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Cross-border taxation| Dire irect & In Indirect tra ransfers - CA Sa Saurabh Dh Dhadphale le 15 15 De December 20 2018 18 December 2018 Cross-border taxation - Direct & Indirect transfer 1 le of content Sect ection 1

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  • CA Sa

Saurabh Dh Dhadphale le 15 15 De December 20 2018 18

Cross-border taxation| Dire irect & In Indirect tra ransfers

1 December 2018 Cross-border taxation - Direct & Indirect transfer

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Contents

Sect ection 1

Back to basics

Sect ection 2

Recent regulatory update

Sect ection 3

Indirect-transfer

Sect ection 4

Case Studies

Table le of content

2 December 2018 Cross-border taxation - Direct & Indirect transfer

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Back to basics Section 01 01

3 December 2018 Cross-border taxation - Direct & Indirect transfer

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Mod

  • des of
  • f res

restructuri ring

Mergers and Acquisitions Acquisitions Merger/ Demerger Business Transfer Share Purchase Amalgamation Demerger Slump Sale Itemised Sale Primary/ Secondary

Acquisition of business - not the company Focus on inorganic growth/ strategic growth Consolidation of businesses/ entities through Court Scheme Acquisition of specified business through Court Scheme 4 December 2018 Cross-border taxation - Direct & Indirect transfer

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Reg egula lations to be be con

  • nsid

idered

Secu Securities es an and d Ex Exch chan ange e Boa

  • ard

d of

  • f Ind

ndia ia Act, Act, 19 1992 92 an and d regu egulation

  • ns

s the hereun under NBFC Regu egulations Fore

  • reign

gn excha change ge man anage gement act, act, 1999 1999 Com

  • mpa

panies s Act.

  • Act. 20

2013 13 (t (to

  • the

he ext xtent no notifi fied) Inc ncome e Tax ax Act, Act, 19 1961 61 Sec Sectoral po polic licies Ac Accounting g Impl plications ns Goo

  • ods

ds an and d Ser Service Tax ax (“GST”) St Stam amp Duty Duty Law Laws Com

  • mpe

petition

  • n Law

Law

Regulations

5 December 2018 Cross-border taxation - Direct & Indirect transfer

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Con

  • nventional ac

acqu quisit itions

Foreign Co1 India Co

Overseas India

Foreign Co2 India Co

Transfer of shares in India Co

Mauritius/ Singapore Co India Co

Overseas India

Foreign Co1 India Co

Transfer of shares in India Co

Non

  • n favorable tax

x treaty juri jurisdiction Favorable tax treaty juri jurisdiction

Fac acts: Tran ansfer of f sh shar ares in n India ndia Co

  • by

by For

  • reig

ign Co1

  • 1 to

to For

  • reig

ign Co2

  • 2

Fac acts: Tran ansfer of f sh shar ares in n India ndia Co

  • by

by Mau auriti itius/ Sing ngapore Co

  • to

to For

  • reig

ign Co1

  • 1

Iss ssues: Whe Wheth ther the he treaty y pr prot

  • tectio

tion unde under sp specif ific ic ta tax treatie ies would ld be be avail ilable le? Iss ssues: Rate of tax? 6 December 2018 Cross-border taxation - Direct & Indirect transfer

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Le Lets thin think?

Con

  • ntin

inuity ity of f gr gran andfathering Fun undin ing & & de debt-push dow down

Per eriod of

  • f

hol holding Cos

  • st bas

base Tax treaty avai ailability

Al Alte ternate?

Ra Rate of

  • f

tax

Com Complia pliances

7 December 2018 Cross-border taxation - Direct & Indirect transfer

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SLIDE 8

Recent regulatory ry update Section 02 02

8 December 2018 Cross-border taxation - Direct & Indirect transfer

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Cro ross bo bord rder r merg erger – India India evolu lution

Ireland

Introduced section 234, allowing cross-border mergers The RBI issued draft regulations for cross-border mergers to the public for comments. IV: : 26 26 Apri April 20 2017 17 A foreign company can be merged with an Indian company Notified section 234 of the Companies Act, 2013, allowing outbound mergers III: : 13 13 Apri April 20 2017 17 II: : Com Companies Act Act, 2013 I: : Com

  • mpanies

s Ac Act, 19 1956 56 The RBI issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 [FEMA 389/2018-RB]. V: : 20 20 Mar arch 20 2018 18

1 2 3 4 5

Notes:

  • 1. As per EU merger directives, EU member states can engage into cross-border mergers

(both inbound and outbound) with other EU member states only.

  • 2. Mauritian tax and regulatory provisions allowed cross-border mergers with other
  • countries. However, in light of the recent budget amendments in Mauritius, cross-border

provisions may also undergo changes.

  • 3. Countries where inbound mergers are allowed.
  • 4. Inbound and outbound mergers are both allowed, subject to certain conditions.

