bombay chartered accountants’ society · 2017-07-11 · fmv of b co based on stock exchange...
TRANSCRIPT
Bombay Chartered Accountants’ Society
Recent developments in taxation of
capital gains
Pinakin Desai
11 July 2017
slide 2 11 July 2017Recent developments in taxation of capital gains
Index
► Notional taxation w.r.t. FMV of unlisted equity shares (Section 50CA)
► Valuation of shares under normative valuation
► Resolving normative valuation of shares under Draft Notification
► Issues under normative valuation
► Normative valuation more than fair value – whether a possibility?
► Valuation of unquoted equity shares – Preference premium
► Transfer of CHC shares by Parent to subsidiary
► Section 195 – WHT on actual or notional consideration for 50CA
► Cost of bonus shares - Shift of base year for indexation from 1981 to 2001
slide 3 11 July 2017Recent developments in taxation of capital gains
Index
► Amendment to Section 10(38) - Third proviso to section 10(38)
► Background on 10(38)
► Notification on 3rd proviso to 10(38)
► Case study - Acquisition in IPO
► Case study - Acquisition pursuant to merger
► Case study – Gift of shares
► Case study – Inter-se promoter transfer
► Case study – Acquisition pursuant to conversion of company into LLP
slide 4 11 July 2017Recent developments in taxation of capital gains
Index
► Protocol to India-Mauritius treaty
► Impact of grandfathering under India-Mauritius treaty
► Mauritius and MLI
► Protocol to India-Singapore treaty
► Indirect transfer of India assets
► Case study – Direct transfer v. indirect transfer
► Case study – Impact of dividend distribution
slide 5 11 July 2017Recent developments in taxation of capital gains
Case studies on Section 50CA
slide 6 11 July 2017Recent developments in taxation of capital gains
Notional taxation w.r.t. FMV of unlisted shares (S.50CA)
► If sale price of non-quoted shares held as capital asset < prescribed FMV
► FMV deemed as full value of consideration in place of actual consideration
► Extends to all form of unquoted shares - whether equity or preference
► Extends to all categories of assesses
► Quoted share’ means shares traded regularly on RSE and price based on current
transaction in the ordinary course of business
► Transfer of listed shares in overseas jurisdiction may also be covered.
► No relaxation even if transfer among relatives
► No de minimis exemption
► Provision akin/similar to section 50C/43CA:
► Draft Notification for FMV of non-quoted equity shares released for public consultation
► Mechanism to derive FMV of preference shares not prescribed for 50CA
► For 56(2)(x), FMV as certified by accountant or merchant banker
slide 7 11 July 2017Recent developments in taxation of capital gains
Notional taxation w.r.t. FMV of unlisted shares (S.50CA)
► Per se provision has no impact on
► MAT computation
► Transfer without consideration i.e. where no consideration received or accruing
► Transfer exempt u/s 47 or treaty protected or exempt otherwise
► Recipient of share may suffer gift taxation u/s 56, leading to dual taxation
► Cost step up available u/s 49(4)
slide 8 11 July 2017Recent developments in taxation of capital gains
Valuation of shares under normative valuationDraft valuation Rule notified under 50CA1
► Under draft valuation rules, all the assets and liabilities of ICo to be taken at book value
except the following assets:
1 Prone to change2 Date of transfer or receipt of consideration
Assets Valuation methodology
Jewellery, work of art Market price as per valuation report
Unquoted Equity
shares
FMV determined in the manner provided under this draft rule
Immovable property Stamp Duty Value
Quoted shares and
securities. (say,
quoted shares held by
CHC)
Transaction value recorded in such stock exchange on date of
transaction of CHC shares
► If share not traded as on valuation date2, lowest price on any RSE
preceding the valuation date
slide 9 11 July 2017Recent developments in taxation of capital gains
Case Study: Resolving normative Valuation of shares as per Draft Notification3
Facts:
► Promoters hold equity shares in ICo (CHC)
► ICo holds shares of A Co, B Co, foreign listed
company and partnership interest
► LLP owns intellectual property
► B Co is a listed company which owns
immovable properties and shares of CHC
► A Co holds immovable properties
► Foreign List Co principally owns immovable
properties outside India
► Promoters wish to transfer shares of SPV (ICo)
Issue:
► Impact of section 50CA in the hands of
promoters on transfer of non-quoted equity
shares of SPV ?
