1. 1 Structuring of Outbound Investments By T.P. Ostwal Sharad Jain International Fiscal Association-WIRC Residential Refresher Course:8 th -11 th April,2006

2. 11 th April,2006 ©T..P. Ostwal And Sharad Jain2 Scope of presentation Impact of Globalization of Indian Economy Key drivers for overseas investments Indian regulatory provisions: Exchange Control Regime Income Tax Regime Some Concepts in International Structuring Case Studies Possible approaches to case specific concerns

3. 11 th April,2006 ©T..P. Ostwal And Sharad Jain3 Economic growth: Inbound investment FDI Portfolio Outbound investment Exploring foreign markets Indian Multinational Enterprises ‘IMNEs’ Medium and Small enterprises Liberalized exchange control regulations Impact of Globalization of Indian Economy…

4. 11 th April,2006 ©T..P. Ostwal And Sharad Jain4 Moving up in value chain Inorganic growth, expansion and diversification Mitigation of geographical risk Global reach Foreign regulatory requirements Overseas listing Dynamic tax regime Tax friendly future exit Hedge against foreign exchange fluctuation and spreading of risk Key drivers…

5. 11 th April,2006 ©T..P. Ostwal And Sharad Jain5 Exchange control Regime (in brief’): Investor categories: Corporates – upto 200% of net worth Partnerships / Proprietorships Individuals – US$ 25000 scheme Permitted Financing: Equity Debt Guarantee Special Purpose Vehicles allowed Automatic approval for investment Automatic approval for divestment / transfer Liberalized regime – setting up of overseas branch / offices Snapshot of Indian Regulatory Environment…

6. 11 th April,2006 ©T..P. Ostwal And Sharad Jain6 Income Tax Regime Taxation of foreign source investment income Classical System of taxation of foreign dividends Provisions related to ‘Deemed Dividend’ Capital gains on divestment Transfer pricing regulations Phasing out of tax exemptions for exports No CFC regulations No detailed regulations on Foreign Tax Credits Extensive tax treaty network …Snapshot of Indian Regulatory Environment Compulsions for businesses to structure overseas investments in tax efficient manner

7. 11 th April,2006 ©T..P. Ostwal And Sharad Jain7 Structuring overseas investment is not just offering tax efficient shareholding structure, it also involves structuring of incidental transactions and lot of decision making- Forms of overseas investment: Sole ownership or Joint Venture Acquisition / Merger Vs. Green field project Selection of investment vehicle: Resident company ?? Non – resident company (branch or establishment)?? ‘Hybrid Entities’ Third Country Holding Company?? Financing investment: Leveraged buyouts Internal accruals About overseas investment structuring…:

8. 11 th April,2006 ©T..P. Ostwal And Sharad Jain8 Operational Planning: Effective utilization of start up losses Technology transfers Equipment leasing Additional financing Repatriation of profits Liquidations Planning for deputation or secondment of employees Tax planning for employees Transfer pricing planning for intra-group transactions. … About overseas investment structuring: Need to offer customized solution Possibility of more than one alternative structure

9. 11 th April,2006 ©T..P. Ostwal And Sharad Jain9 EU Directives: EU Parent-Subsidiary Directive EU Interest and Royalty Directive Participation Exemption Underlying tax credit Multilayer underlying tax credit Mixer Companies – for Foreign Tax Credit Full tax credit Vs. Source by source tax credit Group Taxation Regime Group relief regime Thin capitalization rules Capital duty Net worth tax CFC Regulations Limitation of Benefits (‘LOB’) Territorial Tax Systems Vs. Worldwide Tax System Some Concepts

10. 11 th April,2006 ©T..P. Ostwal And Sharad Jain10 General Aspects (Non Tax Factors): Objective of investment Nature of overseas operations Geographic location and connectivity Local restrictions [host country FDI norms] Political, economic and legal stability Cost Competitiveness Minimum share capital requirement Exchange control regulations Important aspects for consideration in outbound structuring:

11. 11 th April,2006 ©T..P. Ostwal And Sharad Jain11 Tax Factors: Host Country Tax regime - tax rates and availability of tax incentives Tax sparing Existence of transfer pricing rules Withholding taxes Availability of group taxation scheme Existence of thin capitalizations rules Availability of advance rulings / APAs Existence of General Anti-Avoidance Rules Tax havens rules Taxation aspects specific to Holding Companies Participation exemption Taxation of Capital Gains Capital Duty (stamp duty) Controlled Foreign Corporation Regulations (CFC) Tax Treaty Network …Important aspects for consideration in outbound structuring:

12. 11 th April,2006 ©T..P. Ostwal And Sharad Jain12 Case Study– 1

13. 11 th April,2006 ©T..P. Ostwal And Sharad Jain13 Case Study # 1: Facts Facts: 1.X Ltd, an Indian company, engaged in home appliance business 2.Proposes to set up overseas manufacturing operations in UK, Germany and France through WOS. 3.IPRs – manufacturing and marketing – important aspects of business, spends substantial amount in R&D activities and brand promotion. 4.Initial manufacturing license from India for one product 5.Development of future IPRs for overseas operations. Issues: Structuring for investment IPR holding

