Case Study – Direct & Indirect transfer

1. Case Study – Direct & Indirect transfer Current structure • Facts • US Hold Co holds an Indian company (‘I Co’) through a Mauritius holding company (‘M Co’) • US Hold Co also holds operating companies in various jurisdictions • M Co also holds US Co, an operating company • Objectives • M Co intends to shift I Co under US Co, as a part of corporate restructuring • Subsequently, US shareholders intend to transfer the entire group to Acquirer by way of transfer of their shares held in US Hold Co to Acquirer • Therefore, I Co would be indirectly transferred by US Shareholders US Shareholders Acquirer US Hold Co 100% Holding Company Other operating companies in various jurisdictions 100% Mauritius Co (‘ M Co’) 100% US Co Operating Company Holding Company 100% Outside India India I Co Operating Company

2. Case Study – Direct & Indirect transfer Steps • Steps – Direct transfer of I Co • US Co to incorporate a subsidiary in Mauritius (‘New M Co’) • M Co to transfer its investment in I Co to New M Co at fair value for cash consideration • Steps – Indirect transfer of I Co • US shareholders to transfer their stake in US Hold Co to the Acquirer at fair value of the entire group for cash consideration US Shareholders Acquirer 100% US Hold Co 100% Holding Company Other operating companies in various jurisdictions 100% Mauritius Co (‘ M Co’) 100% US Co Operating Company Holding Company 100% New Mauritius Co (‘ New M Co’) 100% 100% Outside India India I Co Operating Company

3. Case Study – Direct & Indirect transfer Resultant Structure • Key Aspects • Capital gain tax in India in the hands of Mauritius Company, whether treaty benefit be applicable • Capital gains tax in India in the hands of shareholders of US Company, whether treaty benefit be applicable • Value of I Co vis-à-vis the global value of US Hold Co, • If the value of Indian business is 15%/ 26%/ 51% / 76% of the global value? • When can it be said, that value is substantially derived from India? • Computation of capital gains tax in the hands of shareholders of US Co, who have joined at various times, thereafter how the cost of shareholding vis-à-vis the proportionate value of Indian business to be determined. Acquirer US Shareholders 100% US Hold Co 100% Holding Company Other operating companies in various jurisdictions 100% Mauritius Co (‘ M Co’) Holding Company 100% US Co Operating Company 100% New Mauritius Co (‘ New M Co’) Outside India India 100% I Co Operating Company

4. Case Study – Direct & Indirect transfer • Key Aspects (contd.) • Whether capital gain would attract in the hands of shareholders of US Co at the stage when acquirer is allotted the shares in US Hold Co at premium on account of dilution of interest of existing shareholders or at time of payment to US shareholders at the time of sale of shareholding or buyback of shares • If the US shareholder holds only 1% share in the US Hold Co would he be liable to capital gains in India on the entire capital gains or proportionate to his shareholding • What would be the with holding taxpayers liability in the above cases on the Non-resident?

5. Case Study 2 – Direct & Indirect transfer • Facts • A US Company (‘US Co’) holds an Indian company (‘I Co’) through its WOS in Mauritius, M Co • The Indian Company I Co is an operating company as well as holding Company for many other operating companies in similar business through a Dutch Company (‘BV’) • Key aspects • US Co derives its 100% value from investments in I Co. • However, I Co derives its value partly ( say 40%) from its own operating assets in India and the balance (60%) from investments held in operating companies in various jurisdictions • US co sells M Co to a non-resident party US Co Holding Company M Co Outside India India 100% Operating Company I Co 100% BV Outside India Operating companies in various jurisdictions

6. Case Study – Direct & Indirect transfer • Questions for consideration • For the purpose of determining whether US Co holds ‘substantial ‘ assets or interest in India, what is the nature of assets to be considered – operating assets alone or passive assets in the form of investments as well? • For this purpose, is there a distinction to be made between assets situate in India (Sec 9(1)(i) and assets located in India (Explanation 5)? • If it includes investments in operations outside India, what if those countries seek to tax US Co based on the “indirect” transfer of operational assets in those countries – could US Co be saddled with tax in India and those countries with no mechanism for a bilateral tax credit? • In any case, would US Co, being a foreign company, be eligible for indexation? What would be the mode of computation? • If M Co were a listed company, having public shareholders, besides US Co, would every individual transfer be subject to tax in India? Would the expectation be that every individual acquirer would deduct tax at source on the capital gains made by the sellers?

7. 3 Case Study – Direct & Indirect transfer • Facts • A Sing Company (‘Sing Co’) holds another Sing Company (Sing Co 2). • Sing Co and Sing Co 2 hold 50% interest each in an Indian Company I Co, which has certain immovable properties in India (say IMP1) • A 100% subsidiary of Sing Co 2, ie Sing Co 3 also owns certain immovable property in India (say IMP2) • It is proposed that Sing Co will merge with Sing Co2 • Key aspects • Pursuant to the introduction of indirect transfers, following are the capital assets being transferred: • 50% of I Co (directly owned by Sing Co) • 50% of I Co (owned through Sing Co 2) • 100% Shares of Sing Co 3 (owned by Sing Co 2) X Co Sing Co 100% Sing Co2 50% 50% Sing Co3 Outside India India Operating Company I Co IMP 2 IMP 1

8. 3 Case Study – Direct & Indirect transfer • Questions for consideration • While 50% of shares of I Co owned directly by Sing Co would be covered by the exemption provided under section 47(via), would the indirect transfer of shares held in I Co through Sing Co 2 and the indirect transfer of Sing Co 3 which derives substantial value from India be deemed as an indirect transfer? • In the case of a purely internal reorganization, such as this, when the ultimate owner, X Co and the immediate owner Sing Co 3 remain the same as far as the Indian assets IMP 2 are concerned, is there really a ‘transfer’ that needs to be taxed? X Co Sing Co 100% Sing Co2 50% 50% Sing Co3 Outside India India Operating Company I Co IMP 2 IMP 1