Outbound Tax Structuring

Ajay Kumar

Agenda
Why? Overseas Investment Guidelines Investment Structure Planning
Investment in Europe Investment in US

Some ideas Other Issues

Why?

Why?
With the increasing globalisation of world trade, India Inc. is looking towards establishing presence in overseas markets Setting up a greenfield project or acquiring an existing target or financing the overseas business could involve various tax & regulatory consideration both from India and overseas perspective This creates a need to structure the overseas investments and operations in a tax efficient manner while achieving the overall business and shareholder objectives

Commercial Drivers
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

Overseas Investment Guidelines

Overseas Investment Guidelines

No approval for investment by Indian companies in WOS/JV abroad provided:
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 equity participation in WOS/JV
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Overseas Investment Guidelines

All transactions to be routed through one branch of authorized dealer in Form 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 I Merchant 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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Overseas Investment Guidelines

Transfer by way of sale of shares in WOS/JV permitted under automatic 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 for availing facilities from authorized dealer or Indian financial institution permitted

Investment Structure Planning

Base Structure
Pros Relatively flatter structure, leading to less complexities and reduced operating costs
Indian Parent Indian Parent

Option can be implemented faster Cons

India Overseas

Dividend declared by Overseas company taxable in India @ 34% on current year basis Capital gains tax payable on sale of shares of Overseas company @ 22.66% (if shares held for more than 12 months); else @ 34% on the amount of capital gains Not a flexible structure for future overseas listing / bringing in strategic partner

Overseas Overseas business business

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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 at entity, regional, or project level Profits can be ploughed back into India under FDI route Repatriation of profits without any tax in India - reverse cross border merger Ease of exit at various levels
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SPV Structure
Pros Overseas income can be retained at SPV level for future expansion / investments without getting taxed in India Could be effective, if profits do not have to be remitted back to India on a regular basis
SPV SPV

Indian Parent Indian Parent

India Overseas

Cons There is no single jurisdiction which gives an effective structure for making investment in all locations

Overseas Overseas business business

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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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Control & Management

Key factors for consideration
Key decisions relating to operations of SPV to be taken in that country by its 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 wholly controlled and managed in India Similar factors as mentioned aforesaid were considered

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Investment in Europe
EU Saving Directives on dividend, interest, royalty
No taxation in source country if payment to a EU member country, subject to 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

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Investment in US
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

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Some Ideas!

Debt Push Down Structure

Indian Parent Indian Parent
Small Equity Large RPS

India Overseas

SPV
Small equity Loans

Mezzanine Loans

SPV2

Tax Group

Shares acquisition

Bank Loans

Target Co

Merge Co

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Entrepreneur Structure
Indian Parent Indian Parent
India Overseas

SPV

Manufacturer/ Developer

Principal Entrepreneur

Sales Agent

Commission Suppliers Toll manufacturing agreement Customers

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Finance/ IP Structure

Indian Parent Indian Parent

Cash held and recycled EU Parent/Subsidiary Directive

EU HoldCo

CFC management or EU argument

Dividend flows

IP Co
Royalty flows EU Royalties Directive

EU Local cos

Finance Co
Interest Charges EU Interest directive

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Other Issues

Other Issues
Potential CFC regulations in India?

Corporate law requirements in Overseas Countries?

Residency requirements in overseas jurisdictions?

Control & Management of entities in SPV jurisdictions?

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Thank you

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