International Tax Structuring

Tax Structuring• Tax Structuring is defined as a form into which business or financial

activities may be organized to minimize taxation.

• An important part of tax structuring is deciding how to set up a business before commencing operations. A business may run as a sole proprietorship, general partnership, limited partnership, corporation or limited company.  

• International tax structuring means different things to different people—depending upon their responsibilities within a company; but if its done correctly it can relieve (sometimes) onerous financial burdens that can inhibit a company’s development.

• An integrated international tax program which takes careful account of all of a company’s tax exposures can free up precious capital that can be redirected to the firm’s long-term benefit.

• Tax Residency

• Permanent Establishment

• Transfer Pricing

• Substance

• Due Diligence

• Anti Avoidance/Abuse/Tax Risk Management

• Treaty Shopping/WHT issues

Issues Underlying Tax Structuring

Cross border transaction imperatives

Cross Border Transactions

Cross Border Transactions

Legal & regulatory framework

Identifying and delivering synergies

Tax regimes & treaties

Business Dynamics

Business Environment

Cultural Issues

Accounting treatment

Cross border transactions

Cross border transactions

Exit considerations

Cash repatriation

Debt Structuring

Income flows and their taxability

Entry Strategy

Financing options

1

2

3

4

5

6

Key tax and financial considerations

• What should you acquire (assets or shares)?

• How should you acquire it (holding company issues)?

• How will you pay for it (tax efficient funding)?

• How will you use profits (maximizing dividend flows)?

• What if things don’t work out (tax efficient exit)?

The Five Questions of Tax Structuring

What should you acquire?

• Share Purchase

• Asset purchase

• Merger, Demerger, etc

Asset PurchaseTarget Structure Acquisition Structure

Parent Company

Holding Company

Target Company

Parent Company

Holding Company

Target Company

Acquirer

Acquisition Co.

Share Purchase

• Acquirer sets up Acquisition Company in Target Country• Acquisition Company purchases Assets/Business of Target Company for

cash consideration

How should you acquire it ?...

SPV Options• Company• Branch / Liaison office• Trust• LLPs

Applicable Tax Laws• Host Country• Target Country• SPV Jurisdiction• Tax Treaties

Need for an Overseas Holding Company (OHC)

• Taxation of foreign dividends in India

• Retention of profits in offshore jurisdiction

• Deferment of tax

• Greater flexibility for inter-company transfer of funds and for setting up operations in other overseas jurisdictions

• Future restructuring easy

• Better tax regime within European Union

Investors Considerations when choosing OHC• Receive dividends and capital gains tax free - Corporate Tax (Participation) Exemption

• Tax efficient repatriation of profits - Reduced Witholding of Profits

• Controlled Foreign Company (CFC) legislation

• Finance companies mechanism

• Flexible reorganizations

• Reliable tax authorities - Rulings

• Non tax driven considerations, e.g. IPO, exchange control regulations, protection IPR

How should you acquire it ?Considerations

• Capital Gains• Local taxes and underlying credit of foreign taxes• Withholding Taxes – Interest, Dividends and Royalties• Controlled Foreign Corporation Rules• Thin Capitalization Norms

- Debt Vs Equity• Ability to push up / down debt cost• Valuation of intangibles• Accounting (Consolidation)• Stamp Duties

Direct Tax• Tax Incentives• Utilisation of B/f tax losses• Group Relief• Revenue - Operating arrangements – Revenue vs Capital • Expenses

- Interest - Double dip• Treaty Shopping

Indirect taxes• Stamp Duty

Integration• Indirect Taxes

- Tax arbitrage from VAT via export and import• Transfer Pricing

How will you minimize tax incidence on Profits ?

Income stream and their taxability

Income streams Principles for evaluation

Dividends

Capital Gains

Interest

Other royalty / brand fees /technical Services / management services

• Interest, TS and royalty can flow independent of ownership pattern

• TS and royalty would typically flow to an operating entity, which possess technical capabilities

• Principal drivers are tax costs associated with dividend flows and gains on disposal of shares

• Brand fee would flow to the IPR company

Key elements – arm’s length principle, documentation, overall tax costs and foreign tax

credits

How will you minimize tax incidence on Repatriation?

• Dividend

• Buy back / Reduction / Redemption of Preference Capital

• Debt Repayment

• Royalties, Fees for Technical Services, etc

• Advances / Loans / Investments

How will you plan tax-efficient exit?

• Use of Multi layered Structure– Capital Gains in Tax Free Jurisdiction– Sale of Foreign Assets

• Merger / Winding Up

• Taking advantage of Tax Incentives / Exemptions– LTCG – Listed Companies

Transfer of intermediary foreign company’s shares - Vodafone Case

Mechanics

• CCo1 sold its stake in CCo2 to Acquirer

UK CoUK

Acquirer NCo

I Co

CCo1

CCo2

Ne

the

rla

nd

sC

ay

ma

n I

sla

nd

Ind

ia

Issue

• Revenue Authorities contend that this transfer is taxable in India since the “controlling interest” in Indian Asset is transferred

Mauritius Co

Ma

uri

tiu

s

Through downstream

subsidiaries

Debatable issues after Vodafone Case

• What is the subject matter of transaction ?

• Is transfer of interest in subsidiary merely a mode of transfer of interest in the downstream company ?

• Does consideration paid or payable represents the value of assets of intermediary or of the downstream company ?

• What is the effect of declarations made by the parties to the transaction to their respective shareholders and / or to their regulatory authorities ?

THANK YOU