R. Kumar, B.Com. MBA (Finance)
1. Introduction:-
The current age of globalization can be distinguished from the previous one by the much higher mobility of capital than labor this increased mobility has been the result of technological changes. In the last one decade, India is emerging as a Global participator in various sectors of the economy especially in Information technology. Many corporate entities had made huge amount of investments word wide so as to tap the market globally.
In today’s competitive scenario where the control over sale price is almost not possible and the profit margins are under pressure the same require the constant review over the various business cost so as to keep in business. Among the different business cost, tax cost is the major factor which require considerable planning and analysis so as to reduce it to the minimum as possible.
2. Why to consider the Out bound Investment:-
Following are the key factors as to why the out bound investments are considered:
i) Respond to the Globalization of the market,
ii) To exploit the different tax benefits,
iii) To expand the business so as to make it competitive with International market,
iv) Brand building.
3. Selection of appropriate business structure for outbound investments:–
Selection of appropriate legal structure is the very first step for setting up the business operation overseas and requires careful analysis and evaluation of various business and tax consideration.
There are different types of outbound investment transactions such as formation of:
i) Wholly owned subsidiaries/ Joint ventures or
ii) Branches or
The following are some of the relevant Business & Tax consideration which is to be keeping in consideration while deciding upon the nature of structure to be setup overseas:
>Business consideration:-
i) Requirement of funds for expansion:– From the business expansion perspective formation of wholly owned subsidiary (WOS) is preferable as the WOS is capable of extracting the funds from the capital market in future if require.
ii) Further Investment:– A WOS facilitate the easy expansion by further investment in other countries which not viable in case of setting up a branch
iii) Market Parlance:- The setup of branch or WOS is also based on the market parlance as the clients in foreign country would feel more convenient to deal with the WOS which would be registered in that country jurisdiction as compared to the foreign branch of Indian company. Local company in foreign country generally provides more confidence as compare to foreign branch.
iv) Cost of formation & Discontinuance:- The cost of setting up a branch is more economical as compared to the setting up the WOS as the later would involve high compliance cost for example cost of Incorporation in case of WOS. Same ways in case of discontinuance the cost of closing down the branch would be less as compare to the liquidation of WOS which require follow up of long drawn procedure & consequently cost.
v) Liability:– This factor is of much importance as the liability of investing enterprise in case of setting up branch is unlimited as compare to the setting up the WOS from the liability point of view it would be advisable to setup WOS.
>Tax consideration;-
As already pointed out that among the various business cost the Cost of Tax is an important factor which requires the constant review so as to avail the maximum tax benefits and reduce the cost of tax to minimum as possible. There are some important factors which are to be considered
i) Tax on flow of Profits:– In case of WOS, the business profits are taxed in the hands of WOS and the after tax profits are distributed to the parent company in India in the form of dividend on which withholding tax is paid at the prescribed rate in the source country however of which tax credit is available to the Indian parent company against it’s Tax liability in India of it’s own business income and dividend income from WOS however in case parent company in India is incurring the losses in such a case there is no credit available of withholding tax paid on dividend distribution in the source country, which will result as additional cost in the form of tax to the company.
It will be important to note that there would be double taxation on the business income of WOS and the tax on the dividend received in India from WOS, as most of the treaties except Mauritius and Singapore does not provide for the underlying tax credit of tax paid by the WOS on it’s business profits out of which dividend is paid to the Indian parent, therefore the credit available is of withholding tax which has been paid in the foreign country on distribution of dividend.
In case of a branch, tax paid in the foreign country on the business income will be available as credit in India to the parent company under the Tax treaty with India. This would, therefore, avoid economic double taxation of the same income.
ii) Force of attraction rule:- The underlying principle of the ‘Force of Attraction’ rule, in its pure form, envisages that when an enterprise is said to have a permanent establishment (PE) in another country, it exposes itself to taxation the entire amount of income that it earns from carrying on activities in that other country, whether or not through that PE.
