3
► Merger is tax exempt in FCo2 jurisdiction
► Merger involves direct and indirect transfer of
I Co shares
► FCo2 enjoys exemption u/s 47(via) and
47(viab) respectively in respect of transfer of I
Co and F Co1 shares
► No Consideration to FCo3 but mere
cancellation of its shares in FCo2
► Assets vesting in FCo3 in its capacity of
amalgamated company and not as
consideration for ‘transfer’ of FCo2 shares?
100%
100%
Outside India
India
Merger
Taxation of Capital Gains including indirect transfers
30 January 2016
Reporting obligations and penal consequences
31 January 201631 January 2016
Reporting obligation u/s 285A► Shares of FCo may derive value substantially from India located asset [as referred to
in Explanation 5 to S.9(1)(i)]
► FCo may directly or indirectly hold assets in India i.e. through, or in, an Indian concern
► FCo may hold assets in India directly or
► FCo may hold assets ‘in India’ through an Indian concern or
► FCo may hold assets in India ‘in’ Indian concern
► Form of reporting and time limit of reporting to be prescribed. The documents to be
furnished also to be prescribed
► Since information is to be furnished for determination of income u/s. 9(1)(i); obligation
of reporting ‘may’ be after transaction is completed
► Reporting obligation on Indian concern if assets held through or in Indian concern
► Obligation is for determination of income accruing or arising u/s. 9(1)(i)
► Is reporting required if transaction is exempt?
► The date from which reporting obligation arises?
Taxation of Capital Gains including indirect transfers
32 January 201632 January 2016
Penalty u/s.271GA► Penalty on Indian concern for failure to furnish information / documents u/s. 285A
► Penalty is 2% of the transaction value if transaction has effect of directly or indirectly transferring right of management or control in relation to Indian concern► In other cases, penalty is INR 500,000
► Transfer of change in management or control* : What is threshold – 51% or 26%? Ability to block critical decisions?
► Change in control, if it arises independent of transfer of share in a foreign company or interest in a foreign entity should not trigger penalty as the obligation of reporting is for the purpose of determination of income arising u/s. 9(1)(i) ► Test, for example, issuance of rights shares by FCo which may not be subscribed to by all the
existing shareholders
► Management and control needs to be seen qua the Indian concern - though, the change may occur oven as a consequence of transfer to an associate or the group concern
► Change of shareholding in the vertical structure (such that, the ultimate parent and immediate shareholder of Indian concern remain unchanged ) may not trigger in direct or indirect transfer of the right of management or control in relation to I Co
* Positive control? Negative Control?
Taxation of Capital Gains including indirect transfers
33 January 201633 January 2016
Case study
► Transfer of shares FCo3 by FCo2 in favour of FCo1 may trigger S.9(1)(i) tax implications
► ICo may trigger reporting obligation u/s. 285A
► Does transfer have effect of direct or indirect transfer of right of management or control in relation to ICo?
► Right of management or control is ordinarily with the Board of Directors and/or shareholders of the company. The right of management or control of FCo4 remains unchanged
► Penalty of Rs. 500,000?
► What if FCo3 had contractual right to manage / control I Co? Is change in ownership of FCo3 leads to change of control or management ‘in relation to’ I Co?
► What if F Co 2 effects gift or enjoys treaty protection in terms of India?
FCo1
FCo2
FCo3
FCo4
ICo
Outside India
India
Tra
nsf
er
Taxation of Capital Gains including indirect transfers
34 January 2016
Payment of foreign dividend [Circular 4/2015]
35 January 201635 January 2016
Taxation of dividend paid by F Co► Explanation 5 applies, creates a fiction: share / interest in F Co /
FE is ‘deemed to have been situated in India’► Issue debated : Is dividend paid by F Co / FE from deemed
source of income in India?► Circular No. 4 of 2015
► S. 9(1)(i) amendment clarifies source rule of taxation in respect of gains from indirect transfer and is restricted in its applicability to transfer
► Declaration of dividend by F Co does not have effect of transfer of underlying assets
► Accordingly, dividends declared and paid outside India by F Co not covered by s. 9(1)(i)
► Circular refers to ‘dividend declared’ and ‘paid’
► No taxation in respect of:
► Interim or final dividend;
► Dividend paid in kind;
► Dividend paid out of share as premium (or any capital reserve) as
permitted under corporate law of F Co
FCo1
Outside India
India
FCo3
FCo4
ICo
FCo2
Div 4100%
100%
100%
Div 3
Div 2
Div 1
Taxation of Capital Gains including indirect transfers
36 January 201636 January 2016
Applicability to dividend in kind
► SPV 1 derives substantial value from Indian assets
and is covered by explanation 5 to S.9(1)(i)
► Jurisdiction of SPV 1 permits distribution of dividend
in kind, in the form of investment
► SPV 1 distributes investment in shares of SPV
2(and indirectly I Co) as dividend to shareholder, i.e.
