India Inbound InvestmentWhen we are planning an inbound investment into a profit center like India we always have several considerations in mind to make more efficient and flexible investment. Such considerations must include the tax efficiency of the jurisdiction of entry and the ability to exit the jurisdiction in a flexible and tax efficient manner.
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Holding Company Consideration "Ease of access and ease of exit"
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Tax efficiency of the instrument of entry
The instrument of entry in a jurisdiction like India plays a huge role in proper and tax efficient planning. India is a jurisdiction charging Dividend Distribution Tax which makes double tax treaties irrelevant in relation to dividends or capital invested in equity. At the same time India charges a flat withholding tax on interest which brings the double tax treaties and local corporate tax into play.
Preferred Method for Investing in India
Although the preferred method for investing in India is certainly through Loan Instruments, their use is not always straightforward mainly due to capitalization restrictions in force. The solution is the use of a combination of Equity and Loan methods through hybrid instruments, with either preference or conversion characteristics. The diagram below shows the instruments applicable to more situations.
Capital Instrument ConsiderationsCapital Instruments like Equity or Preference Shares pose several issues that should be considered in all situations prior to the registration and set-up of the structure. Such issues include:
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Debt Instrument Considerations Debt Instruments like Convertible Debentures and Bonds pose several issues that should be considered in all situations prior to the set up of the structure. Such issues include:
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Why Cyprus Registration for Inbound Investment in India
The traditional investment route to India is Mauritius, following the old silk route. Most of the popularity of Mauritius as a routing jurisdiction is based on historical rather than real tax efficiency reasons. Cyprus poses a much more attractive option for inbound investment giving many more options to the international investment. The clear advantage of Cyprus on Interest payments but at the same time the equivalence on Dividend payment gives a superior routing jurisdiction over Mauritius. The comparison below shows only the numbers to compare the two routing jurisdictions. Its also an issue nowadays that Mauritius route was abused by many over the years and the jurisdiction poses high in India Tax Authorities radar.
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Dividends
Interest
Royalties
Capital Gains
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Mauritius
NIL/17%
20,91%
15%
EXEMPT
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Singapore
NIL/17%
10%/15%
10%
TAXED
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Netherlands
NIL/17%
10%
10%
TAXED
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Cyprus
NIL/17%
10%
10%/15%
EXEMPT
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Comparative advantage of Cyprus for Capital Instruments
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A Cyprus registered company serving as Holding Structure for India equity investment has many advantages over other jurisdiction. However the most important characteristic is the fact that according to the double tax treaty between Cyprus and India capital gains on title or share sales is taxed in the jurisdiction of the seller. Therefore in case of a sale of the subsidiary the capital gains are taxed in Cyprus. This characteristic is only afforded to Cyprus and Mauritius structures, wiping out all other jurisdictions from the picture as being "lock in" jurisdictions. Vodafone case and other recent Indian cases re-affirm the principle and make it even more obvious that without the double tax treaty protection on capital gains the profits of a sale in India are wiped out by the local tax authorities. The diagram below show the comparative advantage of Cyprus registered and resident companies for equity investing.
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"The single most important comparative advantage unique to Cyprus registered companies is the treaty protection of capital gains for sale of subsidiaries providing a simple exit mechanism for any investment."
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Comparative advantage of Cyprus over Mauritius
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A Cyprus registered company serving as Finance Structure for India equity investment has a major advantage over an equivalent Mauritius structure. The simple fact is that interest income paid to Cyprus is effectively taxed at 10% whereas an equivalent payment to Mauritius is effectively taxed at 22%. This together with the efficiency of equity investment gives to the investor the option of planning using hybrid structures involving both equity and debt. The diagram below shows the comparison of the two jurisdictions on debt instruments.
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The simple fact is that interest income paid to Cyprus is effectively taxed at 10% whereas an equivalent payment to Mauritius is effectively taxed at 22%.
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