Normally, business profits are taxed in the country of residence except when the entity operates business in the other country with the help of a dependent agent or a permanent establishment. In such cases, income attributable to the permanent establishment is taxed in the country of source. The Contracting States will attribute to a permanent establishment the profits that it would have earned had it been an independent enterprise engaged in the same or similar activities under the same or similar circumstances.
As the name suggests, the force of attraction approach focuses on the actual economic connection between a particular item of income and the permanent establishment. Under the “force of attraction” approach, all domestic sourced income is attributed to the permanent establishment, irrespective of whether the relevant item of income is in fact economically connected with the activity of such a permanent establishment.
Article 5 of OECD & UN model conventions also provide for an inclusive definition of the term permanent establishment i.e. “it includes a place of management, a branch, an office, a factory, a workshop and …”
Sec. 92 F(iii) of income Tax Act, 1961 provides an inclusive definition of Permanent Establishment. The section says, “It includes fixed place of business through which the business of the enterprise is wholly or partly carried out.”
However the force of attraction rule does not apply to the WOS. Thus, to avoid this exposure, a WOS may be preferable
iii) Capital gains on transfer of assets:– This is an important factor that needs evaluation. There is general practice to transfer the assets between branch and its head office during the course of business operation as it would not result in the change of ownership there is no question as regards the capital gain tax however in the case of WOS the holding company and the WOS are considered as the separate legal entity, the transfer of assets shall give rise to the capital gain tax.
iv) Double dip benefit for losses:- Another important factor for deciding as to whether setup the branch or the WOS is the benefit of claiming the double deduction for losses incurred. If the business is carried out through the branch, it may facilitate an opportunity to claim double deduction for the losses. It has been seen that in startup phase operating through branch is more beneficial in the sense that the losses incurred by the foreign branch is allowed as deduction in the hands of Parent enterprise u/s 72 of Income tax act, 1961 at the same time such losses can also be carried forward by the branch for set off against future profits.
4. Key factors for Tax Planning in Outbound Investment:-
The following are the key factors to consider for tax planning in outbound investment
i) Underlying Tax Credit:- This is an important aspect to consider while planning for the outbound investment. The concept is related to the availability of credit in respect of tax paid in foreign country to Indian investor enterprise. Most of the Indian tax treaty does not provide for the underling tax credit in India in except Treaties with Mauritius/Singapore to a company which is resident of India owing less than 25% equity in the dividend paying company, then credit shall take into account, Mauritius/Singapore tax paid in respect of the profits out of which the dividend is paid.
It should be important to note that for availing the underlying tax credit under both tax treaties the entity should be a Company.
ii) Availability of Tax Credit:– Availing tax credit in respect of taxes paid in foreign countries is another important factor to consider for planning an outbound investment as the same income is taxed both in foreign country as well as in India. As per Indian Income tax Act, 1961 there are two sections which deal with the situation i.e. Section 90 the country with which India has tax treaty & Section 91 the country with which India does not have any tax treaty. The total amount of tax credit will be restricted to the tax liability in India on the same income.
iii) Tax Sparing:– Apart from normal tax credit and underlying tax credit, availability of credit for tax which would have been paid, but for certain exemption provided in the Income Tax Act have not actually paid is called as Tax sparing. Tax sparing is type of incentive given by the developing countries to attract foreign investors. Tax sparing is intended to promote economic development among developing nations by ensuring that tax incentives offered to foreign investors by these countries were not eroded through the tax treatment of the income from the advantaged activities in the investor’s country of residence.
5. Key Structure for Outbound Investment:-
There are broadly Two Key structures for outbound investment proposals
5.1 Direct Investment in Operating Jurisdiction (Foreign country), or
a) Through setting up a Branch
b) Through setting up a WOS
5.2 Investment through a holding company in an intermediate jurisdiction.
a) Through setting up a Branch in operating jurisdiction
b) Through setting up a WOS in operating jurisdiction
There are following tax implications, tax benefits opportunities and the concerned issues related to different structure/options with regards to outbound investments as mentioned above
5.1 (a) Direct Investment in Operating Jurisdiction through setting up a Branch
If the investing entity opts for setting up the branch for outbound investment, such branch shall be treated as Permanent establishment of the Indian enterprise and the profit of such branch shall be taxable as per the provisions of such jurisdiction under article 7 read with (r.w.) article 5 of the concerned treaty. However the tax so paid in the foreign jurisdiction shall be available as credit.
