doing business in india - avoiding the pitfalls breakfast briefing 4 th november 2008
TRANSCRIPT
DOING BUSINESS IN INDIA
- AVOIDING THE PITFALLS
BREAKFAST BRIEFING
4th November 2008
November 4, 2008
■
PLANNING AN INDIA INVESTMENT…
10 common pitfalls to avoid
Ajay Sethi II Director & Managing Partner II
Corporate Catalyst India www.cci.in&
ASA & Associates chartered accountants www.asa.in
PRESENTATION OUTLINE
INDIA TOUR
KEY SET-UP ISSUES
KEY POST SET-UP ISSUES
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INDIA TOURINDIA TOUR
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INDIA TOUR
The 2nd most attractive investment destination
(source UNCTAD World Investment Report 2007)
Advantage - low cost of production, large size domestic market
Growth rate expected around 8%
Besides the service industry, evolving into a manufacturing hub
Foreign Exchange reserves touched USD 310 bn in May 2008
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FDI INFLOWTop Investing Countries
Ranks Country 2005-06 2006-07 2007-08 2008-09 Cumulative
1 MAURITIUS 2,570 6,363 11,096 4,122 29,757
2 U.S.A. 502) 856 1,089 867 5,400
3 SINGAPORE 275) 578 3,073 750 5,107
4 U.K. 266 1,878 1,176 415 4,778
5 NETHERLANDS 76 644 695 286 2,991
6 JAPAN 208 85 815 55 2,181
7 GERMANY 303 120 514 258 1,801
8 CYPRUS 70 58 834 272 1,258
9 FRANCE 18 117 145 251 1,011
10 U.A.E. 49 260 258 154 818
Total 5,546 15,726 24,579 10,073 72,582
US$ Million
6Source – Department of Industrial Policy & Promotion
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INDIA TOUR Understanding Regulatory Compliances
Most laws originate from British Laws
Procedure Driven
Failures to comply usually leads to penalty and sometimes prosecution
Stacked in favor of labour (blue collar staff)
Fine reading and interpretation is the norm
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SETTING UP THE BUSINESSAvoiding Pitfalls
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INDIA ENTRY Mode of Investment
INDIA
Head Office
Representation
Local
Subsidiary
Distribution
Channel
Liaison Office
Project Office
Branch Office Wholly Owned Subsidiary
Joint Venture
Importer
C&F
Franchise
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S’pore Corporate
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INDIA ENTRY Alternate Entity Comparison
Corporate[CO]
Liaison Office[LO]
Project Office[PO]
Branch Office[BO]
Characteristics Share capital owned by parent company
No commercial activities allowed
Temporary site office, specific projects
Commercial activities allowed
Status Shareholders Foreign Company Foreign Company
Foreign Company
Tax Rate 30% + Non Taxable 40% + 40% +
Control Board of Directors Parent Company Parent Company Parent Company
Set-up FIPB Approval / Automatic Route (4-6 weeks)
RBI approval(4 weeks)
RBI approval(4 weeks)
RBI approval(4 weeks)
Closure ROC (6-9 months)
RBI(3 months)
RBI(3 months)
RBI(3 months)
RBI – Reserve Bank of IndiaFIPB – Foreign Investment Promotion BoardROC – Registrar of Companies
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■ How will the joint venture be financed?
■ Who will primarily run the joint venture?
■ How can I exit the joint venture?
■ What happens if there is a fall out with the other party involved?
INDIA ENTRY Planning your Joint Venture
Management control issues viz.
■ appointment to the board of directors and chairman of the board
■ appointment of CEO, MD, CFO
■ issues arising from future change of control, non-compete, etc.
■ implications of 26, 51 and 75 percent shareholding
Operational issues viz.
■ Labour handling
■ Government Liaisioning
■ Appointing head of sales, manufacturing, etc
INDIA ENTRY Joint Venture – Term Sheet and Shareholder’s Agreement
CORPORATE SET-UPFlawed Feasibility Study (#1)
Negative List - sectors where Foreign Direct Investment is not allowed e.g. betting, lottery business, atomic energy, retail trading (except ‘Single Brand’ product retailing)
Sectoral Caps – foreign investment in certain industries governed by equity cap e.g. Insurance (26 %)
A small list of activities is reserved for the Small Scale Industries (SSI)
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Examine the Negative List, Sectoral caps and SSI
reservations while conceptualizing investment into
India
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If yes, a ‘No Objection Certificate’ is mandatory from
the existing Indian Partner and prior approval is required from
the Foreign Investment Promotion Board of India
CORPORATE SET-UPExisting Collaboration(s) in India can restrict your entry plans (#2)
Do you have an existing joint venture with an Indian partner for the very field in which you now intend to set-up business in India?
