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Outbound Investments structuring

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Title: Outbound Investments structuring


1
Outbound Investments structuring related
issues
  • Western Region Chapter
  • International Fiscal Association - India Branch

Saturday, January 13, 2007
2
1
Introduction
2
Entity Structure Planning
3
Contents
International Acquisition Structuring
4
International Holding Structures
5
Post Acquisition Structuring
6
Way forward
3
Introduction
4
Recent trends in outbound investments
  • Indian companies increasingly focusing on
    outbound investments, fuelled by a strong economy
    and liberal exchange control regime
  • ODI will exceed FDI FIRST TIME!!! News reports
  • Indian Companies adopting acquisition-led growth
    strategy - Cross-border (outbound) Mergers
    Acquisitions on the rise
  • Value of overseas acquisitions by Indian firms
  • 2006 US 18.80 billion (173 deals)
  • 2005 US 7.64 billion (156 deals)
  • 2004 US 1.97 billion (73 deals)
  • Some recently concluded big ticket deals

News on other proposed big ticket buys
5
Foreign Country Planning
India Planning
  • Complex international tax environment in U.S./
    Europe
  • Generally considered high-tax jurisdictions
  • Well developed/ codified anti-avoidance rules
  • International tax environment in most Asian
    countries still evolving
  • Local practices can differ from law
  • Aggressive enforcement
  • Increased tax/ transfer pricing risks as Indian
    companies globalize operations
  • India tax-deferral planning
  • Achieving tax-efficient circulation of cash
    within foreign structure
  • Repatriation planning for mitigating India tax
    costs
  • Foreign Tax Credit Issues
  • Phase-out of export related (non-SEZ) incentives

Key Considerations
Outbound Structuring
  • Entity Structure Planning
  • Choice of entity for foreign operations
  • Structuring of International Acquisitions
  • Asset Purchase v Share Purchase
  • Acquisition Financing
  • International Holding Structures
  • Direct Holding v Use of Intermediate Holding
  • Choice of jurisdiction for Holding Company
  • Post-acquisition Structuring
  • Legal business model integration of Target Group

6
Entity Structure Planning
7
Choice of Entity Structures
Incorporated Entity
Branch
  • Taxation in India deferred until repatriation
  • Possibility of economic double taxation on
    repatriation
  • Losses can be consolidated but inability to defer
    India tax
  • Income attribution issues

Hybrid Entity
  • Can combine benefits of corporate form with
    flexibility of partnerships
  • Opportunities for tax arbitrage on account of
    conflict in classification

8
International Acquisition Structuring
9
Planning for International Acquisitions
Basic Objectives
Achieve tax-free step-up for underlying assets
Tax efficient acquisition financing/ deduction
for borrowing costs
Acquisition Structuring Share Purchase vs.
Asset Purchase
Acquisition Financing
  • Obtaining step-up in asset value
  • Preservation of tax attributes of Target (NOL,
    Business Credits, Foreign Tax Credits etc.)
  • Taxation of Vendor
  • Migration of Intangibles

10
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11
Intangible Migration Structure
  • Likely Benefits
  • Profit extraction
  • Possibility of avoiding withholding tax on
    royalty
  • Deductible expense for Acquisition Company
  • Royalty may be tax-exempt in IP Holding Company
  • Tax deferral in India
  • No India tax until repatriation from IP Holding
    Company

Possible Structures
Intangible Asset Sale
IP Holding Co.
Target Company
License
Royalty
Tangible Asset Sale
Acquisition Co.
12
Acquisition Financing
  • Leveraged v Non-leveraged Acquisition
  • Source country tax base erosion
  • Offset of financing cost against Targets
    operating income
  • Minimize tax cost on interest income
  • Treaty planning for minimizing source country
    interest withholding tax
  • Possibility of achieving tax deferral in India on
    interest income
  • Use of leveraged Acquisition SPV for acquiring
    Target Co

13
Leveraged Acquisition Structure
  • Acquisition Company set-up in Target Country
  • Can also be located in country which permits
    cross-border fiscal unity
  • Acquisition Company thinly capitalized by debt
  • Financing company located in favorable
    jurisdiction
  • Acquisition Company uses debt for acquiring
    shares in Target Company
  • Acquisition Company and Target Company file for
    fiscal unity

