PEs Take ‘Double Decker’ Route to Escape Tax Here
Move mainly adopted by foreign funds that make strategic investments here
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.