PEs Take ‘Dou­ble Decker’ Route to Es­cape Tax Here

Move mainly adopted by for­eign funds that make strate­gic in­vest­ments here

The Economic Times - - Companies: Pursuit Of Profit - Sachin.Dave@ times­group.com

Mum­bai: Some pri­vate eq­uity (PE) funds are ex­per­i­ment­ing with ways of circumventing the law on in­di­rect trans­fer of shares by set­ting up twotiered struc­tures in coun­tries where ex­ist­ing treaties pre­vent In­dian au­thor­i­ties from levy­ing tax on trans­ac­tions, said peo­ple with di­rect knowl­edge of the mat­ter.

Of­ten called a ‘dou­ble decker Dutch sand­wich’ or dou­ble decker th­ese struc­tures are aimed at avoid­ing get­ting taxed in In­dia and may run afoul of In­dian au­thor­i­ties and the pro­vi­sions of the Gen­eral Anti-Avoid­ance Rule (GAAR).

In­di­rect trans­fer of share reg­u­la­tions — in­tro­duced in 2012 af­ter Voda­fone won a trans­fer-pric­ing tax dis­pute with the gov­ern­ment — pro­vides for tax­ing over­seas trans­ac­tions of shares of In­dian com­pa­nies, pro­vided the shares con­sti­tute more than 50% of the for­eign fund’s to­tal as­sets (ex­ceed­ing .₹ 10 crore). If caught on the wrong foot, PEs can face about 20% tax on long-term cap­i­tal gains and higher tax of 30%-40% on short-term cap­i­tal gains, say in­dus­try ex­perts. “Many PE firms have cre­ated the struc­tures, known as dou­ble decker struc­tures, where they are cre­at­ing a buf­fer com­pany from where in­vest­ments in In­dia will be made due to the in­di­rect trans­fer of shares pro­vi­sions. This is mainly done by for­eign com­pa­nies mak­ing strate­gic in­vest­ments in In­dia,” said Amit Sing­ha­nia, part­ner, Shardul Amarc­hand Man­gal­das, a law firm.

The way it works is like this: A fund sets up a firm or pool­ing ve­hi­cle in the Nether­lands or Ger­many but does not di­rectly in­vest in In­dia. It sets up an­other step down sub­sidiary in the same coun­try which makes the in­vest­ment. At the time of sale, the

shares in sub­sidiary are sold to the new buyer. Th­ese struc­tures are set up only in those coun­tries which pre­vent In­dian au­thor­i­ties from prob­ing such trans­ac­tions.

While this is a text­book case of in­di­rect trans­fer of shares, tax ex­perts say that some of In­dia’s tax treaties with th­ese coun­tries may safe­guard such in­vest­ments from the prob­ing eyes of the tax­man.

“Some tax treaties in­clud­ing those with Ger­many, Ja­pan, France, Ire­land, Korea, Nether­lands and Lux­em­bourg pro­vide safe­guard if a pool­ing ve­hi­cle in­vests in In­dia through an­other com­pany reg­is­tered in th­ese des­ti­na­tions. How­ever, such trans­ac­tions could come within the purview of newly-in­tro­duced GAAR as the tax depart­ment may ques­tion the in­tent of cre­at­ing such struc­tures,” said Ra­jesh H Gandhi, Part­ner, Deloitte Haskins & Sells LLP.

For in­stance, sec­tion 13 of the Lux­em­bourg treaty with In­dia says that In­dia is not per­mit­ted to tax gains if the deal doesn’t hap­pen in In­dia. Treaties with Ger­many, Nether­lands, Ja­pan and other coun­tries con­tain sim­i­lar clauses. But th­ese firms may not be able to get away with it due to GAAR or Base Ero­sion and Profit Shift­ing (BEPS) frame­work. “We are aware of such struc­tures but the (tax) depart­ment’s po­si­tion is same as be­fore that such trans­ac­tions can be taxed do­mes­ti­cally. But there is a case which is pend­ing in the court and we will have to wait for the judge­ment,” a se­nior tax of­fi­cial told ET. BEPS is a com­mon frame­work adopted by a group of coun­tries to tax multi­na­tional com­pa­nies and for­eign in­vestors, who ex­ploit loop­holes and shift prof­its from coun­tries which have high taxes to those that have low or no taxes. Speak­ing on con­di­tion of anonymity, a tax ex­pert in in­ter­na­tional tax­a­tion said that BEPS and GAAR may not be such de­ter­rence. “Ac­tion un­der GAAR can only hap­pen when tax of­fi­cer comes to know of the deal,” he said.

He added that in sev­eral cases when the deal is not in pub­lic do­main it’s very dif­fi­cult for tax of­fi­cials to find out the de­tails. Since the deal has hap­pened at en­tity level out­side In­dia and there is no change in the share­hold­ing in In­dia.

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