Inbound Investment Structuring

What is Inbound Investment Structuring?

Choice of Entity

Use of Holding Companies

Direct Investments in India

Foreign Investor > Indian Company Key Issues

• Capital gains on sale of shares are taxable in India
• Treaty Benefit in respect of capital gains is available only in selected countries
• Risk of double taxation due to conflicting source rules

For foreign companies investing in India, Mauritius has become like a Hub. Especially for portfolio investors who earn from portfolio investments in India in the form of capital gains, it is unavoidable to set up a holding company in Mauritius. Most of the countries do not levy a capital gain tax on non-residents investing in shares in their countries. However, if a foreign company holds shares in Indian Company it will end up paying 21% tax on long-term capital gain and 42% tax on the short-term capital gain. In most of the countries, the supreme rate is below 35%. Therefore, in case of short-term gains, the foreign company will not get the full credit for the taxes paid in India. Further, in case of FIIs and venture capital funds, most of the investors are pension plans, which are otherwise tax-exempt entities in their home countries. Therefore, they do not have taxable income to offset the tax paid in India. This is the reason many inbound investments have flown into India via Mauritius. A substantial amount of foreign direct investment has gone into IT and ITES industries.

Most of the companies set up for IT services and BPOs enjoy a tax holiday under section 10A/10B. It is very common for the founders to start the business with minimum paid-up capital, to take the companies to a reasonable maturity stage and invite private equity investors to invest in these companies. By virtue of provisions like S. 10A(9), often these companies lose the tax holiday at the time new investors join in. This is derogatory to the main objective of providing the tax incentive to these units set up in STPs for development of software industry and encouraging their expansions. Often, provisions like this compel foreign investors to induct holding companies so that they are neutral to changes in foreign law or internal restructuring.

The Regulatory environment in the relation to foreign investment has been steadily eased to make it investor friendly. The liberalization programs set up by the government aims at rapid and substantial growth of country’s economy and harmonious integration with the global economy

Key Services provided by us for Inbound Investment Structuring?

• Advise on Indian entrance approach and suggestions for gaining finest ownership/jurisdiction for investing in India
• Advising on entity restructuring by selecting the finest entry vehicle such as setting up a branch, subsidiary, LLP or a Joint Venture
• Provide the services of capital restructuring in terms of foreign exchange policies keeping repatriation in loop
• Assisting in the filing, obtaining necessary approvals including regulatory compliances from Reserve Bank of India, Foreign Investment Promotion Board, Government of India or any other regulatory authority.
• Assisting and finalizing from the perspective of the shareholder, joint venture agreements, any other business arrangements or agreements from the tax perspective
• Target Due Diligence