Inbound investment re-organisation - Indian Tax and regulatory issues

Inbound Investment
Reorganisation
India
Ajay Kumar and Richa Sawhney
Danta Transaction Services
August, 2013

Table of Contents
• Typical Structure
• Modes of Intra Group Re-organisation
‒ Direct transfer of shares of Indian Company
‒ Indirect transfer of shares of Indian Company

• Comparative Analysis
• Annexures
• About Author
• Disclaimer
August 2013

www.TransactionStructuring.Com

2

Typical Structure

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3

Typical Structure
F Co

Hold Co

•

A Foreign Company (F
Co)

• Holding shares of an
Indian unlisted Company (I
Co)

Outside India

India

I Co

August 2013

• Through a Holding
Company (Hold Co)
situated outside India


4

Table of Contents

• Annexures
• About Author
• Disclaimer
August 2013


5

Modes of Intra Group Reorganisation

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6

Modes of Intra group Re-organisation
• Direct transfer of shares of I Co
‒ Sale for a consideration
‒ Transfer without consideration (Gift)
‒ Contribution in exchange for issue of shares
‒ Merger of offshore Hold Co
‒ Demerger of the offshore Hold Co
‒ Liquidation of I Co
‒ Merger of Hold Co with I Co

• Indirect transfer of shares of I Co
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7

Structure 1 – Transfer for a Consideration
•

Of I Co

To another group
company overseas (Hold
Co1)

•

Hold Co1

•

•

Hold Co

Hold Co transfers shares

For a consideration

Transfer of shares
for consideration
Outside India
India

I Co

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8

Tax Implications
• Sale of shares of I Co by Hold Co to Hold Co1 is liable to capital
gains tax in India.
• Capital gains are taxable to Hold Co at 40%/20%/10% (plus
applicable surcharge and cess) depending upon various
considerations. Refer Annexure 1 for details.
• Capital gains may not be taxable subject to exemption provided in
the relevant Double Tax Avoidance Agreement (DTAA) between
India and the Hold Co country. Mauritius, Cyprus, the Netherlands
and Singapore DTAAs provide for an exemption in such cases
subject to certain conditions. Refer Annexure 2 for details.

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9

Tax Implications
• Transfer Pricing (TP) provisions would apply with regard to the
valuation of the sale consideration. Generally DCF based market
valuation is followed.
• Transfer of shares of I Co beyond a certain percentage may result in
lapse of unabsorbed losses of I Co. Refer Annexure 1 for details.
• The Hold Co1 would need to register with the Indian tax authorities
and comply with Withholding Tax (WHT) requirements on payments
to be made to the Hold Co. Refer Annexure 3 for WHT compliance
requirements.

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10

Tax Implications
• However, Hold Co is ultimately responsible for its income tax
liability.
• Where the Hold Co1 has not withheld adequate taxes, for whatever
reason, Hold Co would need to pay taxes by way of advance tax
and comply with other requirements. Refer Annexure 4 for details.
• Even in circumstances where such transfer is not subject to tax in
India due to DTAA benefit, a recent notification issued in 2013 by
the income tax authorities has made it mandatory to file income tax
returns in India (Notification 34/2013 dated May 1, 2013).

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11

Other Considerations
• Stamp duty – Stamp duty is applicable at 0.25% of the value
of share transferred, if shares are held in physical form. No
stamp duty is levied if shares are held in demat form (e-form).
• Exchange Control - Transfer of shares between two nonresidents for a consideration is under automatic route and
does not require any approval or reporting from Indian
exchange control perspective. However Hold Co1 needs to
ensure that purchase of shares is within the existing FDI
norms and guidelines.
‒ For instance, with regard to investment in construction/
development of townships, housing etc., original investment cannot
be repatriated before a period of three years from completion of
minimum capitalisation conditions. However, the investor may be
permitted to exit earlier with prior approval of the Government
through the Foreign Investment Promotion Board (FIPB).
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12

Structure 2 – Transfer without Consideration
•

Of I Co

To another group
Co1)

•

Hold Co1

•

•

Hold Co


Without any
consideration

Transfer of shares
without consideration
Outside India
India

I Co

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13

Tax Implications
• There are no Indian tax implications on Hold Co on transfer of
shares of I Co by Hold Co to Hold Co1 without any consideration
(Gift).
• There have been advance rulings wherein gift of shares of Indian
companies were held not taxable in the hands of Hold Co.
• However, the recipient Hold Co1 is liable to pay tax at 40% (plus
applicable surcharge and cess) on the value of shares received as
gift. Such income is taxable in India under the head „income from
other sources‟.
• The valuation of the I Co is based on the Net Asset Value (NAV)
approach as on the date of last audited balance sheet of I Co. DCF
approach is not required.
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14

Tax Implications
• DTAA benefit:
‒ Such income may not be taxable to Hold Co1 subject to exemption
provided in the relevant DTAA between India and the Hold Co1 country.
‒ One needs to look at „other income‟ article of the DTAA. For example,
India-Mauritius DTAA provides for such exemption. See Annexure 5 for
details.

