India – U.S. Tax Planning

New York State Bar Association

March 12, 2015

India – U.S. Tax Planning

Brian Rowbotham

[email protected]

101 2nd Street, Suite 1200 San Francisco, California 94105

Tel: (415) 433 - 1177

Rowbotham & c o m p a n y l l p

11th Annual International Estate Planning Institute

Income Tax Rates for Individuals 2 Resident Status Income Tax 3 Nonresident for Income Tax 4 Capital Gains 5 Capital Gains Exclusions 6 Forms of Doing Business in India 7 Corporate Taxes 8 Dividends 9 Income Tax Treaties 10 Vodafone 11 Succession Planning 12 Taxation of Domestic Trusts 14 HUF Requirements 15 Hindu Undivided Family 16 HUF 18 Trust Planning 19 Foreign Exchange Management Act (FEMA) 20 Speaker’s Bio 22

India Tax Update


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There are different rates of income tax for men, women and senior citizens. Rates below for male below 60m and HUFs

*An additional educational assessment of 3% on tax payable.

India Tax Update Income Tax Rates for Individuals


Income tax slabs (for Men) in India:

Income Tax Slab (in Rs.) Tax

0 to 2,50,000 Nil

2,50,001 to 5,00,000 10%

5,00,001 to 10,00,000 20%

Above 10,00,000 30%

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Residential Status 1. An individual will be treated as a resident in India if he fulfills any of the following two conditions: - Presence in India in a year for 182 days or more, or - Presence in the four preceding years in India for 365 days or more, and the person has been in India for 60 days or more in the current year.

2. An Indian citizen or a person of Indian origin who resides outside India will be treated as resident in India if he stays in India in that year for 182 days or more. [Treaty may override] Section 6, Income Tax Act, 1961

India Tax Update Resident Status Income Tax


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An individual is a nonresident if he stays in India in that year for less than 182 days. An individual (whether an Indian citizen or not) who is outside India and who comes on a visit to India will be treated as nonresident if he stays in India to less than 182 days subject to the condition that during the preceding four previous years his stay in India does not amount to 365 days or more. Section 6, Income Tax Act, 1961

India Tax Update Nonresident for Income Tax


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Securities Sold on Exchange Other Individuals Partnerships Foreign Institutions

* Indexation can apply

10% -0- 30% 20% * 30% 20% * 30-40% 10-20% *

S-T L-T

India Tax Update Capital Gains


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Capital Gain on Transfer of Certain Capital Assets not to be Charged in Case of Investment in Residential House

Where in the case of an absentee being an individual or a Hindu undivided family,

the whole of such capital gain shall not be charged.

• If the cost of the new asset is not less than the net consideration in respect of the original asset,

• the capital gain arises from the transfer of any long-term capital asset,

• not being a residential house (hereafter in this section referred to as the original asset),

• and the absentee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset),

Section 54F, Income Tax Act 1961

India Tax Update Capital Gains Exclusions


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- Local Representative Office - Limited to marketing, coordinating services - Not taxable in India - Branch of Foreign Corporation - Limited Company - Wholly owned by foreign investor - Joint venture with Indian ownership - Public Limited Company - Project Office - For executing contracts awarded for work in India

India Tax Update Forms of Doing Business in India


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Business Income - Domestic Company 30% - Foreign company (branch ) 40% - Additional 2-3% surcharge imposed on aggregate tax

India Tax Update Corporate Taxes


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Dividend Distribution Tax (DDT) - Dividends not taxable to shareholders - Additional 16.22% imposed on corporation

U.S. Issue: Creditable under Section 901

- Tax on corporation vs. - Tax on individual [Section 78 gross up with a credit?] - Existing rulings re: UK ACT, Australian Franked Dividends - No rulings re: India’s DDT

India Tax Update Dividends


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Most foreign corporate investments into India come through treaty countries: - Mauritius - Singapore - Cyprus - Netherlands

Mauritius due to: - Zero tax on Indian capital gains - Dividends: no withholding to outside, taken at source - Treaty with Mauritius - Conditions needed to qualify for the treaty benefits - Scrutiny now with substance and form of holding company - New limitation of benefits provisions cover shell conduit companies

India Tax Update Income Tax Treaties


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- Did Vodafone’s purchase of Cayman trigger capital gains tax? - Is substance of Cayman Company required? - New directions

Vodafone

Hutchison Essan Ltd. Telecom

purchase Hutchison

Cayman Cayman

Hutchison Essan Ltd. Telecom

India Tax Update Vodafone


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No uniform civil code in India - Succession depends on laws of religions

- Trusts can take precedence

- Succession rules differ with 1. Hindus – Mitakshara system 2. Dayabhaga system – region of Bengal only 3. Different rules for non Hindus (Christians, Pasis, Muslims)

- Transfers of property can be restricted

- Restrictions may exist for foreign ownership of an Indian company

- Foreign Investment Policy may restrict ownership

- Restrictions generally apply to real estate, retail and agricultural enterprise