Immovable
properties +
share of CHC
ICo (CHC)
A Co (CHC)
Equity
shareholders
Immovable
properties
B Co (Listed)
Intellectual
property
LLP Immovable
properties
outside
India
Foreign List
Co
3 Prone to change
slide 10 11 July 2017Recent developments in taxation of capital gains
Case Study: Resolving normative Valuation of shares as per Draft Notification4
Valuation of shares of ICo based on draft
valuation rule
Book value of assets and liabilities of ICo subject to:
► No valuation mechanism prescribed for valuation
of partnership interest
► No need to open up LLP
► Balance Sheet of B Co not to be opened up
► FMV of B Co based on stock exchange value
on date of transaction
► Book value of shares of A Co to be adjusted by
ICo - Stamp duty value of immovable property
► Foreign listed shares not considered quoted
shares for the purpose of Rule 11UA
► Book value of immovable property in absence
of SD mechanism
Immovable
properties +
share of CHC
ICo
A Co (CHC)
Equity
shareholders
Immovable
properties
B Co (Listed)
Intellectual
property
LLP Immovable
properties
outside
India
Foreign List
Co
4 Prone to change
slide 11 11 July 2017Recent developments in taxation of capital gains
Issues under normative valuation
► No de minimis exemption: no relief for inter-se transfers between relatives/
subsidiaries-Hold Co.
► Difficulty in carry out valuation of all down stream investment as underlying balance
sheets may not be available
► Valuation of overseas listed and unlisted companies may be difficult
► Varying valuation due to different valuation mechanism under FEMA guidelines,
indirect transfer rules
► Draft rules make no distinction between*
► Productive Vs Surplus/ Unproductive assets
► Valuation of stock in trade at fair value (Jewellery, immovable property)
► Reckons value without considering impact of tax
► No discount for minority interest / restrictions on transferability
* List is illustrative
slide 12 11 July 2017Recent developments in taxation of capital gains
Normative valuation more than fair value –whether a possibility?
Possibility - Normative valuation is more than fair
valuation
► Value of shares of SPV to derive value from shares B Co
Valuation of B Co. [CHC]
► Commercial fair value of B Co. – Rs 1000
► Under normative valuation – Balance sheet of B Co. to be
opened up
► Valuation of immovable property based on value adopted for
stamp duty purpose – Rs 2,000
► Value of B Co under normative valuation higher than fair
value of business
► Whether vires of section 50CA be challenged in light of SC
ruling in case of K P Varghese v ITO [1981] 131 ITR 597
SPV
B Co
[CHC]
Promoters
Hotel Business
not doing well –
Substantial
immovable
properties
slide 13 11 July 2017Recent developments in taxation of capital gains
Case Study: Valuation of unquoted equity shares – Preference premium
Facts:
► Preference Shares issued at premium and redeemable at
premium
► Net worth of ICo is Rs 800
► Respective holders contemplating to transfer equity as also
preference of I Co
Issue:
Whether premium on preference shares is “liability” to be reduced
for normative valuation of Equity Shares ?
Comments
► Valuation of preference shares likely to factor premium
► Securities premium received at time of issue akin to Reserves
and Surplus
► R&S not to be reduced under normative valuation
► Equity holders to bear commercial value of preference shares
► Commercial value may include premium receivable on
redemption
I Co
Equity
shareholders
Indicative Balance sheet of I Co
Liabilities Amt
(INR)
Assets Amt
(INR)
ESC 100 Assets 800
RPS 200
Securities
premium
500
Total 800 800
Preference
shareholders
slide 14 11 July 2017Recent developments in taxation of capital gains
Case Study: Transfer of CHC shares by Parent to subsidiary
Facts:
► Parent holds 99% in CHC 1 and 90% shares of CHC 2
► Parent transfers shares of CHC 2 to CHC1 at book cost
Issue:
► Tax implications to Parent and CHC 1 ?
