international tax conference, 2009equity / adrs / grds foreign investor fccbs / fcebs ecb hybrid...

International Tax International Tax Conference, 2009

International tax structuring – Investing in India

Pranav Sayta

December 5, 2009

Foreign investments in India*

20

30

40

50

For

eign

inve

stm

ent i

n bi

llion

US

D

Direct Investment Portfolio Investment

International Tax Conference, 2009 – Investing in India

** Up to Aug’09 – extrapolated for 12 months* Source: RBI website

-20

-10

0

10

For

eign

inve

stm

ent i

n bi

llion

US

D

Year

Key considerations

Regulatory framework

governing the investment

Inbound investments


Key considerations

Return on investment /

profit repatriation

Efficiency in case of future

exit

Forms of business entities in IndiaForeign Investor

Unincorporated entities Incorporated entities

Branch OfficeBranch OfficeProject OfficeProject OfficeLiaison OfficeLiaison Office SubsidiarySubsidiaryJoint VenturesJoint Ventures

Partnerships

LLPLLPUnlimited Unlimited


Branch OfficeBranch OfficeProject OfficeProject OfficeLiaison OfficeLiaison Office SubsidiarySubsidiaryJoint VenturesJoint Ventures LLPLLPUnlimited

partnershipUnlimited

partnership

Preferred form of business entity

► Operating flexibilities

► Tax efficiencies

► Regulatory

compliances

► Efficiency in capital raising

Relevance of choice of business entity

Investment instrument

Equity / ADRs / GRDs

Foreign investor

ECBFCCBs / FCEBs

Hybrid instruments Debt

Optionally convertible pref shares / debentures

Compulsorily convertible pref shares / debentures

Equity instruments


No end use restriction Specified end use restrictions

► Tax arbitrage may be available on interest payouts► No tax break on payment of dividends

► Commercial objectives► Regulatory constraints► Tax considerations

Relevance of choice of instrument

Typical inbound investment structure

FOREIGN INVESTOR

In tax favourable Cyprus

Mauritius

Typical inbound jurisdictions Typical inbound struct ure


INDIAN COMPANY

INTERMEDIATE HOLDING COMPANY

INTERMEDIATE HOLDING COMPANY

In tax favourable jurisdiction

Singapore

Netherlands

Treaty taxation for typical income streams

Income streams Mauritius Cyprus Singapore # Netherlands

Dividends Tax exempt – DDT of 16.995% paid by Indian company

Capital gains Not taxable Not taxable Not taxable Not taxable*

Interest 20%/ 40%** 10% 15% 10%


Royalty 10%** 10%** 10% 10%

Fees for technical services

10%** 10% 10% 10%

# Subject to fulfillment of conditions (LOB)* In certain cases** Surcharge and educational cess additionally appl icable

Case study – Inbound investment through IHCs

Facts and objectives

► Foreign investor (InvestorCo) intends to invest in an Indian company (IndCo) and get desired stake

► InvestorCo intends to receive a steady flow of income from IndCo

► InvestorCo desires to structure investment in IndCo considering:► Tax efficiency of recurring income streams

In order to reduce overall tax cost, investor could consider the structure depicted below

MCo

InvestorCo

100%Mauritius

Dividend

Facts and challenges


Tax efficiency of recurring income streams

► Tax efficiency of future divestment

► Minimum regulatory hurdlesCypCo

IndCo

100%Cyprus

FCDsIndia

Interest

Dividend

Key challenges

► Distribution of profits by way of dividends entails high tax cost:► In India – DDT at 17%

► In the US – Corporate tax at 30%-35%

► Achieving desired shareholding

► FCDs to be convertible into equity shares at a futu re date

► FCDs to carry arm’s length interest

CypCo to infuse FCDs in IndCo

Regular funds flow to investors

► Investor Co to MCo – Equity capital

► MCo to CypCo – Equity capital

InvestorCo to invest into IndCo through chain of ho lding companiesFlexibility to raise funds

/ make further investments

Key mechanics and implications

International taxation conference, 2009 – Investing in IndiaDecember 5, 2009

► Interest to be tax deductible expense for IndCo

► Total tax cost of repatriation – 10%► IndCo to withhold tax at 10%

► CypCo corporate tax at 10%

► CypCo eligible for credit of tax paid in India

IndCo to pay interest to CypCo till conversion of FC Ds

Funds repatriated out of India at 10%

► Additional tax in Mauritius at 3% (presuming MCo ho lds GBL 1 licence)

► Possible to reduce this cost to nil► MCo structured as GBL2 company

► Structuring investment in CypCo through redeemable preference shares

If required, CypCo to repatriate interest received t o MCo by way of dividends

Flexibility to accumulate funds at MCo / CypCo level

Compliance with FEMA pricing guidelines

FCDs to be converted into equity shares

Obtaining pre agreed



► Liquidation not taxable in Cyprus / Mauritius

► MCo should not be taxable in India, presuming MCo i s eligible for treaty benefits