Recently a controversy had arisen as to whether the profit of foreign branch having taxed in the foreign jurisdiction can be taxed in India again?
The controversy so arises however clarified by the Judgments of Tribunal & Courts these are as follows:
a) In a case of Ayer Manis’s Rubber Estate’s case (46 ITD 429) the Madras bench in the context of India- Malaysia Treaty had held that income arising in Malaysia to Indian residents was not liable to tax in India.
b) The Tribunal also referred to the Madras High court decision in CIT vs. SRM Firm (208 ITR 400) holding that in view of the India- Malaysia Tax Treaty, income derived from the rubber estate in Malaysia could not be included in the total income of the assessee for taxation in India.
c) In case of CIT vs. Lakshmi Textile Exporters Ltd. Following observations were made:
“In the present case, the income arose in Sri Lanka and it is taxable only in Sri Lanka. The fact that it was not taxed in Sri Lanka would not give rise to taxing the same by the Indian Government…..”
From the above observation it is clear that in the context of India-Sri Lanka Tax treaty, income of the assessee was taxable only in Sri Lanka and not in India. Article 7 provides that business profits of an enterprise of a contracting state are taxable only in the state unless it carries on business in the other state through a PE situated therein. In such a situation, only so much of the profits as it attributable to that PE could be taxed in that other state. In this case, it was an accepted fact that the assessee had PE in Sri Lanka and therefore business profits were taxable therein. However, the Sri Lankan government had exempted the income of the assessee. In other words, though the assessee was liable to tax in Sri Lanka, no taxes were actually recovered from it. The High court observed that the fact that the Sri Lankan government exempted the income from tax would not make the income taxable in India under the Indian income tax act
On the basis of decided cases tax position in case of Branch setup shall be as follows:
| Particulars | Amount |
| Business income in Foreign country | 150000 |
| Less: Tax @ 20% assumed | (30000) |
| Net Income remitted to India | 120000 |
| No tax on branch profits remitted to India |
Tax position of Indian Investing enterprise
| Particulars | Amount |
| Income from foreign branch | 120000 |
| Less: Tax in India- Nil as per the above |
Mentioned decisions-Net Income120000
If the tax authorities in India do not accept the above tax computation supported by the above mentioned decisions then the tax computation shall be as follows:
Tax position in case of Branch setup
| Particulars | Amount |
| Business income in Foreign country | 150000 |
| Less: Tax @ 20% assumed | (30000) |
| Net Income remitted to India | 120000 |
| No tax on branch profits remitted to India |
Tax position of Indian Investing enterprise
| Particulars | Amount |
| Income from foreign branch | 120000 |
| Less: Tax in India @ 30 % on 150000 | (45000) |
| Credit for tax paid in foreign |
country 30000Balance tax payable 15000Net Income105000
If there is no tax treaty with the operating jurisdiction, then the tax liability will be governed by the domestic tax laws of that country subject to the credit available in India, as per section 91 of Income tax act 1961, in this context one more important concept emerge which is require to explain, that is Permanent establishment tax (PET). Few countries like France, US, Canada, etc. levy PET on actual remittance of the profits by the branch to its head office, the PET is tax which is levied under article 14 of the say India-US. However the PET is levied on the actual repartition of the profits whereas the tax in India is levied on in the hands of Indian company on accrual basis i.e. in the year in which profit is earned, this timing difference may create difficulties for the Indian investor to avail the credit for such tax paid in the contracting state. As per section 199 of the income tax act,1961 the credit for tax is available in the year in which income is taxable, hence there should be proper coordination between the profit earnings and there repatriation so that credit can be taken properly.