Tax implications to Parent:
► No MAT as sale at book cost
► No 47(iv) exemption as transfer not to WOS
► Value substitution possible in Assessment of parent company
► No de-minimus or other exemption and 50CA applicable
Tax implications to CHC 1
► Risk under 56(2)(x) if normative value higher than book cost
► Cost – step up for actual consideration or higher value taxed
under 56(2)(x)
Parent
CHC 1
Transfer of
CHC 2
shares99%
CHC 2
Investment
90%
slide 15 11 July 2017Recent developments in taxation of capital gains
Section 195 - Withholding on actual or notional consideration for 50CA ?
► Asset acquired at Rs. 100 is sold for Rs. 300
► AO determines normative FMV to be Rs. 1,000
► Capital gains as per books is 200 while as per normative formula is 900
► Tax liability w.r.t. book gain is 40 (20% of 200) while as per A.O. it is 180 (20%
of 900)
► Should payer deduct Rs. 40 while crediting/paying Rs. 300 or Rs. 180?
► Text of S. 195
“Any person responsible for paying (i.e. responsible for paying Rs. 300) to a
non-resident, any other sum chargeable under the provisions of this Act shall,
at the time of credit of such income (i.e. Rs. 300) to the account of the payee
or at the time of payment thereof (i.e. Rs. 300) in cash or by the issue of a
cheque or draft or by any other mode, whichever is earlier, deduct income-tax
thereon (Capital gain of 200 / 900?) at the rates in force”
► Recipient (Primary) liability remains unaffected
slide 16 11 July 2017Recent developments in taxation of capital gains
Cost of bonus shares - Shift of base year for indexation from 1981 to 2001
slide 17 11 July 2017Recent developments in taxation of capital gains
Cost of bonus shares - Shift of base year for indexation from 1981 to 2001
I Co
Sub Co
100%
Issue of bonus shares
Tranche 1 1 April 1998
Tranche 2 1 April 2004
Buyer
Sale of 100% shares
(including bonus)
Facts:
► I Co and Sub Co are CHC
► ICo holds 100% in Sub Co.
► Sub Co granted bonus to ICo in two tranches:
► Tranche 1: 1 April 1998
► Tranche 2: 1 April 2004
► I Co proposes to transfer entire shareholding to buyer
Issue:
Cost of bonus shares while computing capital gain ?
Comments
► FA 2017 amended base year for indexation benefit from
1981 to 2001 w.e.f 1 April 2018
► Section 55(2)(aa)(iia) – Ordinarily cost of bonus shares
Nil but subject to 55(2)(b)
slide 18 11 July 2017Recent developments in taxation of capital gains
Cost of bonus shares - Shift of base year for indexation from 1981 to 2001
► Section 55(2)(b)(i) deals with determination of cost of capital assets
acquired prior to 1 April 2001
► Under Section 55(2)(b), at the option of taxpayer, cost will be:
► FMV of bonus shares as on 1 April 2001; or
► Cost of acquisition of shares
► Arguable that for bonus shares acquired prior to 1 April 2001, FMV
of shares as on 1 April 2001 post indexation is the COA
► FMV cannot be diluted because there was bonus issue in 2004
► Supported in some judicial precedents
► FMV substitution available for capital assets acquired by way of
49(1) transactions (ie gift, will, certain section 47 transactions)
► Cost of bonus shares acquired on 1 April 2004 will be Nil [Refer,
section 55(aa)(iia) and 55(2)(b) not applicable]
► Similarly, cost of intangible capital assets (goodwill, brand,
trademark etc) to be Nil as governed by 55(2)(a) and not
55(2)(b)
I Co
Sub Co
100%
Buyer
Sale of 100% shares
(including bonus)
slide 19 11 July 2017Recent developments in taxation of capital gains
Amendment to section 10(38)
slide 20 11 July 2017Recent developments in taxation of capital gains
Background on section 10(38)
► Section 10(38) grants LTCG exemption under normal computation on sale of LTCA
(being equity shares, equity oriented fund and business units) on Recognized
Stock Exchange upon payment of STT
► No exemption u/s 10(38) for computing MAT
► FA 2017 inserted 3rd proviso to Section 10(38) to curtail exemption granted u/s.