Do you have an existing technology collaboration with an Indian partner for the same field in which you intend to do business in India?
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Press Note 1 (2005 Series)
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CORPORATE SET-UPPay attention to your Capital Structuring (#3)
At least two Shareholders are required; and
Capital structure will determine ‘private’ or ‘deemed as public’ company in India viz.
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Case Shareholding of the Indian Company Status in India
1 Indian Individual Shareholder + Foreign Company (Public) Public Company
2 Indian Company + Foreign Company (Public) Public Company
3 Foreign Company (Public) + Foreign Individual Shareholder Public Company
4 Foreign Company (Public) + Foreign Company (Public) Private Company
5 Two or more Foreign Individual Shareholders Private Company
6 Foreign Company (Private) + Foreign Company (Private) Private Company
7 Foreign Company (Private) + Foreign Individual Shareholder Private Company
section 4(7), Indian Companies Act, 1956
If a company is deemed a public company (listed or non-listed), it will attract
higher compliance requirements
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Though retailing is not allowed, ‘Single Brand’ retail can be done
through a 51:49 joint venture with an Indian Partner
Single Brand Retailing means
You retail goods under one single brand, and
The brand is well recognised, and
It covers only products branded during manufacturing
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Applications for single brand retailing are processed by
the Department of Industrial Policy & Promotion (DIPP) and is presently somewhat
restrictive
CORPORATE SET-UPThe confusion of ‘Single Brand’ Retailing (#4)
Press Note 3 (2006 Series)
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Pre-incorporation expenses are tax deductible, viz. preparation of feasibility report, engineering services relating to the business, legal charges for drafting any agreement etc.
Pre-incorporation contracts are recognised if, the company had adopted the same post incorporation; and
Contracts which are warranted by the terms of incorporation, or those entered before incorporation and adopted by the company, are legally valid e.g. office lease agreement ratified in the first board meeting, employment agreements etc
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CORPORATE SET-UPCan we recognise contracts & expenses prior to incorporation? (#5)
Unless the company adopts the contract, the other party
cannot enforce the same against the company.
However, promoters can become personally liable.
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Have you considered various Municipal Level Taxes?
Have you considered effect of Fringe Benefit Tax, Pension
Schemes etc?
If land is required, have you considered future expansion plans?
Logistics and easy access to resources taken into consideration?
Does the paid-up capital of the Indian Company exceeding INR
20 million? if yes, Company Secretary required
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SOME USEFUL TIPSValue Addition to the Feasibility Study
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RECURRING REGULATORY COMPLIANCES
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COMPLIANCESOverview
Customs Duty
Excise Duty
Corporate Tax
CST / VAT
Special Audit
Accounting
Service Tax
Transfer Pricing
Withholding Tax
Expatriate Tax
Statutory Audit
Internal Audit
Tax Audit
RecurringRegulatory Compliance
Secretarial Compliance
sLabour Laws
Employee Payroll
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REGULATORY MATTERS Key Authorities
Reserve Bank of India (‘RBI’)
Registrar of Companies (‘ROC’)
Income Tax Authorities
Central Board of Excise and Customs (‘CBEC’)
Labour Commissioner
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ACCOUNTING Key Laws in Focus
Company Law
Tax Laws (Income tax including tax treaties, Customs,
Excise, VAT/Service Tax)
Indian Generally Accepted Accounting Policies (‘Indian GAAP’)
Labour Laws (Factories Act, Industrial Dispute Act, etc.)
