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 Legal & regulatory framework Identifying and delivering synergies Tax regimes & treaties Business Dynamics Business Environment Cultural Issues Accounting treatment

Cross border transactions Exit considerations Cash repatriation Debt Structuring Income flows and their taxability Entry Strategy Financing options 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 Purchase Target Structure Acquisition Structure Parent Company Holding Company Target Company Parent Company Holding Company Target Company Acquirer Acquisition Co. Share Purchas e 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 streamsPrinciples 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 Co UK Acquirer NCo I Co CCo1 CCo2 Netherlands Cayman Island India Issue Revenue Authorities contend that this transfer is taxable in India since the “controlling interest” in Indian Asset is transferred Mauritius Co Mauritius 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 ?

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