10(38) for equity shares, if sold on RSE post 31 March 2017
► Intent: Target to prevent money laundering through penny stocks
► The proviso does not grant 10(38) exemption if:
► the acquisition was on or after 1 October 2004 and
► such transaction was not chargeable to STT, unless specifically relieved by the
Notification No. 43/ 2017 dated 5 June 2017
► The expression “acquisition” is wide:
► Extends to cover primary subscription and secondary purchase
slide 21 11 July 2017Recent developments in taxation of capital gains
FA 2017 – Insertion of 3rd proviso to Section 10(38)
► Third proviso to Section 10(38) inserted vide FA 2017 reads as
under:
“Provided also that nothing contained in this clause shall
apply to any income arising from the transfer of long-term
capital asset, being an equity share in a company, if the
transaction of acquisition, other than the acquisition notified
by the Central Government in this behalf, of such equity
share is entered into on or after 1st day of October, 2004 and
such transaction is not chargeable to securities transaction
tax under Chapter VII of the Finance (No.2) Act, 2004 (23 of
2004)”
slide 22 11 July 2017Recent developments in taxation of capital gains
Section 10(38) - Notification No. 43/2017 –Target Acquisitions under scanner
Clause (b)
Transaction of Acquisition of
existing listed equity shares off
market
Clause (c)
Acquisition of unlisted equity
shares of a company post delisting but
prior to relisting
Clause (a)
Acquisition of existing listed equity shares of
thinly traded company by way
preferential allotment
► The Notification provides the list of transactions which are not
exempt under Section 10(38), unless excepted
► Limitation applicable to Acquisition on or after 1 October 2004:
slide 23 11 July 2017Recent developments in taxation of capital gains
Section 10(38) - Notification No. 43/2017 –Exceptions to negative list
► The exceptions provided in the Notification are as under:
Carve Outs
i. Approved by SC/HC/NCLT/SEBI/RBI
ii. Acquisition by NR in accordance with FDI
iii. Acquisition by Category I/II AIF and VCF
iv. Through preferential allotment not governed by Chapter VII of SEBI (ICDR), 2009
• To lender or debenture holder on conversion of loan or debt (subject to conversion
terms provided at time of issue)
• Under scheme approved by HC under 391-394 or 230-234
• In terms approved by Rehabilitation scheme (BIFR, SICA 1985, Insolvency and
Bankruptcy Code
Clause (a)
Acquisition of existing listed equity shares of thinly traded company by way preferential allotment
slide 24 11 July 2017Recent developments in taxation of capital gains
Section 10(38) - Notification No. 43/2017 –Exceptions to negative list
► The exceptions provided in the Notification are as under:
Clause (b)
Transaction of acquisition of existing listed equity shares off market
Carve Outs
Following acquisitions only if made in accordance with SCRA, 1956 (if applicable):
i. Through fresh issue of shares [other than thinly traded shares covered by clause (a)]
ii. By banks, PFIs, reconstruction or securitization company
iii. Approved by SC/HC/NCLT/SEBI/RBI
iv. Under SEBI (ESOP and ESPS) Guidelines.
v. By NR in accordance with FDI
vi. Under SEBI (SAST) Regulations, 2011
vii. From Government
viii. By Category I/II AIF and VCF
ix. By mode of transfer specified in s. 47/50B provided “previous owner” was eligible to
claim exemption
slide 25 11 July 2017Recent developments in taxation of capital gains
Case Studies on section 10(38)
slide 26 11 July 2017Recent developments in taxation of capital gains
Case study - Acquisition in IPO
Facts
► A Co is an unlisted company
► The promoters of A Co. to raise funds by listing A Co. on RSE for the
first time
► Fresh issue of shares by A Co.
► Shares would be received by public shareholders off market (ie prior
to listing)
Issue
Whether shares acquired in IPO eligible for exemption under 10(38) ?
