1. Doing Business with European Union Narayan Mehta Feb 3rd 2006

2. 2 Road map Indian Investments in EU – some statistics EU investments in India Emerging opportunities Entry Vehicles – LO / Branch / Subsidiary Tax & regulatory overview Case studies MFN Clause Approach & caution points About SKP

3. 3 Investments from India to EU EU is a major destination for Indian investors - approx. 40 % of Indian overseas investment flows into Europe, as compared to 20 % to the USA India's FDI inflows into the EU have been increasing and amounted to 600 million in 2003 (140 mn in 2002). EU investment has mainly taken place in the power/energy telecommunications and transport sectors. UK has emerged as the No ! destination for Indian Companies setting up in the EU, with investment increasing by nearly 30 percent during the 2004-5 fiscal year During 2004 EU-India trade increased by 17% and has increased with an annual average of 6% between 2000 and 2004.

4. 4 Some of the Indian companies in EU

5. 5 EU Investments in India From August 91 to Sept 05 -EU countries accounted for 21.08% of total FDI Top 10 EU countries accounted for 20.54% of total FDI Top 10 EU countries accounted for 97.45% of total investments from the EU Top 10 EU investors From August 91 to Sept 05 CountryUS$ bn Netherlands1.95 UK1.90 Germany1.32 France0.77 Sweden0.472 Italy0.467 Denmark0.15 Belgium0.14 Cyprus0.084 Finland0.043

6. 6 Investments from India to EU - Old From August 91 to Sept 05- Top 10 EU investors % of total investments from EU countries to total FDI- Growth rate over previous year i.e. Jan-Dec 2004 - % of total investments from TOP 10 EU countries to total FDI - Growth rate over previous year i.e. Jan-Dec 2004 - % of total investments from TOP 10 EU countries to total investments from the EU - Growth rate over previous year i.e. Jan-Dec 2004 - CountryUS$ bn Netherlands1.95 UK1.90 Germany1.32 France0.77 Sweden0.47 Italy0.46 Denmark0.15 Belgium0.14 Cyprus0.084 Finland0.043

7. 7 Emerging opportunities - Sectors Science & Technology Infrastructure Agriculture Industry Business Process Outsourcing (Eastern Europe)

8. 8 Entry strategies

9. 9 Liaison/ representative offices Useful to test the markets Purchasing offices, collecting information, etc. Wider range of activities could be carried out through Coordination centers Generally taxed @ 5-10% of expenses

10. 10 Indian Co EU branch Secondment of staff to branch and execution of the contract off-shore and onsite …………………………………………………………………………... India EU Marketing in EU Project mgt & sales support Principal contract for software development EU custome r Branch

11. 11 Branch Office For initial expenditure (cum limits for all offices) 2% of 2 yr average annual sales For recurring expenditure 1% of 2 yr average annual sales No limits in case of EEFC a/c & STPs In case of IT Cos - 100% of offsite billing & 30% of onsite billing to be repatriated to India

12. 12 Indian Co EU WOS EU customer Contract for outsourcing Secondment of staff to subsidiary and execution of the contract off-shore and onsite Principal contract for software development …………………………………………………………………………... India EU Consideration Marketing in EU Project mgt & sales support Consideration Wholly Owned Subsidiary

13. 13 Approval from Authorized Dealer No monetary limit on investment by Indian Cos Equity, debt and guarantees Subject to 200% of net worth of parent / sub as per last audited balance sheet Not applicable in case proceeds of EEFC A/c & ADR / GDR are used Capitalization of goods, services allowed

14. 14 Approval from Authorized Dealer Investment in bonafide business activity Investment through hold co. also covered! Step down investments also under the automatic route Share valn for investment in existing company By overseas Merchant / Investment Banker for investment above US $ 5 mn By a CA / CPA Special rules apply for investments in Financial Services Sector Co

15. 15 Approval from Authorized Dealer Even qualification shares can now be acquired by an individual director sub to certain conditions! Recent liberalisations include partnership firms as well! Individuals investments allowed up to US $ 25,000

16. 16 Non automatic route - RBI approval Applies to all cases that do not fulfill automatic route conditions Determining factors: Prima facie viability of project Contribution to external trade & other benefits Financial position & track record of Indian & foreign party Expertise & experience

17. 17 Branch v/s Subsidiary Branch Simplicity of formation and administration Indian Cos assets exposed to foreign liability Payments of Royalties, Interest by Branch to HO not deductible for tax purposes Subsidiary Enjoys local credence and patronage Sub - stock options possible, more autonomy Sub - can form branches elsewhere Tax Deductible

