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 Contents Back to basics Sect ection 2 Recent regulatory update Sect ection 3 Indirect-transfer Sect ection 4 Table Case Studies December 2018 Cross-border taxation - Direct & Indirect transfer 2
Section 01 01 Back to basics December 2018 Cross-border taxation - Direct & Indirect transfer 3
Mod odes of of res restructuri ring Mergers and Acquisitions Merger/ Acquisitions Demerger Business Transfer Share Purchase Amalgamation Demerger Primary/ Itemised Sale Slump Sale Secondary Consolidation of Acquisition of Acquisition of Focus on inorganic businesses/ entities specified business business - not the growth/ strategic through Court through Court company growth Scheme Scheme December 2018 Cross-border taxation - Direct & Indirect transfer 4
Reg egula lations to be be con onsid idered Inc ncome e Tax ax Act, Act, 19 1961 61 Com ompe petition on Law Law Com ompa panies s Act. Act. 20 2013 13 Stam St amp Duty Duty Law Laws (to (t o the he ext xtent no notifi fied) Regulations Fore oreign gn excha change ge man anage gement act, act, Goo oods ds an and d Ser Service Tax ax 1999 1999 (“GST”) NBFC Regu egulations Ac Accounting g Impl plications ns Secu Securities es an and d Ex Exch chan ange e Boa oard d of of Ind ndia ia Act, Act, 19 1992 92 Sec Sectoral po polic licies an and d regu egulation ons s the hereun under December 2018 Cross-border taxation - Direct & Indirect transfer 5
Con onventional ac acqu quisit itions Non on favorable tax x treaty juri jurisdiction Favorable tax treaty juri jurisdiction Mauritius/ Foreign Co1 Foreign Co2 Foreign Co1 Singapore Co Transfer of shares in India Transfer of shares in India Co Co Overseas Overseas India India India Co India Co India Co India Co Fac acts: Tran ansfer of f sh shar ares in n India ndia Co o by by Mau auriti itius/ Sing ngapore Co o to to For oreig ign Co1 o1 Fac acts: Tran ansfer of f sh shar ares in n India ndia Co o by by For oreig ign Co1 o1 to to For oreig ign Co2 o2 Iss ssues: Whe Wheth ther the he treaty y pr prot otectio tion unde under sp specif ific ic ta tax treatie ies would ld be be avail ilable le? Iss ssues: Rate of tax? December 2018 Cross-border taxation - Direct & Indirect transfer 6
Le Lets thin think? Per eriod of of hol holding Complia Com pliances Ra Rate of of tax Con ontin inuity ity of f gran gr andfathering Cos ost bas base Fun undin ing & & de debt-push down dow Tax treaty avai ailability Alte Al ternate? December 2018 Cross-border taxation - Direct & Indirect transfer 7
Section 02 02 Recent regulatory ry update December 2018 Cross-border taxation - Direct & Indirect transfer 8
Cro ross bo bord rder r merg erger – India India evolu lution V: : 20 20 Mar arch 20 2018 18 5 The RBI issued the Foreign Exchange Management (Cross 1 1 Ireland Luxembourg UAE Border Merger) Regulations, IV: : 26 26 Apri April 20 2017 17 2018 [FEMA 389/2018-RB]. 1 1 4 Netherlands United Kingdom South Africa The RBI issued draft regulations for cross-border mergers to the 2 3 Japan Mauritius Cyprus public for comments. 4 4 III: : 13 13 Apri April 20 2017 17 Australia France Sweden 3 Notified section 234 of the Canada Companies Act, 2013, allowing outbound mergers Singapore II: : Com Companies Act Act, 2013 2 Introduced section 234, Notes: allowing cross-border mergers 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 I: : Com ompanies s Ac Act, 19 1956 56 countries. However, in light of the recent budget amendments in Mauritius, cross-border 1 A foreign company can be provisions may also undergo changes. merged with an Indian 3. Countries where inbound mergers are allowed. 4. Inbound and outbound mergers are both allowed, subject to certain conditions. company December 2018 Cross-border taxation - Direct & Indirect transfer 9
