Case Study – Direct & Indirect transfer
Current structure
US
Shareholders
Facts
US Hold Co
► US Hold Co also holds operating
companies in various jurisdictions
100%
Holding
Company
Other operating
companies in various
jurisdictions
100%
Mauritius Co
(‘ M Co’)
► US Hold Co holds an Indian company
(‘I Co’) through a Mauritius holding
company (‘M Co’)
Acquirer
100%
Holding
Company
100%
Objectives
US Co
► M Co intends to shift I Co under US
Co, as a part of corporate restructuring
Operating
Company
Outside India
India
► Subsequently, US shareholders intend
to transfer the entire group to Acquirer
by way of transfer of their shares held
in US Hold Co to Acquirer
► Therefore, I Co would be indirectly
transferred by US Shareholders
I Co
Operating
Company
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► M Co also holds US Co, an operating
company
September 2012
Case Study – Direct & Indirect transfer
Steps – Direct transfer of I Co
Steps
US
Shareholders
► US Co to incorporate a subsidiary in
Mauritius (‘New M Co’)
Acquirer
► M Co to transfer its investment in I Co
to New M Co at fair value for cash
consideration
100%
US Hold Co
100%
Holding
Company
Other operating
companies in various
jurisdictions
100%
Mauritius Co
(‘ M Co’)
100%
Holding
Company
US Co
► US shareholders to transfer their stake
in US Hold Co to the Acquirer at fair
value of the entire group for cash
consideration
Operating
Company
100%
New Mauritius Co
(‘ New M Co’)
100%
100%
Outside India
India
I Co
Operating
Company
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September 2012
Steps – Indirect transfer of I Co
Case Study – Direct & Indirect transfer
Resultant Structure
Key Aspects
US
Shareholders
► Capital gain tax in India in the hands of
Mauritius Company, whether treaty benefit
be applicable
Acquirer
100%
US Hold Co
100%
Holding
100% Company
Mauritius Co
(‘ M Co’)
Other operating
companies in various
jurisdictions
Holding
Company
► Value of I Co vis-à-vis the global value of US
Hold Co,
100%
US Co
► If the value of Indian business is 15%/ 26%/
51% / 76% of the global value?
Operating
Company
100%
► When can it be said, that value is
substantially derived from India?
New Mauritius Co
(‘ New M Co’)
Outside India
100%
India
I Co
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Operating
Company
September 2012
► Capital gains tax in India in the hands of
shareholders of US Company, whether
treaty benefit be applicable
► Computation of capital gains tax in the hands of
shareholders of US Co, who have joined at
various times, thereafter how the cost of
shareholding vis-à-vis the proportionate value
of Indian business to be determined.
Case Study – Direct & Indirect transfer
►
Key Aspects (contd.)
►
Whether capital gain would attract in the hands of shareholders of US Co at the
stage when acquirer is allotted the shares in US Hold Co at premium on account of
dilution of interest of existing shareholders or at time of payment to US shareholders
at the time of sale of shareholding or buyback of shares
►
If the US shareholder holds only 1% share in the US Hold Co would he be liable to
capital gains in India on the entire capital gains or proportionate to his shareholding
►
What would be the with holding taxpayers liability in the above cases on the Nonresident?
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September 2012
Case Study 2 – Direct & Indirect transfer
Facts
Holding
Company
US Co
► A US Company (‘US Co’) holds an Indian company
(‘I Co’) through its WOS in Mauritius, M Co
M Co
Outside India
100%
Operating
Company
India
► The Indian Company I Co is an operating company
as well as holding Company for many other
operating companies in similar business through a
Dutch Company (‘BV’)
Key aspects
► US Co derives its 100% value from investments in
I Co.
I Co
► However, I Co derives its value partly ( say 40%)
from its own operating assets in India and the
balance (60%) from investments held in operating
companies in various jurisdictions
100%
BV
► US co sells M Co to a non-resident party
Outside India
Operating companies in various
jurisdictions
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September 2012
Case Study – Direct & Indirect transfer
►
Questions for consideration
►
For the purpose of determining whether US Co holds ‘substantial ‘ assets or interest
in India, what is the nature of assets to be considered – operating assets alone or
passive assets in the form of investments as well?
►
For this purpose, is there a distinction to be made between assets situate in India
(Sec 9(1)(i) and assets located in India (Explanation 5)?
►
If it includes investments in operations outside India, what if those countries seek to
tax US Co based on the “indirect” transfer of operational assets in those countries –
could US Co be saddled with tax in India and those countries with no mechanism for
a bilateral tax credit?
►
In any case, would US Co, being a foreign company, be eligible for indexation? What
would be the mode of computation?
►
If M Co were a listed company, having public shareholders, besides US Co, would
every individual transfer be subject to tax in India? Would the expectation be that
every individual acquirer would deduct tax at source on the capital gains made by the
sellers?
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September 2012
3 Case Study – Direct & Indirect transfer
Facts
X Co
► A Sing Company (‘Sing Co’) holds another Sing
Company (Sing Co 2).
Sing
Co
50%
► Sing Co and Sing Co 2 hold 50% interest each in an
Indian Company I Co, which has certain immovable
properties in India (say IMP1)
100%
► A 100% subsidiary of Sing Co 2, ie Sing Co 3 also
owns certain immovable property in India (say IMP2)
Sing
Co2
► It is proposed that Sing Co will merge with Sing Co2
50%
Sing
Co3
Key aspects
Outside India
Operating
Company
India
► Pursuant to the introduction of indirect transfers,
following are the capital assets being transferred:
► 50% of I Co (directly owned by Sing Co)
I Co
► 50% of I Co (owned through Sing Co 2)
► 100% Shares of Sing Co 3 (owned by Sing Co
2)
IMP 1
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September 2012
IMP 2
3 Case Study – Direct & Indirect transfer
Questions for consideration
X Co
Sing
Co
50%
► While 50% of shares of I Co owned
directly by Sing Co would be covered
by the exemption provided under
section 47(via), would the indirect
transfer of shares held in I Co through
Sing Co 2 and the indirect transfer of
Sing Co 3 which derives substantial
value from India be deemed as an
indirect transfer?
100%
Sing
Co2
50%
Sing
Co3
Outside India
Operating
Company
India
I Co
IMP 1
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September 2012
IMP 2
► In the case of a purely internal
reorganization, such as this, when the
ultimate owner, X Co and the
immediate owner Sing Co 3 remain the
same as far as the Indian assets IMP 2
are concerned, is there really a
‘transfer’ that needs to be taxed?