Employment Regulation (Social Security Regulations )
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ACCOUNTING Key Issues
Financial Year - April 1st to March 31st
Recording of transactions - per Indian GAAP
Adequate provisioning and appropriate disclosure
Compliances - Daily, Monthly, Quarterly, Annual
CO LO BO PO
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PAYROLL MANAGEMENTKey Issues
Employment Contracts
Regulated under labour laws
Income Tax Issues
Corporate Laws
CO BOPOLO
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AUDITSOverview
Statutory Audits Annual Review and Reporting by an Indian firm of
Chartered Accountants Indian Generally Accepted Accounting Policies (‘Indian GAAP’) Annual Reporting to Government Authorities
Tax Audits Applicability – Annual Turnover INR 4 Million (USD 90,000 approx) Certification by an Indian firm of Chartered Accountants
Internal Audits Applicability – Turnover INR 50 Million or Paid-up Capital INR 5 Million In-house Team or Outsource to Indian firm of Chartered Accountants
CO BOPOLO
CO PO BO
CO
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DIRECT TAXESOverview
Corporate Tax
Transfer Pricing
Withholding Tax
Fringe Benefit Taxation
Expatriate Taxation
CO PO BO
CO
CO
CO
CO
LO
LO
LO
PO
PO
PO
PO
BO
BO
BO
BO
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DIRECT TAXESTax Withholding
27
PAYEE WHEN TAX WITHHOLIDNG
(%) *
DATE OF DEPOSIT
REPORTING
Employee If salary is taxable
Per prescribed slabs
Within 7 days of payment
Quarterly to Indian tax authorities
Contractor Annual payment exceeds INR 20,000 (USD 500 approx)
27th of the month
succeeding payments
Landlord Annual rental exceeds INR 120,000 (USD 2,500 approx)
15/20
Profession Annual payment exceeds INR 20,000 (USD 500 approx)
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INDIRECT TAXESOverview
Excise Duty
Customs Duty
Service Tax
Central Sales Tax
Value Added Tax
CO PO BO
CO
CO
CO
CO
PO
PO
PO
PO
BO
BO
BO
BO
LO
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INDIRECT TAXESExcise Duty
Applicability
Definition of Goods
Concept of Manufacture
Proper Recoding of transactions
Inspection by Excise Inspectors
Complex Duty Structure and Calculation Mechanism
Developed Case Laws
CO
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INDIRECT TAXESCustoms Duty
Applicability
To regulate imports of foreign goods into India
Regulate supply of goods into domestic market
Additional Duty of Customs – protective shield to domestic industry
Methods of Valuation
Classification of Goods – 99 Chapters
CO PO BOLO
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INDIRECT TAXESService Tax
Applicability
Voluntary compliance
Services defined – Over 100 categories
Services provided from outside of India and received in India
Proper Recording of transactions
Developed Case Laws
CO PO BO
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INDIRECT TAXES Central Sales Tax/ VAT
Central Sales Tax Non VATABLE Under phase out by 2010
Value Added Tax Includes goods sold within a particular Indian state Goods sold from outside of India and title transferred in India Proper Recording of transactions Developed Case Laws
CO PO BO
CO PO BO
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INDIRECT TAXES VAT Case Study
Purchase Price Rs 100
Tax paid on purchase Rs 10 (input tax)
Sale price Rs 120
Tax payable on sale price Rs 12 (output tax)
Input tax credit Rs 10
VAT payable Rs 2
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INDIRECT TAXES Flag This
Central Sales Tax/ VAT & Service Tax – to be merged into a
single Goods & Service Tax (‘GST’) by 2010
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SECRETARIAL COMPLIANCE Overview
EVENT Applicability
Office shifting CO LO PO BO
Change in Director / Authorised Representative
CO LO PO BO
Board Meetings & Annual Shareholders Meeting
CO
Maintain Statutory Records CO
Annual Return to ROC CO LO PO BO
Annual Return to RBILO PO BO
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POST SET-UPAvoidable Pitfalls
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POST SET-UP – Recurring Compliance Key Dates
REGULATORY MATTER DUE DATE
CORPORATE LAW
Board Meeting Quarterly (calendar year basis)
Annual General Meeting Within 180 days of closing the accounts
INCOME TAX
Corporate Tax Return September 30th
Tax Audit Report September 30th
Fringe Benefit Tax Return September 30th
Transfer Pricing Report September 30th
TDS Returns (Tax Withholding) Quarterly
Employee Tax Return July 31st
SERVICE TAX October 25th & April 25th
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Arm’s Length price (‘ALP’)
Any income arising from an international transaction between associated parties to be computed having regard to ALP
ALP means a price which is applied in a transaction between persons other than associated enterprises
Associated Enterprise (‘AE’)
Participation in management or control or capital of other enterpriseDirectly through intermediaries
TRANSFER PRICINGEnsuring that transactions between group companies are at market price? (#6)
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Holding Company
Wholly Owned Subsidiary
Singapore
India
Transfer Pricing Issue – what should be the profit
margin of the Wholly Owned Subsidiary?