5.1 (b) Direct Investment in Operating Jurisdiction through setting up a WOS
i) Outbound investment is in a country with which Indian tax treaty provide for underlying tax credit in addition to credit for withholding tax on distribution of dividend
Cash flow of dividend and tax incidence for WOS
| Particulars | Amount |
| Business income in Foreign country | 150000 |
| Less: Tax @ 20% assumed | (30000) |
| Net dividend to India parent company | 120000 |
It is assumed that there is no withholding tax on distribution of dividend if the dividend paying company is tax payer
Tax position of Indian parent company
| Particulars | Amount |
| Dividend income from the foreign subsidiary | 120000 |
| Less: Tax in India @ 30 % on 120000 | (36000) |
| Underlying tax credit for foreign taxes | 30000 |
| Balance tax payable | (6000) |
| Net Income | 114000 |
ii) Outbound investment is in a country with which Indian tax treaty does not provide for underlying tax credit in addition to credit for withholding tax on distribution of dividend
Cash flow of dividend and tax incidence for WOS
| Particulars | Amount |
| Business income in Foreign country | 150000 |
| Less: Tax @ 20% assumed | (30000) |
| Net dividend to India parent company | 120000 |
It is assumed that there is no withholding tax on distribution of dividend if the dividend paying company is tax payer
Tax position of Indian parent company
| Particulars | Amount |
| Dividend income from the foreign subsidiary | 120000 |
| Less: Tax in India @ 30 % on 120000 | (36000) |
| Net Income | 84000 |
5.2 (a) Investment through a holding company in an intermediate jurisdiction and setting up a branch in operating jurisdiction
Cash flow of dividend and tax incidence
| Particulars | Amount |
| Business income in Foreign country(Branch) | 150000 |
| Less: Tax @ 20% assumed | (30000) |
| Net profit remitted to International holding |
Company say in Mauritius120000
International holding company (Mauritius)
| Particulars | Amount |
| Net income from foreign branch | 120000 |
| Less: Tax @ 15% on Rs.1,50,000 | (22500) |
| Credit for tax paid in foreign country(Branch) |
(restricted to Rs.22500) 22500Balance tax payable -Net dividend to India parent company120000
Indian Investing co.
| Particulars | Amount |
| Net income from International holding co. |
(Mauritius)120000Less: Tax @ 30% assumed (36000)Underlying tax credit under India-Mauritius
tax treaty* 22500Balance tax payable 13500Net Income 106500
* The underlying tax credit of Rs.22500 has been considered on the basis of the provision of the Article 23 (2)(b) of the India-Mauritius Treaty dealing with tax credit in India states that underlying tax credit should be available in respect of Mauritius tax payable by the company in respect of the profits out of which such dividend is paid.
5.2 (b) Investment through a holding company in an intermediate jurisdiction and setting up a WOS in operating jurisdiction
Cash flow of dividend and tax incidence
| Particulars | Amount |
| Business income in Foreign country(WOS) | 150000 |
| Less: Tax @ 20% assumed | (30000) |
| Net dividend remitted to International holding |
Company in Mauritius120000
International holding company (Mauritius)
| Particulars | Amount |
| Net income from foreign WOS | 120000 |
| Less: Tax @ 15% on Rs.1,20,000 | (18000) |
| Underlying tax credit for foreign taxes |
(It is assumed that tax treaty between
Mauritius & foreign country provide
for underlying tax credit otherwise it
would be nil) 18000Balance tax payable -Net dividend to India parent company120000
Indian Investing co.
| Particulars | Amount |
| Net income from International holding co. |
(Mauritius)120000Less: Tax @ 30% assumed (36000)Underlying tax credit under India-Mauritius
tax treaty* 18000Balance tax payable 18000Net Income 102000
* The underlying tax credit of Rs.18000 has been considered on the basis of the provision of the Article 23 (2)(b) of the India-Mauritius Treaty dealing with tax credit in India states that underlying tax credit should be available in respect of Mauritius tax payable by the company in respect of the profits out of which such dividend is paid.
