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:
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.
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:
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:
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.
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.
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.