TRANSFER PRICINGDetermining the appropriate pricing for group companies transactions (#6)
payment?
servicing
warranty etc.
supply of goods
Customer
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PERMANENT ESTABLISHMENT (PE)Risk of exposure (#7)
Foreign company operating through an agent, branch etc regarded as having a PE in India
In certain cases, an Indian subsidiary can be classified as a PE
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Where work linked to India, India tax office can prove
existence of PE, part or entire portion of India linked
transactions can be brought to tax in India
LIAISON OFFICEThe PE Trap (#7)
Does the India Liaison Office (‘LO’) sign direct contracts in India ?
Is the LO deeply involved in price negotiations?
Are the employees of the LO paid incentives on sales ?
Does the LO raise Purchase Orders on the Head Office ?
An affirmation to any of the above – LO regarded as a
Permanent Establishment of the parent company in India.
This is a high risk of exposure to taxation
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Involved in negotiation
X-Company
X - LO
Singapore
India
Supplies S$ 100
Customer
Effect: Part or whole of S$ 100 can be taxed to India
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LIAISON OFFICEThe PE Trap (#7)
TAX COMPLIANCESCharging the Head Office Expenses (#8)
The lower of the following are tax deductible expenses by the HO
An amount equal to 5 per cent of the total income of Indian entity, or
Actual expenses
Plan your future Head Office (HO) expenses allocations
carefully to avoid disallowance by the Indian
Tax Officer
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REPATRIATING PROFITSThe menace of Dividend Distribution Tax (#9)
Whether the credit in respect of Dividend Distribution Tax (DDT)
of INR 17 is available in the Parent Country?
X-India
Parent CompanyX - Singapore
India
Singapore
Net Profit 133
Tax on Profit 33
Distributable Profit 100INR 83
Amount in INRGovernment
Treasury
INR 17
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EXPATRIATE TAX MATTERSSocial Security Payment (#10)
Social security payments made outside India, are
taxable in India where a right immediately vests to the
expatriate
Does the parent company pay for the pension funds maintained outside
India by the expatriate?
Does he/she have an internationally valid medical insurance?
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THANK YOU
46®Copyright Reserved
The Iyer PracticeAccountants & Business Consultants
Tax Aspects of Singapore Tax Aspects of Singapore Companies Investing in IndiaCompanies Investing in India
Shanker Iyer, FCAShanker Iyer & Co
Certified Public AccountantsSingapore
The Iyer PracticeAccountants & Business Consultants
Investing via Mauritius
The Iyer PracticeAccountants & Business Consultants
AdvantageCapital Gain in India – 0% by virtue of India-Mauritius tax treaty.
Pitfalls Dividends Income is
taxed in Mauritius at effective rate of 3%.
Interest payment is subject to 20% withholding tax – No treaty benefits
Investing via MauritiusInvesting via Mauritius
100% Share ownership
Indian Co.
Cap
ital
Gai
nC
apit
al G
ain
100% Share
ownership
Singapore Co.
Mauritius Co.
The Iyer PracticeAccountants & Business Consultants
Pre 2005 - Capital gain in India was subject to tax as per domestic law of India – No treaty protection
Pre 2003 – All foreign sourced income (including dividend) was subject to taxed on receipt basis in Singapore.
Earlier disadvantage of using Earlier disadvantage of using Singapore Holding StructureSingapore Holding Structure
Indian Co.
Cap
ital
Gai
n
100% Share
ownership
Singapore Co.
The Iyer PracticeAccountants & Business Consultants
Investing via Singapore
The Iyer PracticeAccountants & Business Consultants
India-Singapore CECA
Foreign-sourced income exemption.
Extensive tax treaty network.
Investing via SingaporeInvesting via Singapore
The Iyer PracticeAccountants & Business Consultants
Investing via SingaporeIndia – Singapore CECA
Capital gains provisions replaced - gains to be taxed on
basis of residence, subject to shell/conduit conditions
Amended provisions to be in force till included in India-
Mauritius tax treaty
Reduction in withholding tax on royalties & Fees for
Technical services to 10%
Highlights of the Protocol amending the treaty
The Iyer PracticeAccountants & Business Consultants
First condition Singapore company is not used for the primary purpose of taking advantage
of the capital gains tax exemption. Protocol clarifies that any legal entity without any bona fide business activity
would be considered as having a primary purpose of taking advantage of the benefit.