• Hold Co1 would need to register with Indian tax authorities and pay
taxes by way of advance tax in India. Refer Annexure 4 for details.

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15

Tax Implications
• Transfer of shares of I Co may result in lapse of unabsorbed losses
of I Co. Refer Annexure 1 for details.
• In case of subsequent sale by the Hold Co1 of I Co shares, the cost
of acquisition will be the valuation considered for taxation at the time
of receipt of shares. However, the period of holding will be reckoned
from the time it was acquired by the Hold Co.
• Exchange Control - Transfer of shares without consideration is
under automatic route and does not require any approval or
reporting from the Indian exchange control perspective.

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16

• Stamp duty - would be payable at 0.25% of value of shares
transferred if shares are held in physical form. No stamp duty if
shares are held in demat form (e-form).
• The value to be considered for stamp duty in case of gift has not
been clearly defined in the legislation. Stamp duty can be paid
based on the market value of share transferred.
• Gift of shares may not attract any additional stamp duty in India, if
the instrument of gift is not brought in India.

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17

• Gift of shares should be allowed under the local laws of the Hold Co
country and also under the Charter of the Hold Co.
• Local taxation, stamp duty and accounting aspects also need to be
considered in the countries where Hold Co and Hold Co1 are
registered.

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18

Structure 3 – Contribution in exchange
•

Of I Co

To another group
Co1)

•

Hold Co1

•

•

Hold Co


In consideration for
issue of shares by Hold
Co1 to Hold Co

Contribution in
exchange for shares
Outside India
India

I Co

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19

Tax Implications
• All implications remains same as in case of Structure 1, where sale
is for a consideration.
• TP provisions would apply with regard to the valuation of the
consideration for computing capital gains tax. Generally DCF based
market valuation is followed.
• The Hold Co is liable for capital gain tax on the transaction. No tax
impact on Hold Co1.

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20

Tax Implications
• At the time of subsequent sale by Hold Co1 of the shares of I
Co, the valuation considered as sale consideration for tax purposes
will be reckoned as cost of acquisition.
• Period of holding of I Co shares by Hold Co1 will be reckoned from
the date of exchange of shares only.
• Transfer of shares of I Co can result in lapse of unabsorbed losses
of I Co. Refer Annexure 1 for details.

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21

Structure 4 – Transfer pursuant to Merger

•

Transfer of shares of I Co

•

Hold Co1

Hold Co

Pursuant to merger of
Hold Co with another
group company (Hold
Co1)

Merger

Outside India

India

I Co

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22

Tax Implications
•

When shares of I Co are transferred by Hold Co to Hold Co1 in a scheme of
merger, such transfer will not be liable to capital gains tax in India if:
‒

At least 25% of the shareholders of Hold Co continue to remain shareholders of
Hold Co1,and

‒

Such transfer does not attract capital gains tax in the country in which Hold Co is
incorporated.

•

Where the above conditions are not fulfilled, such transfer of shares would
be subject to capital gains tax in the manner discussed in Structure 1,
subject to any exemption under the DTAA.

•

Since merger will be happening outside India, the scheme of merger need
not be in accordance with the Indian Companies Act requirements. However
it would be essential to prove that the transfer is happening as a result of
merger and is not a case of simpliciter transfer of shares.

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23

• Exchange Control - Technically, transfer of shares of I Co pursuant
to merger of Hold Co with Hold Co1 is not covered in the automatic
route and therefore may require prior approval of the Reserve Bank
of India (RBI).
‒ However, considering that when gift of shares by a non-resident to
another non-resident does not require any approval, in our
view, transfer pursuant to merger should not require approval from the
RBI.