6. Comparative analysis of outbound investment through setup of Branch or WOS under Direct investment plan and investment through International holding company
6.1 Through Direct Investment plan
| S No. | Particulars | WOS | Branch |
| 1 | Business Profits | 150000 | 150000 |
| 2 | Less: Tax @ 20% | (30000) | (30000) |
| 3 | Profit of Subsidiary/Branch | 120000 | 120000 |
| 4 | Tax on remittance/ withholding tax |
On dividends 0 05Revenue flow taxable in India 120000 1200006Tax Payable @ 30% (36000) (45000)7Credit for tax paid in Foreign country
(It is assumed that tax treaty between
India & foreign country does not provide
for underlying tax credit) 0 300008Tax payable in India (36000) (15000)9Net Income 84000 10500010Total Tax liability(2+8) 66000 45000
6.2 Through International holding company (IHC)
| S No. | Particulars | WOS setup |
Branch setup1Business Profits1500001500002Less: Tax @ 20% (30000) (30000)3Profit of Subsidiary/Branch120000 1200004Tax on remittance/ withholding tax
On dividends 0 05Net income to IHC from foreign WOS/branch1200001200006Less: Tax @ 15% on Rs.1,20,000/ 150000 (18000) (22500)7Underlying tax credit for foreign taxes
(It is assumed that tax treaty between
Mauritius & foreign country provide
for underlying tax credit otherwise it
would be nil) 18000 225008Balance tax payable – -9Net income from International holding co.
(Mauritius)12000012000010Less: Tax @ 30% assumed (36000) (36000)11Underlying tax credit under India-Mauritius tax treaty* 18000 2250012Balance tax payable 18000 1350013Net Income 102000 10650014Total Tax liability(2+12) 48000 43500
* The underlying tax credit of Rs.18000/22500 has been considered on the basis of the provision of the Article 23 (2)(b) of the India-Mauritius Treaty dealing with tax credit in India states that underlying tax credit should be available in respect of Mauritius tax payable by the company in respect of the profits out of which such dividend is paid.
On the basis of the above analysis it can be said that from tax perspective it would be better to setup the branch in foreign jurisdiction.
7. Transfer Pricing regulations:-
The term Transfer Pricing refers to pricing arrangements between associated entities and commonly applies to inter-company transfers of services and tangible / intangible properties, expenses or interest. An appropriate transfer pricing policy is one of the most important international tax tools in international business. With increase in cross border investments and due to global integration, transfer pricing assumes greater significance today. Stringent penalties, comprehensive contemporaneous documentation requirements and increased information exchange among different jurisdictions have made it absolutely imperative for corporate entities to find innovative transfer pricing solutions. For several Indian companies this is a new development, as transfer pricing regulations have been recently made mandatory in India with regard to any Indian company that has an international transaction with an associated enterprise.
Therefore, it would be necessary to ensure that the transactions/dealings between the parent and subsidiary are done at arm length price and by complying with the Transfer Pricing regulation to avoid any dispute/ litigation with tax authorities.
8. Objectives of setting up International holding company:-
There are certain reasons due to which it would not be beneficial to opt for direct investment in foreign jurisdiction these are:
i) Income received by the Indian company would be subject to high corporate tax at the rate in force,
ii) Dividend/ Interest may be subject to high withholding tax in the source country,
iii) Capital gains on sale of shares of subsidiary may be subject to high tax in the country where the subsidiary is located,
Benefits of setting up International holding company
i) Dividend, interest and capital gains income may be received with low/ nil withholding tax and accumulated in low tax jurisdiction,
ii) Overall group level taxation could be minimized by consolidated group losses,
iii) There is also a possibility of availing double dip losses,
iv) Debt borrowings at the holding company level could enable interest cost deduction from the overall tax perspective,
v) International holding company can act as borrowing and lending intermediary for the group,
vi) It is use full to manage adverse currency fluctuations and exchange controls,
vii) Helpful for centralized control over funds through treasury management etc.