UAE South Africa Australia Japan Canada Netherlands United Kingdom Luxembourg Mauritius France Cyprus Sweden Singapore

1 1 1 1 2 3 4 4

9 December 2018 Cross-border taxation - Direct & Indirect transfer

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Key as aspects

Tax ax:

  • Capital gains tax
  • Corporate tax rate vs foreign branch tax rate
  • Foreign tax credit and transfer of other credits (direct/ indirect)
  • Minimum alternate tax (MAT)
  • Interest deductibility
  • Special economic zones (SEZs)
  • Carry forward of losses

Reg Regulatory:

  • Eligibility
  • Exchange control framework (migration/new structure)
  • Treatment of borrowings and guarantees
  • Procedural aspects (resolutions, court approval,

approval of any other regulatory body)

  • Valuation report
  • SEZs
  • Reporting obligations
  • Assignment/transfer of licences/contracts/ intellectual property

10 December 2018 Cross-border taxation - Direct & Indirect transfer

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Inb Inbound merg erger r - Trig riggers rs

De Debt/i /interest serv rvic icin ing

2

Place of

  • f eff

ffectiv ive ma management (PoE

  • EM)

3

Capital repayment and exit to joint venture (JV) partners

4

Con Consol

  • lid

idatio ion of

  • f overseas entit

titie ies (pa (pare rent/ subsidia iarie ies)

1

11 December 2018 Cross-border taxation - Direct & Indirect transfer

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Outb utbound merg erger - Trig riggers rs

De Debt/i /interest serv rvic icin ing

2

Ex Externali lisatio ion and strategic ic partn rtnerships

3

Capital repayment and exit of JV partners

4

Con Consol

  • lid

idatio ion of

  • f entit

titie ies (pa (pare rent/ / subsidiarie ies)

1

12 December 2018 Cross-border taxation - Direct & Indirect transfer

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In Indir irect transfer Section 03 03

13 December 2018 Cross-border taxation - Direct & Indirect transfer

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Ind Indire rect tr transfer – Le Lets eval aluate

Parent Co India Concern

Overseas India

Hold Co Buyer

Sale of Shares

Mauritius Co India Co

Overseas India

US Co1 US Co2 UK Co

100% 100% 100%

Merger

On n transfer of

  • f shar

shares On n extinguishment of

  • f shar

hares

14 December 2018 Cross-border taxation - Direct & Indirect transfer

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Sum Summary ry of

  • f Ind

Indire rect tr tran ansfer r tax ax

Valu aluation En Enterprise val alue app approac ach

Valuation to be determined by Merchant Banker or a Chartered Accountant Gain in proportion to stake holding with Non residents to be taxed in India

Deri Derivation of

  • f sub

substantial val alue fr from Ind ndia: If f the val alue of

  • f Ind

ndian as asse sets s is is

Exceeding INR 10 Cr; and Representing atleast 50% of value of all assets owned by the Foreign entity

Spe Specified da date

The last day of the accounting period of the entity preceding the transfer; or Date of transfer, if the book value of assets has increased by 15% or more from the above date Exemptions:

  • Foreign amalgamation / demerger – conditions apply
  • No transfer of right of management / control in target

entity (Foreign or Indian; and

  • Voting power/share capital / interest held by non

residents (along-with AEs) < 5% in: ─ Indian entity or assets; or ─ Foreign entity holding Indian entity / assets

  • Transferor to file ROI and CA report (for correct

computation)

  • Indian entity to file Form 49D reporting Indirect

Transfer ─ Penalty on Indian entity depending upon default: ─ 2% of the fair value of overseas transfer; or ─ INR0.5 million

15 December 2018 Cross-border taxation - Direct & Indirect transfer

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Ind Indire rect tr transfer – Le Lets eval aluate

Seller India Concern

Overseas India

Hold Co Buyer

Sale of Shares

Gai ains s liab liable to

  • tax

x in in Ind

  • ndia. Furn

Furnish form

  • rm 3C

3CT alo along with ith Return of

  • f Inc

ncome Lia Liable to with ithhold tax Furn Furnish sh Form

  • rm 49

49D D Main aintain Doc Documents s as as spe specifi fied in in Rul Rule 11 114D 4DB

16 December 2018 Cross-border taxation - Direct & Indirect transfer

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Case studie ies Section 04 04

17 December 2018 Cross-border taxation - Direct & Indirect transfer

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Cas ase stu tudy 1: 1: Ind Indire rect tr transfer – tr treaty pro provisions

US Co India Co

Overseas India

Mauritius Co UK Co

Scenario 1: Transfer of shares in Mauritius Co Scenario 2: Transfer of shares in UK Co

Fact acts: s:

  • Mauritius Co and UK Co derive its value directly or indirectly substantially from

India ─ Scenario I: US Co to transfer shares in Mauritius Co ─ Scenario II: Mauritius Co to transfer shares in UK Co Iss ssue ues:

  • Which treaty to refer under Scenario 1 & 2?
  • Whether treaty benefit available, if any?

