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


3 January 2016

Background


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



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?



► “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


7 January 2016

FA 2015 amendments


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



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



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


11 January 2016

Specified date


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



► 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!!


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



► Illustration: Date of transfer is 1 July 2016


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%



► 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



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%



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:


18 January 2016

Small shareholder exemption


► 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)



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



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



► 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)



► 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%



► 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


25 January 2016

Overseas merger/ demerger


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



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



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



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


30 January 2016

Reporting obligations and penal consequences


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?



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?



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


34 January 2016

Payment of foreign dividend [Circular 4/2015]


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



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



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


38 January 2016

Case Studies


► 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



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%



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



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


43 January 2016

Treaty interplay


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



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



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



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



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%



Questions?



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.

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