9. Ideal location for setting up International holding company:-
Following factors are generally considered for selecting an ideal location for an IHC
i) Low/ Nil withholding tax on receipts- dividends, interest and capital gains,
ii) Low/Nil corporate tax on different incomes,
iii) Low/Nil withholding tax on their subsequent redistribution as such,
iv) Wide tax treaty network thereby reducing the withholding tax to minimum,
v) Availability for setting of past losses of Target company,
vi) Exchange control regulations,
vii) Currency strength,
viii) Financial and Banking facilities,
ix) Access to International capital markets,
x) Facility for easy transfer of funds,
xi) Availability of infrastructure for business operation.
10. Categorization of Income:-
Following could be types of Incomes in an outbound investment proposals using holding company structure
i) Dividend:– The Indian parent will receive dividend income from the holding company which will be liable to tax in India subject to credit for taxes withheld in the foreign country.
ii) Royalty:– The Indian investor may provide the Technical know how to the operating company in the foreign country and may derive income in the form of Royalty, the payment of royalty would be subject to withholding tax under the relevant tax treaty with India. Such royalty will be liable to tax in India in the hands of Indian investor entity subject to credit for taxes withheld in the foreign jurisdiction; such an expense shall be allowed as deduction to operating company in foreign country.
iii) Interest income:– The Indian investor may provide the loan to the operating company subject to approvals as required and earn interest income there from. The payment for interest by the operating company may be subject to withholding tax under the relevant tax treaty with India. Such interest shall be allowed as an expense in the hands of operating company and shall be deductible.
Here, it would be important to note that the Thin line capitalization may be kept in view, if applicable
Thin capitalization is a mechanism wherein funds are infused into a company in the form of loan rather than equity to avail of tax benefits. This would also ensure that the capital of the company is very small or thin.
A higher debt component in the capital structure — reflected by an exorbitantly high debt-equity ratio — enables companies to save on taxes since interest on loans is normally deductible for calculating taxable profits. This is in contrast to dividends which are not deductible.
iv) Fees for Technical Services (FTS): The Indian investor may provide the Technical services to the operating company in the foreign country and may derive income in the form of FTS, the payment of FTS would be subject to withholding tax under the relevant tax treaty with India. Such FTS will be liable to tax in India in the hands of Indian investor entity subject to credit for taxes withheld in the foreign jurisdiction; such an expense shall be allowed as deduction to operating company in foreign country.
v) Rental Income:– The Indian investor may provide the property on rent to the operating company subject to approvals as required and earn rental income there from. The payment for rent by the operating company may be subject to withholding tax under the relevant tax treaty with India. Such rent shall be allowed as an expense in the hands of operating company and shall be deductible.
11. Tax mechanism in case of Intermediate International holding company structure:
- Tax implication for the Operating Company: The operating company, say Luxembourg, would pay tax on its business profits in Luxembourg. The after tax profit could then be distributed to the parent holding company by way of dividend, subject to applicable withholding tax under the relevant Tax treaty.
- Tax implication for the intermediate International holding company: The income flow for the intermediate holding company would be in the form of dividend which would be derived from the operating company. After paying tax, if any, on such dividend income, the balance profits could either be distributed to the Investor Company or could be retained in this jurisdiction.
- Tax implication for Indian Investor Company: The Indian Investor Company would receive dividend income from the Intermediate holding company. The Indian company will pay tax on such dividend income and will be eligible for credit for withholding tax, if any, paid in the holding company jurisdiction.
12. Other Important aspects to be considered for Outbound investment from Tax perspective:-
There are some other important aspects which require to considered for deciding for the outbound investment proposals
i) Controlled Foreign Corporations (CFC) rules:-
The genesis of a CFC regulation lies in the fact that the government of a country can generally levy taxes on global income of only those companies that are incorporated in the country, or a company that is a resident of that country under the domestic tax laws. The right of government to levy tax on income of foreign companies is generally restricted to the income derived from the sources within its jurisdiction.