• Stamp Duty - Liability to pay stamp duty on transfer of shares of I Co
pursuant to merger overseas is a grey area. Practically, one can
discharge stamp duty on the market value of shares transferred
assuming it as a sale of shares. No stamp duty is to be paid if
shares are in held in e-form.
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24

Structure 5 – Transfer pursuant to Demerger
•
Hold Co

India

•

Into another group
company (Hold Co1)

•

Resulting in transfer of
shares of I Co

Demerger

Hold Co1

Outside India

Demerger of „undertaking‟
of Hold Co comprising
shares of I Co

I Co

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25

Tax Implications
•

When shares of I Co are transferred by Hold Co to Hold Co1 in a scheme of
demerger, such transfer will not be liable to capital gains tax in India if:
‒

The shareholders holding not less than 75% in value of the shares of Hold Co
continues to remain shareholders of Hold Co1, and

‒

Such transfer does not attract capital gains tax in the country in which Hold Co is
incorporated.

• Where the above conditions are not fulfilled, such transfer of shares would
be subject to capital gains tax in the manner discussed in Structure 1,
subject to any exemption in the DTAA.
• Since demerger will be happening outside India, the scheme of demerger
need not be in accordance with the Indian Companies Act requirements.
However it would be essential to prove that the transfer is happening as a
result of de-merger and is not a case of simpliciter transfer of shares.
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26

Other Implications
• Exchange Control - Technically, transfer of shares of I Co pursuant
to de-merger of undertaking of Hold Co into Hold Co1 is not covered
in the automatic route and therefore may require prior approval of
the RBI.
‒ However, considering that when gift of shares by a non-resident to
another non-resident does not require any approval, in our
view, transfer pursuant to demerger should not require approval from
RBI.

• Stamp Duty - Liability to pay stamp duty on transfer of shares of I Co
pursuant to de-merger overseas is a grey area. Practically, one can
discharge stamp duty on the market value of shares transferred
assuming it as a sale of shares. No stamp duty is payable if shares
are held in e-form.
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27

Structure 6 – Liquidation of I Co

•
Distribution of
assets and cash

Liquidation of I Co in India

•

Hold Co

Resulting in distribution of
assets and cash to Hold
Co

Outside India
India

I Co
(in liquidation)

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28

Tax Implications
•

The taxation in case of liquidation happens in the following manner:
‒

Where assets are distributed to the Hold Co, such distribution is not regarded as
transfer of assets by I Co to Hold Co and therefore there are no capital gains tax
implications on the I Co.

‒

Any distribution made by I Co to Hold Co, to the extent of accumulated reserves
with I Co immediately before its liquidation, is considered as deemed dividend in
the hands of Hold Co.

‒

Such deemed dividend is subject to dividend distribution tax at 15% (plus
applicable surcharge and cess) to be paid by I Co. There is no further taxation in
the hands of Hold Co of such dividend.

‒

Hold Co is liable to capital gains tax to the extent of difference between the sale
consideration and cost of acquisition. Sale consideration means market value of
assets plus cash received by Hold Co from I Co less the amount already
assessed as deemed dividend.

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29

Other Implications
• The banks are allowed to remit winding up proceeds of companies
under liquidation, subject to payment of applicable taxes.
• I Co is required to submit the following documents with bank:
‒ No objection or tax clearance certificate from income tax authorities for
the remittance.
‒ Auditor's certificate confirming that all liabilities in India have been either
fully paid or adequately provided for.

‒ Auditor's certificate to the effect that the liquidation is in accordance with
the provisions of the Indian Companies Act.

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30

Structure 7 – Merger of Hold Co with I Co
•

Hold Co

Outside India

Issue of
shares by
I Co to F
Co on
merger

Issue of shares by I Co

•

To shareholders of Hold
Co (F Co)

•

On Merger of Hold Co with
I Co

•

F Co

Resulting in transfer of
shareholding of I Co

Merger

India

I Co

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31

Tax Implications
• Any transfer of capital assets in a scheme of tax neutral merger of
Hold Co with I Co is not considered a transfer from capital gains
perspective and is not subject to tax.
• Where the shareholder of Hold Co transfers shares held in Hold Co
in lieu of shares allotted by I Co pursuant to merger is not
considered a transfer from capital gains purposes and not subject to
tax.
• Therefore merger of Hold Co with I Co is tax neutral both for the
company and the shareholders.
• Please refer Annexure 6 for conditions to be fulfilled for a tax neutral
merger.