Key as aspects Tax ax: Reg Regulatory: • • Capital gains tax Eligibility • • Corporate tax rate vs foreign branch tax rate Exchange control framework (migration/new structure) • • Foreign tax credit and transfer of other credits (direct/ indirect) Treatment of borrowings and guarantees • • Minimum alternate tax (MAT) Procedural aspects (resolutions, court approval, • approval of any other regulatory body) Interest deductibility • • Valuation report Special economic zones (SEZs) • • SEZs Carry forward of losses • Reporting obligations • Assignment/transfer of licences/contracts/ intellectual property December 2018 Cross-border taxation - Direct & Indirect transfer 10
Inb Inbound merg erger r - Trig riggers rs 1 Consol Con olid idatio ion of of overseas entit titie ies (pa (pare rent/ subsidia iarie ies) 2 De Debt/i /interest serv rvic icin ing 3 Place of of eff ffectiv ive ma management (PoE oEM) 4 Capital repayment and exit to joint venture (JV) partners December 2018 Cross-border taxation - Direct & Indirect transfer 11
Outb utbound merg erger - Trig riggers rs 1 Consol Con olid idatio ion of of entit titie ies (pa (pare rent/ / subsidiarie ies) 2 De Debt/i /interest serv rvic icin ing 3 Externali Ex lisatio ion and strategic ic partn rtnerships 4 Capital repayment and exit of JV partners December 2018 Cross-border taxation - Direct & Indirect transfer 12
Section 03 03 In Indir irect transfer December 2018 Cross-border taxation - Direct & Indirect transfer 13
Ind Indire rect tr transfer – Le Lets eval aluate On n transfer of of shar shares On n extinguishment of of shar hares Parent Co Buyer Mauritius Co Sale of Shares 100% US Co1 UK Co Hold Co 100% Merger US Co2 Overseas Overseas India 100% India India Concern India Co December 2018 Cross-border taxation - Direct & Indirect transfer 14
Sum Summary ry of of Ind Indire rect tr tran ansfer r tax ax Deri Derivation of of sub substantial val alue fr from Ind ndia: If f the Spe Specified da date val alue of of Ind ndian as asse sets s is is The last day of the accounting period of the entity Exceeding INR 10 Cr; and preceding the transfer; or Date of transfer, if the book value of assets has Representing atleast 50% of value of all assets owned increased by 15% or more from the above date by the Foreign entity • Valu aluation Exemptions: Transferor to file ROI and CA report (for correct • Foreign amalgamation / demerger – conditions apply computation) • • No transfer of right of management / control in target Indian entity to file Form 49D reporting Indirect entity (Foreign or Indian; and Transfer • ─ Penalty on Indian entity depending upon default: Voting power/share capital / interest held by non ─ 2% of the fair value of overseas transfer; or residents (along-with AEs) < 5% in: ─ Indian entity or assets; or ─ INR0.5 million Enterprise val En alue app approac ach ─ Foreign entity holding Indian entity / assets 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 December 2018 Cross-border taxation - Direct & Indirect transfer 15
Ind Indire rect tr transfer – Le Lets eval aluate Seller Buyer Sale of Shares Lia Liable to with ithhold tax Gai ains s liab liable to o tax x in in Ind ndia. Furn Furnish form orm 3C 3CT along with alo ith Return of of Inc ncome Hold Co Overseas India India Concern Furn Furnish sh Form orm 49 49D D Main aintain Doc Documents s as as spe specifi fied in in Rul Rule 11 114D 4DB December 2018 Cross-border taxation - Direct & Indirect transfer 16
Section 04 04 Case studie ies December 2018 Cross-border taxation - Direct & Indirect transfer 17
Cas ase stu tudy 1: 1: Ind Indire rect tr transfer – tr treaty pro provisions Facts acts and and iss issue ues: US Co Fact acts: s: Scenario 1: Transfer of • Mauritius Co and UK Co derive its value directly or indirectly substantially from shares in Mauritius Co India Mauritius Co ─ Scenario I: US Co to transfer shares in Mauritius Co ─ Scenario II: Mauritius Co to transfer shares in UK Co Scenario 2: Transfer of shares in UK Co Iss ssue ues: UK Co • Which treaty to refer under Scenario 1 & 2? Overseas • Whether treaty benefit available, if any? India India Co December 2018 Cross-border taxation - Direct & Indirect transfer 18
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