outbound tax structuring

8/4/2019 Outbound Tax Structuring

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Outbound Tax Structuring

Ajay Kumar


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Agenda

Why?

Overseas Investment Guidelines

Investment Structure Planning

Investment in Europe

Investment in US

Some ideas

Other Issues


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Why?


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With the increasing globalisation of world trade, India Inc. islooking towards establishing presence in overseas markets

Setting up a greenfield project or acquiring an existing target orfinancing the overseas business could involve various tax &regulatory consideration both from India and overseas perspective

This creates a need to structure the overseas investments andoperations in a tax efficient manner while achieving the overall

business and shareholder objectives

Why?


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Set up or increase global footprints

Entering new markets

Ease of access to capital and debt from International markets

Location of customers

Quality and location of workforce

Access to technology

Cost competitiveness

Securing natural resources

Commercial Drivers


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Overseas InvestmentGuidelines


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No approval for investment by Indian companies in WOS/JV abroadprovided: Bona fide business activity; and

Investment not in real estate or banking business

Can invest up to 400% of net worth as on last audited balance sheet Net worth means paid-up capital and free reserves;

Net worth of holding/ subsidiary can also be considered (if 51%

shareholding); No limit for investment out of EEFC / ADR / GDR proceeds

Contribution covers: Capital of WOS/JV or loan granted to WOS/JV;

100% of guarantees issued to or on behalf of WOS/JV

Loan/ guarantee can be given only if Indian company has some equityparticipation in WOS/JV


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All transactions to be routed through one branch of authorized dealer inForm ODI

Indian company under obligation to

Receive share certificates within 6 months of the date of remittance;

Repatriate all dues receivable (dividend etc) within 60 days of due date;

APR submitted within 3 months of finalization of accounts of overseas

WOS/JV

Investment in shares of an existing company

If investment is more than US$ 5 mn - valuation of shares by category IMerchant banker registered with SEBI/ regulatory authority outside India

In all other cases - by a Chartered Accountant/ Certified Public Accountant

Step down investments in holding companies permitted


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Transfer by way of sale of shares in WOS/JV permitted underautomatic route subject to following conditions

Sale does not result in any write off of the investment made;

Share price should not be less than the fair value certified by a CA / CPA,based on the latest audited financial statements;

Indian party does not have any outstanding dues such as dividend etc;

Overseas SPV should have been in operation for at least one full year;

APR along with audited accounts for that year has been submitted to RBI

Transfer, by way of pledge of shares of WOS/JV as security foravailing facilities from authorized dealer or Indian financial institution

permitted


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Investment StructurePlanning


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Base Structure

Overseasbusiness

Overseasbusiness

Indian ParentIndian Parent

India

Overseas

Cons

Dividend declared by Overseas companytaxable in India @ 34% on current yearbasis

Capital gains tax payable on sale of sharesof Overseas company @ 22.66% (if sharesheld for more than 12 months); else @34% on the amount of capital gains

Not a flexible structure for future overseaslisting / bringing in strategic partner

Pros

Relatively flatter structure, leading to lesscomplexities and reduced operating costs

Option can be implemented faster


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Optimal Structure - features

Overseas income can be retained at overseas level for future expansion/ investments without getting taxed in India

Flexibility in deciding how profits to be deployed in overseas business

Flexible structure for bringing in strategic partner/ overseas listing atentity, regional, or project level

Profits can be ploughed back into India under FDI route

Repatriation of profits without any tax in India - reverse cross bordermerger

Ease of exit at various levels


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SPV Structure

SPVSPV


Overseasbusiness

Overseasbusiness

Cons

There is no single jurisdiction which givesan effective structure for makinginvestment in all locations

India

Overseas

Pros

Overseas income can be retained at SPVlevel for future expansion / investments

without getting taxed in India

Could be effective, if profits do not have tobe remitted back to India on a regularbasis


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Jurisdictional consideration

Corporate tax rate

Taxation of dividend & interest income

Tax withholding on dividend & interest

Capital gains exemption

Substance requirements Treaty network

Capital duty

Corporate law / governance


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Key factors for consideration

Key decisions relating to operations of SPV to be taken in that country byits Board of Directors

Meetings of the BOD to be held and chaired from that country Directors based in India physically attend the Board meetings

Registered office of the company should be located in that country

Books of account should be maintained in that country

AGM and other shareholder meetings of SPV to be held in that country

Recent Delhi Tribunal decision in Radha Rani Holdings P. Ltd

Indian resident holding 99.99% of shares of a foreign company

Foreign company held to be non resident as its affairs were not whollycontrolled and managed in India

Similar factors as mentioned aforesaid were considered

Control & Management


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EU Saving Directives on dividend, interest, royalty

No taxation in source country if payment to a EU member country, subjectto prescribed conditions

EC-Switzerland agreement similar benefits as to EU country

Domestic anti-abuse regulations

Application of judgments by European Court of Justice

Investment between EU and Non EU Member States

Investment in Europe


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Limitation of Benefit provisions in most of the US Treaties

Treaty benefits to SPV companies not available

Earning Stripping Rules

Timing of interest deduction

US State & Local tax considerations

Investment in US


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Some Ideas!


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Debt Push Down Structure

SPV2

Target Co

SPV

Tax GroupMezzanine Loans

Small Equity

Large RPS

Small equity

Loans

Shares acquisition

Merge Co

Bank Loans


India

Overseas


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Entrepreneur Structure

SPV

Manufacturer/Developer

Sales AgentPrincipal

Entrepreneur

Toll manufacturingagreement

Commission

SuppliersCustomers


India

Overseas


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Finance/ IP Structure

EUHoldCo

IP Co Finance CoEU

Local cos

EU Interest directive

CFC management or EUargument

Interest Charges

Dividend flows

Royalty flows

EU RoyaltiesDirective

Cash held and recycled

EU Parent/SubsidiaryDirective



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Other Issues


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Potential CFC regulations in India?

Corporate law requirements in Overseas Countries?

Residency requirements in overseas jurisdictions?

Control & Management of entities in SPV jurisdictions?

Other Issues


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Thank you

outbound tax structuring

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