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32

• Exchange Controls-There is no specific provision under the Indian
exchange control regulations regarding allotment of shares where a
foreign company merges with an Indian company.
• Accordingly issue of shares to the shareholders of Hold Co (F Co)
pursuant to merger of Hold Co with I Co would require approval from
the FIPB and the RBI.
• There is no specific provision regarding valuation of shares when a
foreign company merges with an Indian company.
• Practically, the valuation rules applicable for fresh issue of shares to
a foreign company may be applied (i.e. Value shares at minimum
DCF value).

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33

Structure 8 – Indirect transfer of shares
Transfer of
Hold Co
shares

Transfer of shares of Hold
Co
By F Co1

•

To F Co2

•

F Co2

•

•

F Co1

Resulting in indirect
transfer of shares of I Co

Hold Co

Outside India
India

I Co

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34

Tax Implications
• Supreme Court in case of Vodafone held that indirect transfer of
shares of an Indian company was not taxable in India.
• Consequent to the ruling, the income tax law was amended in 2012
to retrospectively bring such transactions under the tax net.
• Accordingly, transfer of shares of Hold Co by F Co1 to F Co2 would
be liable to capital gains tax in India provided Hold Co derives its
value „substantially‟ from I Co. Refer Annexure 1 for details for
capital gains tax.
• There is no specific exemption for indirect transfers within the group.
Therefore, companies should consider the possibility of tax on
indirect transfers even when reorganisation is within the group.

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35

Withholding Tax Implications
• Assuming that transfer of shares of Hold Co is taxable in India, F
Co2 while making payment to F Co1, would be required to withhold
Indian tax and deposit the same with the Indian tax authorities within
stipulated time frame. Refer Annexure 3 for detailed compliance
requirements.
• Tax provision on indirect transfer does not override the provisions of
DTAA with the foreign country.
• Usually the capital gains resulting from indirect transfers are dealt
with by residuary clause of the Capital Gain article which usually
gives the right to tax to the country where alienator is resident of.
Hence each DTAA would need to be reviewed to determine the tax
consequences.

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36

Issues
• The term substantially is not defined in the law, which leaves lot of
ambiguity such as:
‒ Whether Hold Co deriving value of more than 50% from I Co is
considered substantial?
‒ Whether Hold Co deriving value of more than 20% from I Co
considered substantial (provided in various other provisions of the law)?

• There is no claw back provision when eventually I Co is sold directly
by F Co, i.e. taxes already paid on indirect transfer is not
considered.

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37

Table of Contents

• Annexures

• About Author
• Disclaimer
August 2013


38

Comparative Analysis

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39

Particulars
Taxability to Hold Co
Taxability to Hold Co1
Tax Impact on the I Co
Holding Period for
the Hold Co1
Cost base in the hands of
the Hold Co1
Stamp Duty
Valuation
Compliance Requirement
for Hold Co

Structure 1
Sale
Capital gains at 40% / 20% /
10% (Refer Annexure 1)
Nil

August 2013

Structure 3
Exchange

Nil

Capital gains at 40% / 20% /
10% (Refer Annexure 1)

Taxed as Income from Other
Sources @ 40%

Nil

Loss not allowed to be
carried forward (Refer
Annexure 1)

Loss not allowed to be carried
carried forward (Refer
forward (Refer Annexure 1)
Annexure 1)
Includes holding period of
From date of purchase
From date of exchange
Hold Co
Sale consideration for
Value considered for
Value considered for taxation
transfer of shares
exchange
0.25% of sale value
0.25% of value of shares
0.25% of exchange value
(NIL if held in e-form)
NAV based on last audited
DCF based market valuation
balance sheet
Register, Pay Taxes and File
Return (Refer Annexure 4)

Compliance Requirements Withholding tax (Refer
for Hold Co1
Annexure 3)
TP Compliance
Requirements

Structure 2
Gift

Applicable (Refer Annexure
4)

Nil

Register, Pay Taxes and File

Register, Pay Taxes and File Withholding tax (Refer
Annexure 3)
N/A


Applicable (Refer Annexure
4)

40

Structure 4
Eligible Merger

Structure 5
Eligible Demerger

Structure 7
Hold Co & I Co Merger


NIL

NIL

NIL

Taxability to Hold Co1/ F Co

NIL

NIL

NIL

Tax Impact on the I Co

NIL

NIL

Particulars

Holding Period for
the Hold Co1/ F Co
Cost base in the hands of
the Hold Co1/ F Co
Stamp Duty
Valuation
Compliance Requirements
for Hold Co/ Hold Co1
Withholding Tax
Requirements for Hold Co1
TP Compliance
Requirements