Comments
► Not a case of “existing listed equity shares”, hence outside clause (a)
and (b) of notification:
► Without prejudice: acquisition by way of fresh issue protected by
point (i) of proviso to clause (b) of notification protects
A Co
Acquisition/ Issue of
shares in IPO
All bonus issues, rights issues, ESOP protected too
slide 27 11 July 2017Recent developments in taxation of capital gains
Case study - Acquisition pursuant to merger
Facts
► Off market acquisition of listed shares by B Co.
► Vesting of such shares in C Co. pursuant to tax
neutral merger approved by NCLT/ HC
► Issue of listed shares to A Co. as merger
consideration
► Acquisition of listed shares of C Co by A Co. off
market
Issues
► Whether A Co. and C Co. eligible for 10(38)
exemption ?
C Co. (Listed
company)B Co.
A Co.
D Co (List
Co)
Tainted
Acquisition of
listed shares
by B Co.
Vesting of listed
shares in C Co. on
merger
100%
20%
slide 28 11 July 2017Recent developments in taxation of capital gains
C Co. (Listed
company)B Co
A Co.
D Co (List
Co)
Tainted
Acquisition of
listed shares by
B Co.
Vesting of listed
shares in C Co.
on merger
Eligibility of 10(38) to C Co.
► C Co acquires shares of D Co as merged entity
► Acquisitions by C Co. pursuant to merger scheme approved
by HC/ NCLT [exempt at item (iii) of clause (b)]
► Though exempt transfer u/s.47 carve out at item (ix) not
applicable for C Co. as B Co. not eligible
Eligibility of 10(38) to A Co.
► A Co acquires as shareholder of merging company:
► Fresh issue of listed shares exempt as item b(i) of
notification
► Acquisition pursuant to NCLT/ HC [exception at item b(iii)]
► Exempt u/s 47 transaction. Carved out under item b(ix)?
► No previous owner of A Co.
100%
20%
Case study - Acquisition pursuant to merger (contd…)
Fast Track merger does not need HC/
NCLT approval
slide 29 11 July 2017Recent developments in taxation of capital gains
Transaction of gift [47(iii)]
► Z received as gift off market without STT
► Such transaction covered by S. 47 and can be
exempted under item (ix) of clause (b):
► if “previous owner” was eligible to claim
► The eligibility of 10(38) in the hands of Mr Z to be
seen qua “previous owner” of shares
► Previous owner for Mr Z - Mr Y or Mr X ?
► Analogy from definition of “previous owner” as
defined under Explanation to Section 49(1) ?
► Under 49(1), cost and holding period substitution
would be taken from Mr X and consequently
eligibility to be seen qua Mr X !!
Disposal of shares
on a RSE
Mr. Z
Gift - off
market
Gift – Off
market
Mr. X Mr. Y
STT paid
acquisition
Case study – Gift of shares
Acquisition by way of inheritance – Same analogy
as gift. It is not a transaction too.
slide 30 11 July 2017Recent developments in taxation of capital gains
Case study – Inter-se promoter transfer
Facts:
► Mr. X and Mr Y are promoters of I Co (Listed Co)
holding 45% and 10% respectively
► Mr X to transfer 35% shares to Mr Y as under:
► Sold off market to Mr. Y for consideration; or
► On stock exchange in private window – Post
STT
► Whether Mr. X and Mr. Y eligible to claim s. 10(38)
exemption?
Eligibility of 10(38) to Mr. X:
► Had it been Off market transfer
► Not eligible to capital gains exemption as no STT
paid
► Stock exchange transfer
► Eligible for 10(38) as STT paid
Mr. X Mr. Y
I Co (List Co)
45% 10%
Present structure
Mr. X Mr. Y
I Co (List Co)
10% 45%
Resultant structure – post transfer
Transfer of 35% stake
slide 31 11 July 2017Recent developments in taxation of capital gains
Case study – Inter-se promoter transfer
Eligibility of 10(38) to Mr. Y:
Off market acquisition of existing equity shares
► Clause (b) applicable
► Acquisition by Mr Y of 35% equity likely to trigger
open offer under SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011 [‘SEBI
(SAST)’]
► Being inter-se promoter transfer, Regulation 10 of
SEBI (SAST) Regulations, 2011 may exempt Mr Y
from open offer subject to disclosure requirements
► Disclosure required under Regulation 10 and
Regulation 29 of SEBI (SAST) Regulations
► Arguable that exemption under item (vi) of clause
(b) available as acquisition made under SEBI
(SAST) Regulations
Mr. X Mr. Y
I Co (List Co)
45% 10%
Present structure
Mr. X Mr. Y
I Co (List Co)
10% 45%
Resultant structure – post transfer
Transfer of 35% stake
slide 32 11 July 2017Recent developments in taxation of capital gains
Case study – Acquisition pursuant to conversion of company into LLP
Facts
► A Co acquired shares of listed company on RSE
► Non-tax neutral conversion of A Co. into LLP
Issue
► Eligibility of LLP to claim exemption u/s 10(38) as
shares vest without STT ?