Conceptually, the purpose of enacting CFC regulations could be to shore up tax revenue collections, curb transfer of profits to low-tax foreign jurisdictions; and support existing anti avoidance legislations.
For instance, a company called Holdco Ltd, incorporated in country X, would be liable to tax on its global income under the domestic tax laws of such country; however a subsidiary of Holdco Ltd, for instance, ‘Subco’, incorporated in country Y and carrying on business abroad would not be taxable in country X, Country X can only tax the dividend declared by the Subco to Holdco Ltd, or the capital gains earned by Holdco Ltd by way of disinvesting the shares of Subco.
If profits are accumulated in Subco, but it does not declare dividend to Holdco Ltd, nor does Holdco Ltd sell the shares of Subco, Country X would not get tax revenues. If Subco is based in a tax haven, it may avoid paying substantial taxes in that country. From an economic perspective, it means that while Holdco Ltd, as group, may be earning substantial profits abroad, it does not pay taxes in country X since the profits are accumulated at Subco level.
It is to address such scenario that many countries, such as the US and UK, have enacted CFC regulations. Usually, the CFC rigours apply to passive incomes; that is, CFC regulations usually do not apply to those CFCs engaged in genuine business activities. To put it simply, if Country X had enacted CFC regulations, then whether or not Subco declares dividend to Holdco Ltd, the proportion to the profits earned by Subco vis-à-vis the shareholding of Holdco Ltd in Subco would have been taxed in country X.
From the above it can be said that the CFC rules are designed to stop companies avoiding tax in residence country by diverting income to subsidiaries situated in low tax regimes.
ii) Limitation of Benefit Article:-
In deciding the location for setting up the holding company, it is also important to keep in view the ‘Limitation of Benefit’ article, many persons were using the provisions of treaties to their own benefits. Limitations on benefits provisions generally prohibit third country residents from misusing treaty benefits. Article 23 of the UK – USA treaty provides for limitation of benefits clause.
Article 22 of the 1996 Model Treaty requires most double taxation conventions entered into by the US to contain what are called “limitation on benefits clauses” which exist to prevent what is called “treaty shopping structures,” in which entities pick and choose for treaties and economic relationships that benefit only themselves. application of limitations on benefit clauses, including clauses which confer the status.
iii) EU Parent- Subsidiary directive:-
An EU resident holding company can have significant tax advantage over a non-EU resident holding company. The directive helps make an EU-based holding company structure an attractive vehicle to conduct business, particularly for retaining and investing foreign-source dividends. The Parent-Subsidiary directive mandates that EU member states apply the directive in two instances:
a) To distribution of profits received by that member state from subsdiaries located in other EU member states; and
b) To distribution of profits by companies of that state to parent companies from other EU member states.
When a parent company receives a profit distribution from its subsidiary, the Parent-Subsidiary directive requires the EU member state of the parent company to either refrain from taxing those receipts or allow the parent company a deduction from the tax due, on an amount equal to that portion of the tax paid by the subsidiary relating to the receipts. In effect, the directive generally allows a parent company of an EU member states without an increase in the parent company’s overall tax liabilty. When a subsidiary in one EU member state distributes profits to a parent company in another EU member state, the directive generally provides that the distributon is exempt from withholding tax by the subsidiary company’s EU member state. These two elements of the directive facilitate essentially, tax free transfers of profits from subsidiaries to parent companies across the boarders of EU member states.
Setting up a holding company in an EU member jurisdiction to invest in a destination which is also a member state of EU can offer the above discussed significant tax in terms of lower or no withhlding tax on profit repatriation.
13. Conclusion:– From the above discussion it can be said that the proper tax planning for any outbound investment helpful for realizing the optimum post tax profits in the hands of Indian investor.
(Author can be reached at sunraj.18@rediffmail.com)
