Tax Structuring through Investment Vehicle

Holding Entity - Investment  Vehicle Jurisdiction
   
The choice of jurisdiction from where  investments can be routed into India would primarily depend on the revenue  flows arising from investments in India and their taxability. The typical  revenue flows arising are:

  1. Dividend;         
  2. Capital Gain on disposal of shares;         
  3. Interest on debt; and         
  4. Royalty & Fee for Technical Service

       

Singapore has long been recognized as a  jurisdiction of choice for setting up a holding company. Other jurisdictions  are such as: Netherlands, Mauritius, and Cyprus etc. 

    

Investment Vehicle

For ease of comparison, we provide below the  withholding tax rates on dividends, interest, and capital gains on shares,  applicable to a holding company located in Singapore, Mauritius and USA, under  the respective Tax treaties:

                                                                                                                                                                                        

Income    Stream

Singapore

Mauritius

USA

Dividend

Tax Exempt for shareholder –
              Dividend Distribution Tax of 16.995 per cent    paid by Indian Company

Tax Exempt for shareholder –
              Dividend Distribution Tax of 16.995 per cent    paid by Indian Company

Tax Exempt for shareholder –
              Dividend Distribution Tax of 16.995 per cent    paid by Indian Company

Capital Gain

Nil

Nil

20 per cent (assuming unlisted and long term    capital gain)

Interest

15 per cent

21.115 per cent

15 per cent

Royalty

10 per cent

10 per cent

10 per cent

Fees for Technical    Service

10 per cent

10 per cent

10 per cent

Corporate Tax Rate

17 per cent

GBC 1- 3 per cent (15 per cent. Tax credit    up to 80% is available)
              GBC 2: Nil

35 per cent

     

The following case study reviews direct and  indirect investment structures for investments in India. The key tax  considerations discussed below are minimization of Indian tax on repatriation  of dividend, interest and disposal of the investment in India.

 

Scenario 1: In case India Co. distributes dividends to the USA Co. directly, no  withholding tax on the dividends is applicable in India under Indian Income  Tax. On the assumption that the profits out of which the dividends are paid,  e.g. USD100, are subject to corporate income tax (CIT) at 30 percent (excluding  surcharge and education cess) in India i.e., USD30. (Refer Figure 1)

1 Dividend  Distribution Tax of 16.995 per cent on dividend paid to shareholders

In addition, the dividend repatriated by the  Indian Co to the USA Co. shall be subject to tax in the USA (assumption CIT in  USA – 35 per cent).  As per Double  Taxation Avoidance Agreement between USA – India, the income tax paid in India  by the Indian Co. can be claimed back by the USA Co. as Foreign Tax Credit  (FTC) if the USA Co owns at least 10 percent shareholding in the India Co.  Hence, the FTC of 30 per cent can be claimed  by the USA Co against the tax payable by the USA Co. on the dividend distributed  by the Indian Co.

Please refer the table below:
        All  figures are in USD

                                                                                                                                                                      


            Particular

Direct    Investment in Indian Company by US Holding

Taxable Income (Indian Co.)

100

Corporate Tax @ 30%

30

Income After Tax

70

 

 

Dividend Distribution to USA Co of USD 100

 

Corporate Dividend Tax @16.995% (India)

16.995

US Federal Tax @ 35%

35

Less Foreign Tax Credit

30

Additional Tax

5

 

 

Total Tax Liability

35

Effective Tax Rate

35 per cent

     

In the event the USA Co. plans to dispose off  a stake in the India Subsidiary, the gains from such disposal would be subject  to a domestic withholding tax of 20 percent (excluded applicable surcharge and  education cess), assuming India Co. is an unlisted company in India and the  gains derived are long-term capital gains.

Scenario 2: Singapore / Mauritius Co., on the other hand, may offer a more tax  efficient solution (a tax-saving for the USA Co or at least significant tax  deferral opportunities under USA tax laws) with an intermediate holding company  in comparison to the direct investment by the USA Co.