18. 18 Branch v/s Subsidiary Branch Foreign clients may not be comfortable in signing contracts with branch Restrictions on borrowing Reporting requirements Subsidiary Possible to defer Indian tax liability by not declaring dividends

19. European holding companies - a useful base for global expansion

20. 20 Levels of international tax planning India Corporate Tax Withholding tax on distributions * Royalty / FTS / Interest / Div etc Income*Equity / Debt EU country Indian Corp tax on foreign income

21. 21 Objectives To shelter profits of EU co. from Indian tax To reduce w.tax on dividends in EU country To reduce / defer Indian tax on foreign dividends To reduce / defer tax in India on capital gains on sale of shares in WOS Used as an extraction base company for management charges, admin fees, etc. Other objectives: accumulating profits in stronger currency use of Bilateral Investment Protection Treaty EU India X Co.

22. 22 Selecting a holding company site Tax rate Tax exemption for foreign dividends and capital gains Can funds be parked? Exchange control Political stability Tax treaty network Any withholding taxes? Anti-treaty shopping regime

23. 23 European holding company - a comparison

24. 24 MFN Clause

25. 25 MFN Clause- India- Netherlands Treaty

26. 26 MFN Clause- India- Belgium Treaty

27. 27 MFN Clause- India- France Treaty

28. 28 MFN Clause- India- Sweden Treaty

29. 29 MFN Clause- India- Spain Treaty

30. Case studies

31. 31 Acquisition – equity swap Indian Co Indian Co UK Co UK Share holders Indian Share holders 100%

32. 32 Acquisition – equity swap 100% Indian Co Indian Co UK Co 49% equity UK shareholders Exempt Capital Gains Indian shareholders 51% equity

33. 33 Acquisition – equity swap Valuations –coordination between UK & Indian valuers FIPB approval RBI approvals after FIPB permission Rollover relief for capital gains available to UK shareholders!

34. 34 Outbound investments into EU / Non- EU countries Indian co establishing subs in Mauritius, HK, UK, Philippines & Thailand – thru direct holding If held directly – the Indian tax rate on dividends was 35%

35. 35 One of the options – OHQ structure Indian co Sing OHQ Philip co UK co Thai co Neth co HK co Mau co

36. 36 Tax effect ! Tax rate on divs from Mauritius & HK dropped to 9% from 35% Tax rate on other divs routed via Netherlands dropped to 15% from 35% This model could be used for large Indian software cos

37. 37 To conclude Spending more time at the drawing board saves costs!! Tying up commercial, tax and non-tax considerations in selection of branch v/s subsidiary Changing legislation Treaty interpretations – can be varied Dont leave anything open to interpretation Intermediate entity must have substance Anti-avoidance rules

38. 38 To conclude Billing methodology especially for IT companies Planning employee secondment Formulating a transfer pricing policy Based on a functional analysis Considering EU and Indian regulations Needs coordination with local tax advisers

39. 39 Beyond just advice, we provide comprehensive solutions... Mumbai Bangalore Pune Hyderabad New Delhi Coimbatore Chennai SKP Outsourcing Single Window Service International Tax & Transfer Pricing Business Advisory & Assurance Accounting & Audit Domestic Tax Outbound Consulting About SKP

40. We are SKP Established in 1962 Today, combines specialist services of 4 entities Sudit K Parekh & Co – An accounting firm with specialized expertise in manufacturing, banking and financial services, information technology, health care and poultry businesses SKP Crossborder Consulting Pvt Ltd – Multi-disciplinary consulting company providing turnkey business setups, outbound investments, international tax, joint ventures and acquisitions, transfer pricing and international contract structuring SKP e-Solutions Pvt Ltd - Provides seamless outsourcing solutions in finance and accounting, tax returns, payroll etc SKP Astral Consulting Pvt Ltd - Dedicated exclusively to management assurance and information technology related services

41. We are SKP 8 practice areas 180 people across 8 locations in India 10 partners and 5 directors 130 international clients from 25 countries as well as several large companies / MNCs in India A large network of Over 100 member accounting, business consulting and tax advisory firms in 50+ countries across 250 cities in the world

42. 42 Contact Narayan Mehta Tel: +91 22 2282 1141 Mobile: +91 98205 44495 E-Mail: narayan.mehta@skparekh.com Thank You