14. 11 th April,2006 ©T..P. Ostwal And Sharad Jain14 …Case Study # 1: Investment Holding Structure French Branch German Branch Option -1 X Ltd (India) UK Branch French Sub German Sub Option -2 X Ltd (India) UK Sub. 100%

15. 11 th April,2006 ©T..P. Ostwal And Sharad Jain15 …Case Study # 1: Investment Holding Structure French Sub German Sub Option -3 X Ltd (India) UK Sub. 100% IHC (Cyprus/Lux/NL) 100% French Sub German Sub Option -4 X Ltd (India) UK Sub. 100% IHC (Mauritius) IHC (Cyprus)

16. 11 th April,2006 ©T..P. Ostwal And Sharad Jain16 …Case Study # 1: Investment Holding Structure French Sub German Sub Option -5 X Ltd (India) UK Sub. 100% IHC (Greece)

17. 11 th April,2006 ©T..P. Ostwal And Sharad Jain17 …Case Study # 1: IPR Holding-existing IPRs French Sub German Sub X Ltd (India) UK Sub. IHC-IPR Holding (Cyprus) IPR for Existing Product Royalty Exclusive License for Overseas Sub License

18. 11 th April,2006 ©T..P. Ostwal And Sharad Jain18 …Case Study # 1: IPR Holding-New IPRs French Sub German Sub X Ltd (India) UK Sub. IHC-IPR Holding (Cyprus) License Royalty

19. 11 th April,2006 ©T..P. Ostwal And Sharad Jain19 Case Study– 2

20. 11 th April,2006 ©T..P. Ostwal And Sharad Jain20 Case Study # 2: Facts Facts: 1.A Ltd, Indian company, engaged in manufacturing business 2.Proposes to set up overseas distribution and trading operations in European Region, Middle East Region and Asia Pacific Region through WOS. 3.Manufacturing operations will be exclusively located in India while overseas distribution is to be done through regional trading company. 4.Overseas distribution operations will have high profitability. 5.Fund needed in future for further acquisitions or expansion. 6.Possibility of divestment to local partners also exist. 7.Issues: 1.Structuring for tax efficient overseas investment plan 2.Suggestions for structuring of commercial operations 3.Tax efficient financing of WOSs.

21. 11 th April,2006 ©T..P. Ostwal And Sharad Jain21 …Case Study # 2: Investment Holding Structure UAE Branch Sing/HK Branch Option -1 X Ltd (India) Ireland Branch UAE Sub Sing/Mau/HK Sub Option -2 Ireland Sub. 100% IHC (Cyprus) X Ltd (India) IHC (Cyprus) European Region Middle East Region Asia Pacific Region 100%

22. 11 th April,2006 ©T..P. Ostwal And Sharad Jain22 Case Study # 2: Financing options Sr. No. ComparatorsEquityPreference shares Debt 1.Repatriation of profits to India repayment of original investment Less, unless share buy back Moderate. Pre. Shares can be redeemed High Loan can be repaid 2.Tax efficiencyDeemed dividend in India. @33.66% No dividend WHT in Cyprus Deemed tax credit of 10%?? Dividend taxable. @33.66% No dividend WHT in Cyprus Deemed tax credit of 10%?? Interest taxable in India @33.66% No Cyprus WHT on interest ALP interest to be charged. Deemed tax credit of 10% in India?? 3.Thin capitalization rulesNo thin capitalization rules in Cyprus

23. 11 th April,2006 ©T..P. Ostwal And Sharad Jain23 Case Study # 2: Commercial Model X Ltd (India) Overseas Branch / Sub (Regional Centers) independent distributors (Country Specific) Rep Office Customer

24. 11 th April,2006 ©T..P. Ostwal And Sharad Jain24 Case Study– 3

25. 11 th April,2006 ©T..P. Ostwal And Sharad Jain25 Case Study # 3: Facts Facts: 1.GBL an Indian Company, has business operation in India and Netherlands. 2.Netherlands operation are presently conducted through NL Branch. 3.Plans to acquire NL and US Targets. 4.Acquisition is to be funded by international borrowings through syndicated loan. 5.International Lenders located in HongKong, BVI, USA, Gibraltar, UK and Sweden. 6.Loan to be disbursed by UK Syndicator in Single tranche, Interest is to be paid to UK Syndicator who in turn will disburse interest to respective lender. Issues: 1.Should GBL hold US Target and NL Target directly? 2.Should it go for global holding company structure? 3.Structuring of International Borrowings?