Going forward, CypCo may be liquidated, if investor does not intend to have a holding company at Cyprus

Structure clean up

► Compliance with FEMA pricing guidelines► At the time of infusion or conversion

Obtaining pre agreed stake

► CypCo level – by selling shares of IndCo

► MCo level – by selling shares of CypCo

► Capital gains tax should be exempt under treaty

Future divestments could be at

Tax efficient exit strategy



Cash repatriation strategies

Cash repatriation – Broad options

Interest/ Royalty/Fees/

Recharges

Dividends

Capital reduction

Repatriation of cash


Acquisition of group co stake

Buy-back of shares

Outbound Investment

of cash to Parent

Cash repatriation – Specific cases

Share buy-back – Multiple financial years

Share buy-back – Classical approach

Share drop down and merger



Share drop down and merger

FCo

IndCo1

Brief description

► FCo has two WOSs in India, ICo1 and ICo2

► ICo2 has surplus cash

► FCo transfers its shareholding in ICo1 to ICo2 at fair value for cash

► Going forward, ICo1 could merge with ICo2

► Commercial considerations / business purpose

Key Mechanics

IndCo2

Pay

men

t of c

ash


► Commercial considerations / business purpose to be demonstrated

Key implications

► Capital gains tax on transfer of shares of ICo1 to ICo2

► May not be taxed if FCo is tax resident of a tax favourable jurisdiction

Mer

ger

Transfer of shares

IndCo1

Share buy-back – Classical approach

MCO

Parent Co

Brief description

► IndCo is held by a Mauritius company, MCo

► IndCo undertakes share buyback using free reserves

Key benefits

► Release of cash without tax charge

Key Mechanics


MCO

IndCo

Con

side

ratio

n

Buy

-bac

k

► No DDT

► No capital gains tax

Key limitation

► Limitation on amount to be repatriated

► Corporate laws restriction – 25% of net worth


MCO

Parent Co

Brief description

► IndCo is held by a Mauritius company, MCo

► IndCo adopts a financial year (FY) of 3 months, instead of current 12 month period (say, Jan-Mar, Apr-Jun, etc.)

► IndCo undertakes share buyback in each of the FY (of 3 months) using free reserves

► CRR created on buy back can be issued as bonus shares

Key Mechanics


MCO

IndCo

Con

side

ratio

n

Buy

-bac

k

bonus shares

Key implications / benefits

► Company law permits change in FY to a period which is less than 12 months

► Company law restrictions on buy back (25% of paid up capital) applicable for each FY

► Buy back treated as capital gains, not taxable under India-Mauritius tax treaty

► Multiple audits and AGMs

Tax planning through LLPs

Inbound investment regulations for LLPs

► Presently FEMA / FDI policy is yet to recognize LLP as an entity for purpose of inbound investment

► Prior approval from Government of India / RBI required for foreign investment in LLP

Direct or indirect foreign investment

by foreign entity currently not

Assuming that, going forward, foreign investments in LLPs are liberalized, ensuing slides


by foreign entity currently not

envisaged under inbound investment

regulations/ FDI Policy

forward, foreign investments in LLPs are liberalized, ensuing slides discuss few planning avenues using LLPs

MAT / DDT planning – Greenfield inbound investment

Brief description

► FCo to setup LLP in India (India LLP)

► FCo is partner in LLP

► LLP earns and distributes profits to FCo

FCo

Pro

fit d

istr

ibut

ion

Key Mechanics


Key benefits

► No MAT

► No DDT

► Profits exempt in hands of partners of LLP

India LLP

Pro

fit d

istr

ibut

ion

MAT planning – existing business

Brief description

► IndCo is WOS of FCo

► IndCo transfers its tax holiday business (STP/ EOU Unit) to India LLP

► IndCo and FCo are partners in India LLP

Key benefits

Profits earned by LLP eligible for tax

FCo

IndCo

Key Mechanics

STP Unit

Pro

fit d

istr

ibut

ion


► Profits earned by LLP eligible for tax holiday

► MAT not applicable to LLP

► Distribution by LLP tax exempt in the hands of partners

Key challenges

► Eligibility of transferee / successor LLP to claim deduction under incentive provision

India LLP

Tran

sfer

to L

LP

STP Unit

STP Unit

Pro

fit d

istr

ibut

ion

Thank youThis presentation is intended to provide only a gen eral outline of the subjects This presentation is intended to provide only a gen eral outline of the subjects covered and to form the basis for future discussion s. It was written at the date specified and has not been reviewed or updated sinc e to take account of tax changes etc. that have taken place in the interim. The presentation should not be regarded as comprehensive or sufficient for making decisions, nor should it be used in place of professional advice, which should always have regard for the particular commercial facts and circumstances. Acco rdingly, Ernst & Young Private Ltd. accepts no responsibility for loss ari sing from any action taken or not taken by anyone by relying on this presentation

international tax conference, 2009equity / adrs / grds foreign investor fccbs / fcebs ecb hybrid...

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