Comments
► Acquisition/ vesting in LLP off market - Not
qualifying as section 47 conversion
► Third proviso to Section 10(38) and clause (b)
requires “transaction of acquisition”
► Whether arguable that such conversion is not
“transaction of acquisition” ?
A Co
List Co shares List Co shares
LLP
Promoters Partners
Conversion of Company to LLP
Akin to acquisition by way of inheritance
It is not a transaction too.
slide 33 11 July 2017Recent developments in taxation of capital gains
Recently concluded treaties with Mauritius and Singapore
slide 34 11 July 2017Recent developments in taxation of capital gains
Case Study - Impact of grandfathering under India-Mauritius treaty
Facts
► The acquisition of shares and CCDs of ICo by Mau
Co has taken place as under:
Issue
Grandfathering benefit under India-Mauritius treaty on
sale of shares of ICo by Mau Co to Mau Co 1 ?
US Co
Mau Co
I Co
Mau Co 1
100%
100%
Transfer of shares
and CCDs of I Co
India
Outside India
Particulars Year of
Acquisition
Original subscription 2008-09
Subscription of partly paid shares 2016-17
Acquisition of CCDs 2017-18
Bonus shares 2017-18
Received as gift (Donor acquired
in 2010)
2017-18
slide 35 11 July 2017Recent developments in taxation of capital gains
India-Mauritius protocol
3A. Gains from the alienation of shares acquired on or after 1st
April 2017 in a company which is resident of a Contracting State
may be taxed in that State.
3B. However, the tax rate on the gains referred to in paragraph 3A of
this Article and arising during the period beginning on 1st April,
2017 and ending on 31st March, 2019 shall not exceed 50% of
the tax rate applicable on such gains in the State of residence of
the company whose shares are being alienated;
4. Gains from the alienation of any property other than that
referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in
the Contracting State of which the alienator is a resident.
slide 36 11 July 2017Recent developments in taxation of capital gains
Transfer of shares/CCD in FY 2018-19
Nature of acquisition Year of
acquisition
Grandfathering
under I-M Protocol?
Benefit of 50% of CG
tax in window period
Original subscription 2008-09 Yes, Acquired before
31.03.17
Academic, Fully
exempt
Subscription of partly
paid shares
2016-17 Arguably Yes Academic, Fully
exempt
Acquisition of CCDs 2017-18 Academic as CCDs
exemption not
restricted
Academic, Fully
exempt
Bonus shares 2017-18 No, acquired post
March 2017
Can claim concession
subject to LOB
Received as gift 2017-18 No, acquired post
March 2017
Can claim concession
subject to LOB
slide 37 11 July 2017Recent developments in taxation of capital gains
Mauritius and Multilateral (MLI) Treaty
► I-M current treaty does not have PPT test
► I-M current treaty does not have LOB clause where
there is complete grand-fathering
► Mauritius has not covered India as CTA under MLI
► No change in treaty status until bilateral negotiations
concluded
slide 38 11 July 2017Recent developments in taxation of capital gains
Protocol amending India-Singapore treaty
► Singapore Company established in 2015 has the following investments
► Shares subscribed and fully paid shares in December 2016
► CCD subscribed in same I Co in April 2017
► Re-negotiated India Singapore treaty
► Grandfathers capital gain derived from investments in shares of I Co prior to 31 March 2017
► Obtaining tax exemption under the treaty subject to
► Establishing tax residence of Singapore in context of capital gains exemption upon
compliance with
► Primary purpose behind investment was not to claim capital gains exemption
► Compliance with the annual expenditure test
► Continues to exempt capital gains from sale of CCD or other securities as before
► In fact, LOB conditions do not apply to other securities post 1 April 2017
► Unlike Mauritius, India Singapore treaty likely to change as a result of MLI signed in June 2017
► MLI may likely take effect for taxation of capital gain accruing on or after 2019/2020
Page 39 12 July 2017 Presentation title
Indirect transfer of India assets
slide 40 11 July 2017Recent developments in taxation of capital gains
Case study – Direct transfer v. indirect transfer
Mau Co
US Co
Outside India
India
ICo
Indirect transfer
Direct transfer
NO TREATY
PROTECTION
TREATY
PROTECTION
UK Co
France
Co
Outside India
India
ICo
Indirect transfer
Direct transfer
TREATY
PROTECTION
NO TREATY
PROTECTION
Indirect transfer
beneficial!!