26. 11 th April,2006 ©T..P. Ostwal And Sharad Jain26 Case Study # 3: Investment Holding Structure US Target GBL (India) NL Target International Lenders Loan Interest Option -1

27. 11 th April,2006 ©T..P. Ostwal And Sharad Jain27 Case Study # 3: Investment Holding Structure GBL (India) IHC [NL] NL Target US Target GHC [Singapore] Fiscal Unity Option -2 International Lenders Interest Loan

28. 11 th April,2006 ©T..P. Ostwal And Sharad Jain28 Case Study– 4

29. 11 th April,2006 ©T..P. Ostwal And Sharad Jain29 Case Study # 4: Facts Facts: X Ltd, an Indian Company, engaged in the business of manufacturing and selling of garments. X Ltd proposes to establish its manufacturing facilities in Sri Lanka for worldwide exports. Garments manufactured in Sri Lanka will be exported to various countries worldwide. Sri Lankan operations will be stand alone operations and will have substantial value additions and the expected profitability is very high. Issues: Whether Sri Lankan Operations should be established either through a branch office or through a subsidiary company?

30. 11 th April,2006 ©T..P. Ostwal And Sharad Jain30 Case Study # 4: Branch vs Subsidiary ComparatorBranchSubsidiary Srilankan corporate tax rate 30% Tax on profit repatriations10% [Branch Profit Remittance Tax] 10% [Dividend WHT] Availability of Foreign tax credit [India – Srilanka Tax Treaty] Yes Tax sparing also available Yes No underlying tax credit No tax sparing Tax deductibilityInterest on financing cannot be claimed Management and other service charges cannot be claimed. Interest and other management charges can be claimed with markup. RepatriabilityPermitted Applicability of Indian TPNoYes Exposure of HO assetsYesNo Capital Gain Tax LiabilityNoYes

31. 11 th April,2006 ©T..P. Ostwal And Sharad Jain31 Case Study # 4: Branch vs Subsidiary SL Branch X Ltd (India) SL Sub X Ltd (India) Option -1 Option -2

32. 11 th April,2006 ©T..P. Ostwal And Sharad Jain32 Case Study– 5

33. 11 th April,2006 ©T..P. Ostwal And Sharad Jain33 Case Study # 5: Facts Facts: B Ltd, an Indian Enterprise, is considering establishing its wholly owned subsidiaries in various foreign countries in Asia Pacific. Planning to establish a global holding company in a tax friendly foreign jurisdiction to hold investments in foreign subsidiaries and to provide management and headquarter related services also to these foreign subsidiaries. Preference is for a country in Asia. Profits are to be repatriated to India. Issues: Ideal Jurisdiction – Singapore/Mauritius/Hong Kong?

34. 11 th April,2006 ©T..P. Ostwal And Sharad Jain34 Case Study # 5: Optimization of Foreign Tax Credit ComparatorSingaporeMauritiusHong Kong Corporate tax rate20%25% / 15%17.5% Capital Gain TaxTax exempt Taxation of foreign dividend income Tax exemptTaxableTax exempt Underlying tax credit under national law Yes Not Applicable Foreign tax credit layers Single TierUnlimitedNot Applicable Method of creditSource by sourceFull tax creditNot Applicable Underlying tax credit in treaty with India? Yes [Art 25(2)]Yes [Art 23(2)(b)]Not Applicable

35. 11 th April,2006 ©T..P. Ostwal And Sharad Jain35 Case Study # 5: Optimization of Foreign Tax Credit B Ltd [India] IHC [Mauritius] Sub CSub BSub A

36. 11 th April,2006 ©T..P. Ostwal And Sharad Jain36 Case Study– 6

37. 11 th April,2006 ©T..P. Ostwal And Sharad Jain37 Case Study # 6: Facts Facts: 1.R Retail Ltd, an Indian retail chain company, plans to setup its retailing business operations in UK. 2.It intends to establish a wholly owned subsidiary in UK. 3.Apart from investments in working capital, UK operations will also need substantial funds for acquiring space for retail stores. 4.Repatriation of profits to India is desired. Issues: 1.Tax efficiency routes?? 2.Any other option??

38. 11 th April,2006 ©T..P. Ostwal And Sharad Jain38 Case Study # 6: Alternative Options R Ltd [India] IHC [Mauritius] R [UK] R [UK] R Ltd [India] IHC [Singapore] R [UK] Option -1 Option -2 Option -3

39. 11 th April,2006 ©T..P. Ostwal And Sharad Jain39 Case Study # 6: Alternative Options R Ltd [India] IHC 2 [NL] R [UK] IHC 1 [Singapore] R [UK] IHC [Greece] R Ltd [India] Option -4Option -5

40. 11 th April,2006 ©T..P. Ostwal And Sharad Jain40 Case Study # 6: Other Options If Startup losses then you may consider, following option: R [UK Branch] R Ltd (India)

41. 11 th April,2006 ©T..P. Ostwal And Sharad Jain41 Thank You