P Co
► Such distribution is characterised as dividend for tax
purposes in SPV 1’s jurisdiction
► Application of Circular 4 of 2015:
► Distribution of shares treated as dividend for the purpose of
the ITA if SPV 1’s jurisdiction characterises the same as
dividend in terms of its tax laws
► Distribution of dividend in kind, i.e. shares of SPV 2, deemed
as dividend u/s 2(22)(a) to the extent of accumulated profits
of SPV 1
► Circular 4 benefit can be applied, covers deemed dividend
P CO
SPV 1
SPV 2
I Co
Outside India
India
Div
iden
d in
the
form
of
S
PV
2 sh
are
s
Taxation of Capital Gains including indirect transfers
37 January 201637 January 2016
Applicability to deemed dividend► SPV 1 derives substantial value from India
through ICo and is covered by explanation 5 to S.9(1)(i)
► SPV 1 has accumulated profits► SPV 1 is liquidated and investment in shares of
SPV 2 (and indirectly I Co) is distributed to shareholder, i.e.P Co
► Distribution to the extent of accumulated profits treated as deemed dividend taxable under S.2(22)(c) of ITA; balance distribution taxable as capital gains
► Application of Circular 4 of 2015:► Liquidation regarded as transfer effected by the shareholder
of an asset which is deemed to be situated in India
► To the extent, distribution upon liquidation is characterised as dividend, is benefit of CBDT Circular 4 available
P Co
SPV 1
SPV 2
I Co
Outside India
India
Liq
uida
tion
proc
eeds
Taxation of Capital Gains including indirect transfers
38 January 2016
Case Studies
39 January 201639 January 2016
► F Co and its promoters are from non-treaty
favourable jurisdiction(s)
► Value of Sing Co is 60% of overall F Co
value triggering proportionate tax liability in
India upon exit at F Co level
► Alt : 1
► Promoters transfer shares of F Co
► Triggers proportionate tax in India as F Co is
covered by Explanation 5 to S.9(1)(i)
► Alt : 2
► Sing Co to dispose of shares of I Co and
claims treaty exemption
► F Co / promoters to dispose of residue post
above sale
Sequencing of the transactions
Transfer
F Co
Others
ICo
Outside India
India
Promoters
Sing Co
1000
600 400
Taxation of Capital Gains including indirect transfers
40 January 201640 January 2016
Computation of capital gain ► FCo had invested $100 in SPV shares 4 years back
► FCo ‘may’ be trigger POEM based residency in India
► FCo transfers shares of SPV for $1000
► Capital gains computation in the hands of FCo:► Gains proportionate to India assets taxable in India
► Cost of acquisition of ICo not relevant
► Capital gains to be calculated in $ terms under Rule 115
► First proviso to S.48 does not apply
► Indexation benefit applies
► Purchaser has TDS obligation u/s. 195 for payments to FCo though tax resident; likewise, S.112(c)(iii) 10% taxation benefit applies even if FCo is POEM resident
► TDS is w.r.t. actual tax liability of payee (refer Circular No. 3 of 2015)
100%
FCo
SPV
ICo
Transfer of SPV shares
100%
Taxation of Capital Gains including indirect transfers
41 January 201641 January 2016
Impact of preferential allotment
► F Co1 and F Co2 are foreign companies operative in different jurisdictions hold shares of SPV
► SPV is covered by Explanation 5 to s. 9(1)(i) desired to be held primarily by F Co2
► SPV makes preferential allotment to F Co2 at fair value
► Post preferential allotment, F Co2 will hold 76% of expanded capital base of SPV
► Issues ► Does preferential allotment result in ‘transfer’?
► Does it result in creation of interest in ‘control and management’ held by F Co1 or SPV?
► Is F Co1 triggering tax in India?
► Is there any reporting obligation on I Co?
FCo1
SPV
FCo2
ICo
90% (24%)
100%
10% (76%)
Outside India
India
Taxation of Capital Gains including indirect transfers
42 January 201642 January 2016
Gift of foreign shares
► FCo1 and FCo2 are sister subsidiaries
► FCo1 is 100% parent of SPV
► SPV has presence in India and holds ICo shares and other Indian assets
► For synergy and as part of global reorganization, FCo1 gifts shares of SPV to FCo2
► Tax implications for FCo1
► S.47(iii) exemption?
► S.50D applicability
► TP applicability
► Tax implications for FCo2 / PCo
► Evaluate S.56(2(viia), S.2(24)(iv); S.2(22)
► Is reporting required u/s. 285A? By whom?
► Penalty quantum u/s. 271GA if I Co / Indian concern in default?