Direct transfer beneficial!!
slide 41 11 July 2017Recent developments in taxation of capital gains
Case study – Direct transfer v. indirect transfer► Article 14 of India-France tax treaty – Capital Gains
4. Gains from the alienation of shares of the capital stock of a company the
property of which consists directly or indirectly principally of immovable property
situated in a Contracting State may be taxed in that Contracting State. For the
purposes of this provision, immovable property pertaining to the industrial or
commercial operation of such company shall not be taken into account.
5. Gains from the alienation of shares other than those mentioned in paragraph 4
representing a participation of at least 10 per cent in a company which is a
resident of a Contracting State may be taxed in that Contracting State.
6. Gains from the alienation of any property other than that mentioned in
paragraphs 1, 2, 4 and 5 shall be taxable only in the Contracting State of
which the alienator is a resident.
slide 42 11 July 2017Recent developments in taxation of capital gains
Case study – Impact of dividend distributionFact pattern
► SPV and ICo are presently debt-free entities
► Cost of acquisition to SPV of ICo shares = 30
► FMV of ICo in SPV > 50% [Rule 11UB]
► Shares of SPV deemed to be situated in India;
► Capital gains trigger upon transfer of SPV shares by
FCo
► SPV makes payment of dividend to FCo
► Circular 4/2015 exempts overseas dividend
► Dividend distribution out of overseas assets
► Dividend in the form of ICo shares attracts receipt
based taxation in India
► FCo transfers shares of SPV at FMV
► Reduction in overall FMV of SPV
► Lower consideration on transfer; lower capital gains
SPV
FCo
Dividend payout
Outside India
India
Overseas Assets
ICo
slide 43 11 July 2017Recent developments in taxation of capital gains
Comparative tax Impact pre and post dividend distribution
► FMV matrix of SPV:
SPV
FCo
Dividend payout
Outside India
India
Overseas Assets
ICo
Particulars Pre divi-
dend
Divi-
dend
pay-out
Post divi-
dend
India assets value (A) 55 Nil 55
Overseas assets value (B) 45 45 -
Sale value of SPV (C = A + B) 100 - 55
Indexed cost of SPV shares (D) 30 - 30
Total capital gains (E = C – D) 70 - 25
Proportion of India assets (F = A/C) 55% - 100%
Proportionate capital gains taxable in India as
India as per Rule 11UC (E*F)
38.5 - 25
slide 44 11 July 2017Recent developments in taxation of capital gains
Adverse impact of dividend distribution
► FMV matrix of SPV:
Particulars Pre divi-
dend
Divi-
dend
pay-out
Post
divi-
dend
India assets value (A) 45 Nil 45
Overseas assets value (B) 55 45 10
Sale value of SPV (C = A + B) 100 - 55
Indexed cost of SPV shares (D) 30 - 30
Total capital gains (E = C – D) 70 - 25
Proportion of India assets (F = A/C) 45% - 56%
Proportionate capital gains taxable in
India as per Rule 11UC (E*F)
- - 14
SPV
FCo
Dividend payout
Outside India
India
Overseas
Assets
ICo
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