August 2013

Not specifically provided to
include holding period of Hold
Co
Same as cost in the hands Not specifically provided as
of Hold Co
cost in the hands of Hold Co
Hold Co

N/A
RBI Approval may be
required

NIL
RBI Approval may be required

carried forward
Hold Co
Same as cost in the hands of
Hold Co
Ideally DCF valuation
FIPB and RBI Approval
required

NIL

NIL

NIL

NIL

NIL

NIL


41

Particulars

Taxability to F Co/ F Co1
Tax impact on I Co

Structure 6
I Co Liquidation

Structure 8
Indirect Transfer

Capital Gains on market value of assets plus
cash received less amount assessed as
divided and cost of acquisition of shares

Nil

Nil
Dividend distribution tax at 15% to the extent
of accumulated reserves

Capital Gains at 40% / 20% / 10%
(Refer Annexure 1)
NIL

Holding Period for F Co/ F Co2

N/A

From the date of purchase

Cost base to F Co/ F Co2

N/A

Sale consideration for transfer

Stamp Duty

N/A

Valuation

N/A

Compliance for Hold Co

Register, Pay Taxes and File Return (Refer
Annexure 4)

Compliance for F Co/ F Co1/ F Co2

N/A

TP Compliance

NIL

August 2013


N/A
Nil
Withholding tax for F Co2 OR F Co1
to Register, Pay Taxes and File
Return (Refer Annexure 3 & 4)
Applicable (Refer Annexure 4)

42

Table of Contents
• Typical Structures

• Annexures

• About Author
• Disclaimer
August 2013


43

Annexures

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44

Annexure 1 - Capital Gains Tax Rates
• Capital gains arising to a foreign company on sale of shares of an
Indian company are taxable at following rates:
‒ 40% (plus applicable surcharge and cess), where shares are held for a
period of less than 12 months.
period of 12 months or more and benefit of forex fluctuation or
indexation is taken.
period of 12 months or more and benefit of forex fluctuation or
indexation is not taken.

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45

Annexure 1- Capital Gains Computation
Capital gains arising to a foreign company on sale of shares of an
Indian company are computed in the following manner:

Full Value of consideration received or accrued, subject to

XXX

any TP adjustment
Less: Cost of acquisition and improvement

XX

Less: Expenditure incurred wholly and exclusively in XX

XX

connection with such transfer
Capital gains (Long term or short term)

August 2013


X

46

Annexure 1- Forex benefit
• Capital gains arising to a foreign company from the
transfer of shares of an Indian company is computed:
‒ By converting the cost of acquisition, expenditure incurred and
the full value of the consideration received or accruing as a
result of the transfer;
‒ Into the same foreign currency as was initially utilised in the
purchase of the shares; and

‒ The capital gains so computed in such foreign currency is reconverted into Indian currency.

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47

Annexure 1- Capital Gains Exemption
•

A foreign company (Seller) can invest the sale proceeds and get
exemption from capital gains provided following conditions are
fulfilled:
‒

The seller held the shares of Indian company for 12 months or more before the
transfer.

‒

Amount of capital gains is invested in the long term bonds issued by the
National Highway Authority of India (NHAI) or Rural Electrification Corporation
(RECL) within 6 months of transfer of shares.

‒

Such bonds are not sold by the seller within 3 years of acquisition.

‒

If the amount invested in long term bonds is more than the capital gains, then
the full capital gains is exempt otherwise the proportionate amount is exempt

‒

The maximum exemption from capital gains is INR 5 million in a year.

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48

Annexure 1- Carry forward of Loss by I Co
• Where shareholding of an Indian Private Limited Company has
changed during the financial year, loss incurred prior to the financial
year cannot be set off or carried forward, unless:
‒ Not less than 51% of the voting power as on the last day of the financial
year was beneficially held by the same persons,
‒ Who held not less than 51% of the voting power as on the last day of
the year in which the loss was incurred.

• There is no impact on unabsorbed depreciation.

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49

Annexure 1- Carry forward of Loss by I Co
• However, where the change in shareholding of the Indian Company
is consequent to merger or demerger of the foreign parent, loss can
be carried forward if:
‒ 51% of the shareholders of the amalgamating foreign company continue
to be shareholders of amalgamated foreign company; or
‒ 51% of the shareholders of the demerged foreign company continue to
be shareholders of the resulting foreign company.