Facts acts and and iss issue ues:

18 December 2018 Cross-border taxation - Direct & Indirect transfer

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Cas ase stu tudy 2: 2: Ind Indire rect tr transfer on

  • n di

dilu lution of

  • f sh

shar arehold lding

F Co1 India Co

Overseas India

Hold Co

Fact acts: s:

  • F Co1 holds 100% shares in Hold Co and
  • Hold Co holds 100% shares in India Co
  • F Co1 derives substantial value from assets located in India
  • F Co1 initially infuses further share capital in Hold Co
  • F Co2 subsequently infuses share capital in Hold Co resulting in change in

control and management in Hold Co and dilution of voting power of FCo1 Issu ssues es:

  • Whether indirect transfer provisions will apply on step1 and step2?

Facts acts and and iss issue ues:

F Co2

Step 1: Infusion of further share capital by FCo1 Step 2: Infusion of share capital by FCo2

19 December 2018 Cross-border taxation - Direct & Indirect transfer

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Cas ase stu tudy 3: 3: Amal algamation of

  • f Fore

reign Com

  • mpanie

ies

Fact acts: s:

  • Mauritius Co holds 100% of US Co1
  • US Co 1 holds 100% in US Co2
  • US Co 2 holds 100 in India Co
  • Mauritius Co, US Co1 and US Co2 derives directly or indirectly its value

substantially from assets located in India

  • Merger of US Co1 with UK Co contemplated

Issu ssues es:

  • Whether indirect transfer provisions trigger for US Co2, US Co1, Mauritius

Co ?

  • Tax treaty analysis?

Facts acts and and iss issue ues:

Mauritius Co India Co

Overseas India

US Co1 US Co2 UK Co

100% 100% 100%

Merger

20 December 2018 Cross-border taxation - Direct & Indirect transfer

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Thank You !

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Leg Legis isla lation hi history ry of

  • f Ind

Indire rect tr transfer tax ax

Fi Finan nance Act Act Sect Sectio ion Ame Amendments Wit ith h effect from

  • m

2012 Capital Asset Section 2(14) Deemed to include any rights in or in relation to an Indian Company, including rights of management or control or any rights whatsoever 1.04.1962 Transfer Section 2(47) “Transfer” deemed to include disposing of or parting with an asset / interest or creating any interest in any manner, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India; 1.04.1962 Situs of Shares / interest in certain foreign companies Section 9(1)(i) deemed to be situated in India, if the share /interest derives, directly or indirectly, its value substantially from the assets located in India 1.04.1962 2015 Explanation 6 to Section 9(1)(i) Word “substantially” has been defined to say that value of assets located in India should exceed Rs. 10 Cr and represent at least 50% of the value of all the assets (FMV) owned by the company as on the specified date 1.04.2016 Explanation 7 (a) to Section 9(1)(i) Exemption provided to small shareholders holding less than 5% of voting power or share capital or interest

  • f shares of a company or entity which directly owns assets situated in India as per conditions specified

1.04.2016 Explanation 7 (b) to Section 9(1)(i) In a case where indirect transfer of provisions are triggered for a foreign company, only income attributable to assets located in India shall be taken into consideration for the purpose of computation of capital gains in a prescribed manner 1.04.2016

22 December 2018 Cross-border taxation - Direct & Indirect transfer

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Leg Legis isla lation hi history ry of

  • f Ind

Indire rect tr transfer tax ax

Fi Finan nance Act Act Sect Sectio ion Ame Amendments Wit ith h effect from

  • m

2015 Section 47(viab) and Section 49 Any transfer, pursuant to a scheme of amalgamation or demerger, subject to fulfilment of prescribed conditions, shall not fall under the purview of Section 9(1)(i) Cost of Acquisition of capital assets in the hands of amalgamated company shall be the cost to its previous

  • wner

1.04.2016 Section 285A Reporting obligations in connection with indirect transfer 1.04.2016 Section 271GA Penal consequences in the event of non compliances as prescribed u/s 285A 1.04.2016 2017 Explanation 5A to Section 9(1)(i) Exemptions for specified types of FIIs/FPIs from indirect transfer provisions 1.04.2012

23 December 2018 Cross-border taxation - Direct & Indirect transfer

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Rep eport rtin ing req requir irement

Inc ncome attributable to

  • as

asse sets loc located in in Ind ndia u/ u/s.

  • s. 9

9 of

  • f the Inc

ncome-tax Ac Act, 19 1961 61

  • To be filed by the Transferor along with the Return of Income
  • Duly signed and verified by an accountant
  • Providing basis of apportionment according to the formula, and
  • Certifying income attributable to assets located in India has been correctly computed

Form

  • rm 3CT

3CT Information and documents to be furnished by an Indian concern u/s. 285A

  • To be filed by the Indian Concern within

─ 90 days from end of FY in which transfer takes place; or ─ 90 days of the transaction where transaction has the effect of directly / indirectly transferring right of management or control in relation to Indian concern

  • Form to be filed electronically
  • The information may be furnished by one designated Indian concern, if there are more than one Indian concerns that are constituent entities

Form

  • rm 49

49D

24 December 2018 Cross-border taxation - Direct & Indirect transfer