- Hindu Undivided Family: all members have an ownership or “coparceners”

India Tax Update Succession Planning


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Gift Tax - Generally none [Gifts from non-family members can be taxable] Estate Tax - None Trusts - Terms and provisions can override religious and instestacy laws - Revocable and irrevocable trusts permitted - Trusts not frequently used in past due to - Culture - No gift or estate tax - Increase use of trusts today Outlook for Change

India Tax Update Succession Planning [Continued]


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Taxable to: Revocable Grantor Irrevocable Discretionary Trustee [30%] Determinate Trustee [30%], or withholding tax at 30% Transfer to Trusts 7% Stamp Duty

India Tax Update Taxation of Domestic Trusts


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• You had to be a married Hindu person. • This income had to be from your ancestral property that you were given or

inherited. • The income had to be above a thresh hold for having to pay tax on it. • While the income was implied to be of the family, the head of the family, known

as a “Karta” (variously understood to be the manager, trustee or the patriarch of the family) was responsible to pay the HUF tax although all other members of his family (known as coparcens) had equal share in the income that could be distributed to the members without attracting further tax liability of any sort.

• Although a birth or death in the family would not change the total income of the family for that year, the individual share to be distributed among the members of the family after paying taxes could change because the distribution would vary from the previous year as members of the family are increased or decreased.

• The Hindu Undivided Family law has its origins in the centuries old Hindu culture and religion so the composition of the family changes for subsequent years after the death of the “Karta”. The inheritance of the assets of HUF and / or its income would also be changed after the death of the Karta. Either the same family would continue with the replacement of the “Karta” or a new HUF could be formed and started to comply with the tax laws of HUF.

India Tax Update HUF Requirements


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Hindu Undivided

Family

Karta Co-parceners

- Typically used to own ancestral property

- Karta until 2005, could only be male - Power to transfer property - Must act for benefit of family

- Taxed as a separate entity

India Tax Update Hindu Undivided Family


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General View - HUF has attributes of foreign trust - Karta: Trustee - Co-parceners: Beneficiaries - U.S. Co-parcener - Grantors - Revocable Trust - Irrevocable Trusts, Section 684 – Capital Gain Issue - Beneficiaries - Revocable Trust, Section 679 - Irrevocable Trust, Complex rules on distributions

India Tax Update Hindu Undivided Family [Continued]


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Father is a “Karta” of Hindu Undivided Family. [HUF] Father to set up a trust for U.S. house.

Indian Father

Home in India

Foreign Trust

- Foreign trust reporting for U.S. every year on Form 3520 - Complex re: holding title - Accumulated income in trust taxed as ordinary income - Generation skipping permitted

India Tax Update HUF


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- Indian trust is revocable during father’s life - Indian trust becomes irrevocable upon death of father - Non U.S. trust is treated as a nonresident alien - Domestication of foreign trust

Indian Father

Indian Trust

U.S. Children

Indian Company Shares

India Tax Update Trust Planning


U.S. Assets

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A Person subject to Foreign Exchange Control is a "person resident in India" (i) A citizen of India, who has, at any time after the 25th day of March, 1947, been staying in India.

Excludes: Citizens of India that are outside of India: (a) for employment outside India, or (b) for carrying on a business outside India, or (c) for any other purpose, that would indicate intentions to stay outside India for an uncertain period.

(ii) A citizen of India, who having ceased by virtue of paragraphs (a), (b) or (c) to be resident in India, returns to, or stays in, India: (a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any other purposes, in such circumstances as would indicate his intention to stay in India for an uncertain period. Section 2 (p) and 2 (q) of FERA

India Tax Update Foreign Exchange Management Act (FEMA)


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Residence under Regulations will impact the ability of Indian residents to transfer funds outside of India Residents - Restrictions relaxed if funds outside of India inherited or acquired by gift Nonresidents - Annual limitation of $1 million

India Tax Update Foreign Exchange Management Act (FEMA) [Continued]


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Brian Rowbotham is the founder and partner in charge of the firm’s international tax practice. Mr. Rowbotham has 35 years of experience in advising businesses and individuals on complex domestic and international income and estate tax planning. He is the founding partner of Rowbotham & Company LLP which is almost exclusively dedicated to businesses and investors needing domestic and international tax and accounting services. His clients include private and public companies around the globe which consist of: U.S. and foreign institutional investors, multinational families and executives and non-U.S. investors doing business in the U.S. Mr. Rowbotham has advised clients in major domestic and international litigation and has also served on the boards of both privately held and publicly traded companies. Mr. Rowbotham has given presentations on cross border tax strategies in Bangalore, Delhi, Mumbai, and to professional organizations throughout Asia, Europe and the U.S. He is a frequent guest speaker at the Haas Business School, UC Berkeley on international tax where he received his bachelors and MBA degrees. In 2012 he was awarded the Distinguished Service Award by the California CPA Society for support of the profession and was featured on the cover of the California CPA for doing business in China.

India Tax Update Speaker’s Bio


Documents

India – U.S. Tax Planning