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50

Annexure 2 - DTAA
ARTICLE 13 - Capital Gains: India – Mauritius DTAA
1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in
the Contracting State in which such property is situated.
2. Gains from the alienation of movable property forming part of the business property of a permanent
establishment which an enterprise of a Contracting State has in the other Contracting State or of movable
property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting
State for the purpose of performing independent personal services, including such gains from the alienation
of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base,
may be taxed in that other State.
3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and
aircraft operated in international traffic and movable property pertaining to the operation of such ships and
aircraft, shall be taxable only in the Contracting State in which the place of effective management of the
enterprise is situated.
4. Gains derived by a resident of a Contracting State from the alienation of any property other than
those mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in that State.
5. For the purposes of this article, the term “alienation” means the sale, exchange, transfer, or
relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition
thereof under any law in force in the respective Contracting States.
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51

Annexure 2- DTAA
ARTICLE 13 - Capital Gains: India – Cyprus DTAA
1. Gains derived by a resident of a Contracting State from the alienation of immovable property, referred
to in Article 6, and situated in the other Contracting State may be taxed in that other State.
establishment which an enterprise of a Contracting State has in the other Contracting State or of
movable property pertaining to a fixed base available to a resident of a Contracting State in the other
Contracting State for the purpose of performing independent personal services, including such gains
from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of
such fixed base, may be taxed in that other State.
3. Gains from the alienation of ships or aircraft operated in international traffic or movable property
pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State in which
the place of effective management of the enterprise is situated.
4. Gains from the alienation of any property other than that mentioned in paragraphs 1, 2 and 3
shall be taxable only in the Contracting State of which the alienator is a resident.

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52

Annexure 2- DTAA
ARTICLE 13 - Capital Gains: India – Singapore DTAA
1. Gains derived by a resident of a Contracting State from the alienation of immovable property,
referred to in Article 6, and situated in the other Contracting State may be taxed in that other State.
2. Gains from the alienation of movable property forming part of the business property of a
permanent establishment which an enterprise of a Contracting State has in the other Contracting
State or of movable property pertaining to a fixed base available to a resident of a Contracting State
in the other Contracting State for the purpose of performing independent personal services, including
such gains from the alienation of such a permanent establishment (alone or together with the whole
enterprise) or of such fixed base, may be taxed in that other State.
pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of
which the alienator is a resident.
4. Gains derived by a resident of a Contracting State from the alienation of any property other
than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that
State.

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53

Annexure 2- DTAA
ARTICLE 13 - Capital Gains - India – Netherlands DTAA
1. Gains derived by a resident of one of the States from the alienation of immovable property referred
to in Article 6 and situated in the other State may be taxed in that other State.
establishment which an enterprise of one of the States has in the other State or of movable property
pertaining to a fixed base available to a resident of one of the States in the other State for the purpose
of performing independent personal services, including such gains from the alienation of such
permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in
that other State.
pertaining to the operation of such ships or aircraft, shall be taxable only in the State in which the
place of effective management of the enterprise is situated. For the purposes of this paragraph, the
provisions of paragraph 3 of Article 8A shall apply.
4. Gains derived by a resident of one of the States from the alienation of shares (other than shares
quoted on an approved stock exchange) forming part of a substantial interest in the capital stock of a
company which is a resident of the other State, the value of which shares is derived principally from
immovable property situated in that other State other than property in which the business of the
company was carried on, may be taxed in that other State. A substantial interest exists when the
resident owns 25 per cent or more of the shares of the capital stock of a company.

August 2013


54

Annexure 2- DTAA
ARTICLE 13 - Capital Gains - India – Netherlands DTAA
5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3
and 4 shall be taxable only in the State of which the alienator is a resident.
However, gains from the alienation of shares issued by a company resident in the other State
which shares form part of at least a 10 per cent interest in the capital stock of that
company, may be taxed in that other State if the alienation takes place to a resident of that
other State. However, such gains shall remain taxable only in the State of which the alienator
is a resident if such gains are realised in the course of a corporate
organisation, reorganization, amalgamation, division or similar transaction, and the buyer or
the seller owns at least 10 per cent of the capital of the other.
6. The provisions of paragraph 3 shall not affect the right of each of the States to levy according to its
own law at tax on gains from the alienation of shares or „jouissance‟ rights in a company, the capital
of which is wholly or partly divided into shares and which under the laws of that State is a resident of
that State, derived by an individual who is a resident of the other State and has been a resident of
the first-mentioned State in the course of the last five years preceding the alienation of the shares or
„jouissance‟ rights.