In this case, the India Co. distributes  dividends to the Singapore / Mauritius Intermediary Co (resident of Singapore /  Mauritius). On the assumption that the profits out of which the dividends are  paid, e.g. USD100, is subject to CIT rate at 30 percent in India (excluding  surcharge and education cess) i.e., USD 30.   (Refer Figure 2)

 

Dividend Distribution Tax of 16.995 per cent  on dividend paid to shareholders.

The foreign  dividend received by the Singapore Co. shall be exempted from Singapore Tax  subject to the conditions under the foreign-sourced income exemption scheme. But,  in case of the Mauritius, foreign dividend is taxable but a credit of  underlying and withholding tax can be claimed.

Please refer  the table below:
        All  figures are in USD

                                                                       


            Particular

Investment in the     Indian Co through Singapore Co.

Investment in the     Indian Co through Mauritius Co.

Taxable Income (Indian Co.)

100

100

Corporate Tax @ 30%

30

30

Income After Tax

70

70

 

 

 

Dividend Distribution to the Singapore Co

100

100

 

 

 

Corporate Dividend Tax @16.995% (India)

16.995

16.995

 

 

 

Singapore Tax @ 17%

N/A

 

Mauritius    Tax @ 15% (Less 80% Credit) for GBC 1 or Nil for GBC 2

 

3 (GBC 1) OR NIL (GBC2)

     

In order to  maximize tax saving the Singapore Company could elect “foreign tax credit  pooling system” (Effective from year of assessment 2012 - Singapore)  if it has foreign source income in both Dividend and Interest. 

                        

Particular

Investment    in the Indian Co through Singapore Co.

Taxable Income (Indian Co.)

100

Corporate Tax @ 30%

30

                                                                                                                                                                                                

Income    After Tax

70

 

 

Dividend Distribution to the Singapore Co

100

Interest paid to the Singapore Co.

100

 

 

Corporate Dividend Tax @16.995% (India)

16.995

Withholding Tax on Interest Payment @ 15%

15

 

 

Singapore Tax @ 17% (foreign tax credit pooling system)

34 (200*17%)

Less Foreign Tax Credit

34    (maximum)

Additional Tax

-

 

 

Total Tax Paid

45 (30 CIT + 15 WT on Interest )

Effective Tax Rate

22.5% (45    out of 200)

     

In addition,  the US taxation of the India Cos profits may be deferred because such profits  are kept at the Singapore Co / Mauritius Co., and not repatriated to the USA  Co. This is on the assumption that the requirements of the controlled foreign  corporation (CFC) rules of Subpart F of the US Internal Revenue Code and the  anti-deferral provisions are satisfied by the USA Co. The USA Co, via the  Singapore Co / Mauritius, can utilise the repatriated profits of the India Co.  to inject additional investment in the Asia Pacific projects without suffering  US taxes.

The USA Co.  could also invest in the other jurisdictions of Asia Pacific Region (like China  Co, Vietnam Co). This structure allows the cash flow routed from the Indian Co.  to the company like China Co. or Vietnam Co. through Singapore Holding Co /  Mauritius Holding Co. without suffering US taxes.

   

Where the  Singapore Co plans to dispose off the India Co, any gains derived by the  Singapore Co from such disposal would not be subject to tax in India under  Double Taxation Avoidance Agreement between India & Singapore and Singapore  Tax Laws.

         

Based on the  understanding and your future business plan, we can also find various tax  efficient structures for your Group.

Conclusion :  
In our view, maintaining Intermediary Holding  Company in Singapore / Mauritius is an appropriate tax solution, for operations  in India and other ASEAN Countries.

We at India Law Offices can provide a  comprehensive bouquet of taxation and structuring advice aligning the client’s  growth trajectory with the regulatory play field.

We understand the complexities of the taxation  and regulatory environments and have deep knowledge of foreign jurisdictions  too, which equips us with the adequate tools to provide cutting-edge and world-class  solutions to our clients for onshore, offshore and hybrid structures. As a  committed tax advisor to our clients, we welcome any opportunities to discuss  the relevance of the above case to your business.

 

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