Second condition Singapore company is not a shell and conduit company with negligible or nil
business operations, or with no real and continuous business activities in Singapore
Not a shell and conduit company if:– it is listed on the Singapore stock exchange; or – its total annual expenditure is equal to or more than Indian Rs 50,00,000 or
S$200,000 over 24 months
Investing via SingaporeIndia – Singapore CECAConditions for Indian capital gains tax exemption
The Iyer PracticeAccountants & Business Consultants
Taxable only if remitted.
Exemption of certain remitted foreign-sourced income dividends; service income; branch profits; provided certain conditions are met.
If conditions not met but if income remitted, then exemption under specific scenarios or circumstances.
Investing via SingaporeTax Treatment of Foreign-Sourced Income Exemption
The Iyer PracticeAccountants & Business Consultants
15% ‘headline’ rate of tax
Exemption should be beneficial
Subject to tax
Resident
Conditions
Investing via SingaporeTax Treatment of Foreign-Sourced Income Exemption
Conditions
The Iyer PracticeAccountants & Business Consultants
Europe Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Hungary Kazakhstan Italy Latvia Lithuania Luxembourg Malta Netherlands Norway
Poland Portugal Romania Slovak republic Sweden Switzerland United Kingdom
America Canada Mexico
Africa Egypt South Africa Mauritius
Middle EastBahrainIsraelKuwaitTurkeyUAEOmanQatar
Asia-Pacific Australia Bangladesh Brunei China India Indonesia Japan Malaysia Mongolia Myanmar New Zealand Pakistan Papua New
Guinea Philippines
South Korea Sri Lanka Taiwan Thailand Vietnam Fiji
New Treaties : Estonia, Malta, QatarPending Retification : Belgium,Morocco,Russian Federation,Ukraine, UzbekistanTotal Comprehensive treaties : 63 of which 5 are pending ratification
Investing via SingaproeTax Treaty network
The Iyer PracticeAccountants & Business Consultants
Pitfalls of using Singapore Holding Company (SHC)
The Iyer PracticeAccountants & Business Consultants
‘Capital’ gains - may be taxed if not an Approved Holding Company.
Interest and royalties – taxed on remittance.
Limitation of relief article in tax treaty.
Pitfalls of using SHCPitfalls of using SHC
The Iyer PracticeAccountants & Business Consultants
Issues pertaining to capital gains
Revenue v/s. Capital.
Even isolated transaction profits may be treated as transaction in nature of adventure.
No safe harbor holding period.
No certainty.
Tax treatment depends on facts and onus of proof.
Pitfalls of using SHC Capital gain issues
The Iyer PracticeAccountants & Business Consultants
Indian withholding taxes
The Iyer PracticeAccountants & Business Consultants
(1) Under Indian domestic law, Dividend Distribution Tax (DDT) @ 16.995%.(2) Under Indian domestic law, including surcharge of 2.5% plus education cess of 3%.(3) No article on technical or management services in India- Mauritius treaty. Thus conservative
approach is to taxed as per domestic law of India. However many take the other approach that such payment is subject to tax only if PE exist in other state.
(4) Taxable under domestic law of Netherlands in case of transfer of shares by a Netherland resident to another non-resident. If transfer is to resident of India it shall be taxable as per Indian domestic tax law.
(5) If no make available
Indian withholding taxesJurisdiction
Mauritius
Dividends Nil(1)
Capital gains on disposal of shares
Nil Nil Note(4)
Interest 21.12% 10% 10%
Royalty 10.55%(2) 10.55%(2) 10%
Cyprus NetherlandsNature of Income
Nil*
Nil
10/15%
10%
Singapore
Nil(1) Nil(1)
Technical/Management fees
0(3)/ 10.55%(2) 0(5)/10/ 10.55%(2) 0(5)/10%0(5)/10%
The Iyer PracticeAccountants & Business Consultants
Any Questions
The Iyer PracticeAccountants & Business Consultants
For a further discussion on any of the topics covered, please contact:
Shanker Iyer [email protected]
Phone: +65 6532 5746Fax : +65 6532 7680Website: www.iyerpractice.com
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Disclaimer : This presentation of slides is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances involved. Accordingly, readers should seek appropriate professional advice regarding any particular problems that they encounter, and this presentation should not be relied on as a substitute for this advice. While all reasonable attempts have been made to ensure that the information contained in this presentation is accurate, Shanker Iyer & Co accepts no responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.
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