Debt financing
Interest

14
International Holding Structures
15
Basic tax considerations
  • Tax treaty network with home and target
    countries(Mauritius, Netherlands, Singapore,
    Switzerland)
  • No / low corporate tax rate(Hungary, Mauritius,
    Cyprus, Singapore, Hong Kong)
  • No tax on capital gains(Mauritius, Cyprus, UAE,
    Bahamas, Bermuda, Singapore)
  • Participation exemption(Netherlands, Germany,
    Spain, Austria)
  • No / low dividend withholding taxes(Mauritius,
    Hong Kong, Cyprus)
  • Favorable tax credit regime
  • Tax sparing - Mauritius, Malaysia, Singapore
  • Underlying taxes - Mauritius, Singapore
  • Not tainted
  • Possibility of obtaining Advance Rulings
  • (Netherlands, Switzerland)

16
Some popular holding company jurisdictions
  • SINGAPORE
  • SWITZERLAND
  • NETHERLANDS
  • BELGIUM
  • DUBAI
  • LUXEMBOURG
  • MAURITIUS

17
Proposed structures Cypriot Holding / Finance
Company
Investor country
Indian Co
Dividend
Cyprus Holding / Finance Co
Cyprus
Equity
No withholding taxes No taxation on
dividends capital gains No capital tax
10 tax on finance income
Dividend
Interest
Loan
EU Opco
No withholding tax on interest payments No/5
withholding tax on dividends payments Interest
expenses tax deductible
EU Opco
EU, Russia and CIS Op Cos
Source country
18
Possible Structures HK / Belgium Structure
  • Favorable treaty network of Belgium
  • EU Parent/ Subsidiary Directive
  • Can help in reducing source-country withholding
  • Participation exemption regime in Belgium
  • New treaty between Belgium HK
  • Nil WHT on dividends
  • No tax/ WHT in HK on dividends

19
Issues to consider
  • CFC regulations presently in over 20 countries
  • Traditional holding company jurisdictions
    typically have low tax regimes
  • Checks to be undertaken
  • Test of control to qualify as a CFC
  • Income streams specified
  • Target countries identified
  • EU Parent-Subsidiary directive
  • Transfer pricing regulations
  • Pricing to avoid economic double taxation
  • Taxability of interest spreads, management fees,
    royalty, FTS
  • Safe harbor provisions
  • Thin capitalization rules
  • Debt-equity ratio permissible
  • Arms length test
  • Availability of advance rulings

20
Issues to consider
  • Transition from current structure to alternative
    structure
  • Potential capital gains tax exposure
  • Need to consider country-specific planning
    strategies
  • Anti-avoidance/ treaty shopping rules in
    operating countries
  • LOB article in US treaties could impact viability
    of structure for US holdings
  • Need to review qualifying conditions for
    participation exemption/ EU Directives
  • Migration of company / tax-residence

21
Post-Acquisition Structuring
22
Post-Acquisition Structuring
Basic Objectives
Tax-effective Supply Chain structuring
Ease of cross-border cash flows
Achieving Global Effective Tax Rate GETR
optimization
  • Optimizing India tax incentives for exports
  • Minimizing foreign country tax costs
  • Enhancing shareholder value
  • Tax planning opportunities from redesign of
    business model
  • Integrates tax planning into business change
    initiatives
  • Review of operating structure of acquired
    business
  • Alignment of business model with strategic
    objectives
  • Designing a tax-effective supply chain structure
    for achieving GETR optimization, increasing
    after-tax cash flow and enhancing shareholder
    value
  • Integration of Supply Chain structure with
    Investment Holding, Financing and Intangible
    Ownership structure

23
Key tax issues
  • Conversion/ Migration related issues
  • Starting point for tax authorities
  • Gap between current and future local profit
    levels
  • Points challenged by tax authorities
  • Lack of commercial purpose/ substance in business
    change
  • Conduct of parties not consistent with
    agreements/ documentation
  • Transfer of Intangibles (patents, know-how, brand
    names, trademarks etc.) upon conversion and
    valuation
  • Deemed migration of goodwill upon conversion

24
Key tax issues
  • PE Exposure
  • Appropriate structuring of arrangement (including
    movement of personnel) to shield from PE exposure
  • Potential PE risk under Toller/ Commissionaire
    structures in some countries
  • Transfer Pricing
  • Appropriate documentation of allocation of
    functions/ risks to support lower income
    allocation to operating entities
  • Intangible valuation
  • Indirect Tax/ VAT
  • Not optimizing indirect taxes may reduce or
    negate corporate tax benefits

25
Way forward
26
Way forward
  • Fiscal incentives for outbound investments
  • Reduced taxability of foreign dividends
  • Introduction of underlying tax credits
  • Unilateral credits
  • Introduction of CFC norms to avoid abuse
  • Other suggestions?

27
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28
Thank you
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