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Annexure 3 - Withholding Tax Requirements
•

Tax is required to be deducted on any payment made by any person to
a foreign company, where the payment is chargeable to tax in India.

•

Taxes have to be withheld at the rates in force i.e. as per the Income tax Act, 1961 (IT Act) or as per the relevant DTAA, whichever is
beneficial to the taxpayer.

•

Therefore the Transferee Co is liable to deduct the capital gains tax
payable in India while making payment of consideration for transfer of
shares to the Transferor Co.

•

Capital Gains Tax is determined in the manner provided in Annexure 1

•

Where the Transferor Hold Co does not have a Permanent Account
Number (PAN) in India, a minimum tax of 20% of the amount paid (sale
consideration) needs to be withheld by the Transferee Co.

August 2013


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Annexure 3 - Withholding Tax Requirements
• Transferee Co needs to do the following compliances in India:
‒ Register with the Indian tax authorities and obtain a Tax Deduction
Account Number (TAN).
‒ Remit the tax withheld to the Government by way of an e-payment or
electronic transfer within one week from the last day of the month in which
deduction is made.
‒ Exchange Rate on the day on which TDS is required to be deducted has
to be considered.
‒ File TDS Return (Form 27Q) within 15 days from the end of the quarter in
which deduction was made (one month and 15 days in case it is the last
quarter).
‒ Issue WHT certificate (Form 16A) to the Transferor Hold Co certifying the
taxes withheld on its behalf within 15 days from the due date for filing
returns (i.e 30 days from the end of the quarter).

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Annexure 4 - Compliances (PAN)
• A foreign company having taxable income in India is required to obtain
a Permanent Account Number (PAN Number: a ten-digit alphanumeric
identifier) from the income tax authorities of India.
• Application for allotment of PAN is made in form 49AA for non
residents. The following documents have to be included:
•

Copy of Certificate of Registration issued in the country where the applicant is
located, duly attested by „Apostille‟ (in respect of the countries which are signatories
to the Hague Convention of 1961) or by the Indian Embassy or High Commission or
Consulate in the country where the foreign company is located.

•

Copy of registration certificate issued in India or of approval granted to set up office
in India by Indian Authorities.

• It is mandatory to quote PAN on all communications with the income
tax authorities and in the return of income.

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Annexure 4 - Compliances (Advance Tax)
• Advance Tax or „Pay as you earn‟ tax is liable to be paid at the time
the income is earned, i.e. during the year, rather than paying the full
amount at the end of the year.
• Companies are liable to pay advance tax in the following
instalments:
Timeline
On or before Jun 15
On or before Sep15
On or before Dec15
On or before Mar15

Minimum Aggregate Payment
at least 15% of total annual tax
100% of the total annual tax

• Annual tax liability for this purpose computed net of WHT i.e. any
sum already paid / expected to be paid by way of WHT will be
reduced from the taxes due and advance tax is determined only on
the balance tax payable.

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Annexure 4 - Compliances (Advance Tax)
• Interest is payable at the rate of 1% p.m. for deferring the payment /
non-payment of advance taxes.
• Amount of advance tax liability is determined based on estimated
income and estimated WHT. However, for the purposes of
computing actual dues and interest on deferment / non-payment at
the end of the year, actual assessed tax is considered.
• Although advance tax is liable to be paid on all incomes including
Capital Gains, it is practically not possible to estimate the Capital
Gains which may arise in a year.
• Therefore, the entire amount of tax payable on such capital gains
shall be paid along with the remaining instalments or before the end
of the year.
August 2013


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Annexure 4 - Compliances (Return of Income)
•

It is compulsory for every company to furnish return of income.

•

Foreign companies are required to file their return of income in respect of
income earned in a particular financial year in form ITR-6 through the efiling (electronic) mode.

•

Even in circumstances where such transfer is not subject to tax in India due
to DTAA benefit, a recent notification issued in 2013 by the income tax
authorities has made it mandatory to file income tax returns in India
(Notification 34/2013 dated May 1, 2013).

•

The following due dates are applicable for filing return of income:
‒
‒

•

Where TP provisions are applicable : November 30
In other cases : September 30

The return of income should be digitally signed by the Authorised Signatory.

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Annexure 4 - Compliances (Return of Income)
• If a return is submitted after the due date, the consequences are:
‒ The taxpayer will be liable to pay penal interest @1% per month or part
of the month of delay (calculated on taxes due and unpaid).
‒ A penalty of Rs 5,000 may be imposed if return is submitted after one
year from the end of the financial year.
‒ If the return of loss is submitted after the due date, losses including
capital losses, cannot be carried forward. The unabsorbed depreciation
can however be carried forward.
‒ If the return is submitted late deductions allowable under certain
sections will not be available.