PCo
FCo1
SPV
FCo2
ICo
100% gift
100%
Indian operative assets
100%100%
Outside India
India
Taxation of Capital Gains including indirect transfers
43 January 2016
Treaty interplay
44 January 201644 January 2016
Relief under a DTAA
Assumptions
► Parent Co holds shares as an investment
► ICo does not hold immovable property in India,
either directly or indirectly► Some DTAAs have specific provisions to capture this,
requires a separate examination
Key points
► DTAA with the Buyer’s jurisdiction not relevant► Buyer does not earn income/gains
► DTAA with HoldCo’s jurisdiction not relevant► HoldCo can be located in any jurisdiction, this does not
impact the analysis
► DTAA with Parent Co’s jurisdiction relevant► Parent Co is the alienator, earning capital gains
HoldCo jurisdiction
India
Transfer of HoldCo’s shares
HoldCo
ICo
Parent Co Buyer
SHCo jurisdiction
Taxation of Capital Gains including indirect transfers
45 January 201645 January 2016
Relief under a DTAA
Categories of Parent Co treaties
(illustrative):
HoldCo jurisdiction
India
Transfer of HoldCo’s shares
HoldCo
ICo
Parent Co Buyer
SHCo jurisdiction
Category Right to tax Treaty examples
1 Exclusive taxation right to COR with/ without conditions about LOB, subject to tax, transfer to NR
Mauritius, Netherlands, Singapore
2 Taxation as per domestic law UK, USA
3 Source taxation in India restricted to shares of Indian resident Company
Germany, Switzerland, Luxembourg
4 Treaty permits taxation of indirect transfer
South Africa, Israel
5 Absence of capital gain Article but presence of other income Article in the treaty
Malaysia, Nepal
Taxation of Capital Gains including indirect transfers
46 January 201646 January 2016
Indirect transfer of immovable property
► Transfer of SPV shares taxable in India if SPV consists,
directly or indirectly, principally of immovable property
(IP) in India [Article 13.4 of UN MC]
► Meaning of IP to be taken as per Article 6(2)
► As per Article 6(2), IP includes–
► IP as per the domestic laws (not only tax laws) of India (i.e.
the source country);
► property accessory to IP;
► rights to which the provisions of general law respecting
landed property apply;
► usufruct of IP, etc.
► Indian domestic laws define IP widely to include
benefits to arise out of land, right of way, etc.
► UN MC clarifies “principally” to mean 50% value
threshold
► No source taxation if IP used for business purposes
[e.g. UN MC, India-Netherlands treaty]
Outside India
India
100%
FCo(Treaty resident)
SPV
ICo
Transfer of SPV shares
100%
Executes infrastructure
project
Taxation of Capital Gains including indirect transfers
47 January 201647 January 2016
Benefits under Singapore treaty: Impact of modified Mauritius treaty
► SE is a treaty resident of Singapore and fulfils
motive and objective test of LOB
► Alienator based taxation in Article 13.4 of I-S
treaty is co-terminus with alienator based
taxation in I-M treaty
► Any amendment in I-M treaty to take away
alienator based taxation will but, will restore
earlier I-S treaty granting ‘limited’ source based
taxation
► Taxation of various instruments as per earlier I-S
treaty:
► Shares of ICo taxable in India
► Any instruments, like MF units, CCDs taxable in
Singapore; no requirement to satisfy LOB rule
Sing Entity (SE) (FII)
Equity / Preference
shares
Singapore
India
I Co 1 I Co 2
CCDsMF
Units
MF
Taxation of Capital Gains including indirect transfers
48 January 201648 January 2016
Direct Transfer of India Shares
► Mr. Patel subscribed to 1 L shares of ICo at par value
(value = INR 1 cr.) on 30 April 2004
► He remitted US$ to subscribe to ICo
► ICo shares are transferred in January 2016 for INR 2 Cr to
a resident of India
► Mr. Patel notes the following:
► Indexation results in capital loss but the first proviso results
in gain!
► Is there option for Mr. Patel to opt out of first proviso and
claim indexation benefit?
ICo
USA
India
Mr. Patel (NRI)
Year Exchange rate Cost Inflation Index [CII]
2004 1$ ͌ INR 44 480
20051$ ͌ INR 68
1024
Fluctuation 54% 113%
Taxation of Capital Gains including indirect transfers
49 January 201649 January 2016
Questions?
Taxation of Capital Gains including indirect transfers
50 January 201650 January 2016
Thank You !This Presentation is intended to provide certain general information existing as at the time of production. This Presentation does not purport to identify all the issues or developments. This presentation should neither be regarded as comprehensive nor sufficient for the purposes of decision-making. The presenter does not take any responsibility for accuracy of contents. The presenter does not undertake any legal liability for any of the contents in this presentation. The information provided is not, nor is it intended to be an advice on any matter and should not be relied on as such. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of the presenter, this document may not be quoted in whole or in part or otherwise.