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Annexure D - Compliances (Transfer Pricing)
• Every person who enters into an international transaction with an
associated enterprise is required to maintain prescribed information
and documents.
• Various types of information to be maintained in respect of an
international transaction, the associated enterprise and the TP
method including ownership structure, profile of the group, nature
and quantum of transaction, FAR analysis etc.
• The prescribed information and documents are required to be
maintained for a period of 8 years.
• Detailed documentation is not required where the transaction value
does not exceed INR 10 million. However, information necessary to
substantiate the transfer price used needs to be maintained.
August 2013


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Annexure 5 – Other Income Article in DTAA
ARTICLE 22 - Other income: India – Mauritius DTAA
1. Subject to the provisions of paragraph (2) of this article, items of income of
a resident of a Contracting State, wherever arising, which are not expressly
dealt with in the foregoing articles of this Convention, shall be taxable only in
that Contracting State.
2. The provisions of paragraph (1) shall not apply to income, other than
income from immovable property as defined in paragraph (2) of article 6, if the
recipient of such income, being a resident of a Contracting State, carries on
business in the other Contracting State through a permanent establishment
situated therein, or performs in that other State independent personal services
from a fixed base situated therein and the right or property in respect of which
the income is paid is effectively connected with such permanent establishment
or fixed base. In such case, the provisions of article 7 or article 14, as the case
may be, shall apply.

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Annexure 6 - Amalgamation
• According to the IT Act , amalgamation in relation to companies
means:
‐

The merger of one or more companies with another company, or

‐

The merger of two or more companies to form one company.

• The company or companies which so merge are referred to as the
amalgamating company.

• The company with which they merge or which is formed as a result
of the merger is referred to as the amalgamated company.

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Annexure 6 - Amalgamation
•

Conditions to be satisfied for tax neutral merger:
‒

All the property of the amalgamating company or companies immediately
before the amalgamation becomes the property of the amalgamated company
by virtue of the amalgamation.

‒

All the liabilities of the amalgamating company or companies immediately
before the amalgamation become the liabilities of the amalgamated company
by virtue of the amalgamation.

‒

Shareholders holding not less than three-fourths in value of the shares in the
amalgamating company or companies become shareholders of the
amalgamated company by virtue of the amalgamation.

‒

For reckoning the above shareholding, shares already held therein
immediately before the amalgamation by, or by a nominee for, the
amalgamated company or its subsidiary are excluded.

August 2013


66

About Authors
Ajay Kumar is an international tax expert with over 18 years of experience in advising clients on
various cross border transactions. As partner of PwC for over 8 years, he has led several practices
within PwC including Outbound Investment Advisory and Global Tax Compliance. He has advised
clients on various international taxation matters both for greenfield and brownfield projects. He
spearheaded lobbying initiative of PwC in 2010 when Direct Taxes Code was introduced in the Indian
fiscal system. He was the Chairman of Taxation committee of American Chamber of Commerce in
2011. He is also the founder of the world's first ever packaged consulting platform,
TransactionStructuring.Com created for cross border transactions.

Richa Sawhney is an International tax expert with over 16 years of experience in tax and regulatory
matters. She has been associated with organisations such as PwC and Deloitte for about 12 years. As
part of PwC Knowledge Management, Centre of Excellence and L&E initiatives, she has been actively
involved in monitoring, analysing key tax policy developments and making representations to the
concerned authorities. She has been involved in developing position papers on emerging tax issues,
thought leadership publications on policy developments such as GAAR, and several other PwC
publications such as the PwC Master Guides, Annual Budget Reports and Doing Business in India
Reports. She has also been part of PwC's lobbying initiatives on Direct Taxes Code, LLPs and
Withholding Tax matters.

August 2013


67

Disclaimer
This product has been prepared by Authors exclusively for Danta Transaction Services Private Limited
(Company) to be published on TransactionStructuring.Com for explaining the topic in a generic
manner. This is not meant to provide any advice or recommendation to anyone. Neither Company nor
the Authors is responsible to any one for taking or not taking any action based on the content of this
product. The readers are advised to seek advice from their own consultants. All rights reserved.

August 2013


68

Inbound investment re-organisation - Indian Tax and regulatory issues

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