We all are living in the VUCA world, i.e., world of Volatile, Uncertain, Complex, and Ambiguous, and surely in the area of taxation. While the Base Erosion and Profit Shifting actions plan were the starting point, today, we are in the era of Pillar 1 and Pillar 2. The intent of G20 and OECD member nations is unanimous that there has to be an end to the race to bottom regime qua tax. A global minimum rate of 15% tax is agreed upon as a policy.
The most impacted of the global changes and reforms are the MNEs. An MNE may operate without physical presence in case of digital businesses but at times, to tap the location advantages, they may set up a subsidiary, or incorporate an LLP or open a Branch in another jurisdiction.
With these global changes, the MNE may also consider relocating the companies out of tax havens to more tax compliant jurisdictions as investments through holding companies incorporated in tax havens are generally viewed negatively by several authorities, both in India and overseas. Apart therefrom, companies which are holding or investment companies and who are in receipt of income from other jurisdictions also want to ensure optimization of tax withholding by such tax jurisdictions as stricter treaty abuse provision like Test/Simplified Principal Limitation Purpose Of Benefits/Detailed Limitation Of Benefits and local GAAR, etc. are now applicable. Also, due to certain commercial reasons like better talent pool, R&D or IP regime, data protection laws, or due to geopolitical situation or political stability, etc., a company may relocate to another jurisdiction. A country with wider trade and tax treaty networks may also be an important factor. The traditional instances of corporate reorganization generally are by way of mergers/amalgamations, whether inbound or outbound, subject to the corporate laws and foreign exchange regulations of both the jurisdictions. A second alternative could be winding up or liquidation in original jurisdiction and then incorporating a new company in another jurisdiction.
The place where a company is incorporated and its registered office is located is generally referred to as “domicile” of the company. A company is generally resident at the place where it is domiciled or the place where effective management is located. Apart from traditional methods referred above, certain jurisdictions allow a company to be ‘redomiciled’ in another jurisdiction.
‘Corporate re-domiciliation’ is the process by which a company moves its ‘domicile’ or place of incorporation from original jurisdiction to another new jurisdiction, by changing the country under whose laws it is registered or incorporated, whilst maintaining the same legal identity. In case of redomicile, only the place of legal seat changes. All other rights, obligations, etc. of the company continues as they were. There is neither liquidation of a company in old jurisdiction nor fresh incorporation of a company in new jurisdiction. The existing company and its history continues; and the company can (post completion of process of redomicile) avail the benefits/advantages offered in the new jurisdiction.
While one may be tempted in theory to explore redomicile, presently very few jurisdictions have specific provisions under the corporate and other applicable laws recognising the same. While India has no provisions presently, certain jurisdictions like British Virgin Islands, Luxembourg, Delaware, Cyprus and Mauritius permit both inbound and outbound redomiciliation, while Singapore only permits inbound. Apart therefrom, other countries which have provisions for redomiciliation are Russia, New Zealand, Australia, Ireland, Canada, Hungry & Latvia. The UK has also published a consulting paper on corporate redomicile in April 2022.
If the laws of both countries permit and recognise corporate redomiciliation, it may avoid lot of other procedural issues and time-consuming compliances apart from tax costs in case of other modes. Nonetheless, before any finite decision is taken, one needs to take in account, corporate laws, foreign exchange and tax laws of both the countries.
Tax Considerations from Indian Perspective In order to highlight important tax consideration from Indian perspective, let us take a case study. Let’s say, ABC Group had set up an investment holding company say, FZ Investment Limited (FZ) in BVI in year 2002.
The ABC Group also has another investment holding company which was incorporated under the laws of Mauritius say, MI Investment Limited (MI) around year 2005. The said company had also made investment in certain companies in India.
Over the years, FZ & MI have made investments in listed and unlisted Indian companies and are classified as a promoter entity in terms of SEBI Regulations. It is assumed, necessary compliances under FEMA and SEBI laws have been made. MI has been issued Tax Residency Certificate (“TRC”) by the Mauritian Tax Authorities. The Place Of Effective Management (“POEM”) of both companies is outside India.
Both the companies have obtained PAN in India and are filing Return of Income in India regularly in respect of income accruing in India.
Mauritius as a geography is considered as a “favored destination” compared to BVI in view of it being FATF / IOSCO compliant country and has signed double tax avoidance and information exchange agreements with several countries, including India.
The management of ABC group has decided to redomicile FZ in Mauritius considering that Mauritius is favoured destination. Apart therefrom, commercially, the management is contemplating merging FZ into MI so that, as a group, it will enable pooling of resources/assets and income in a more statutory and regulatory compliant geography thereby lending itself to optimum use of such resources and income in the growth of the said companies.
Such consolidation of assets and income will also help in capital and debt raising plans of these entities in future for investments in India and elsewhere besides optimization of management time and efforts and reducing the administrative costs which is currently being spent in both geographies. This will result in compliance and reporting under transparent and more rigid accounting and auditing standards which will have a positive impact with the financial institutions intending to support the capital and debt raising plans.
Whether the transfer of registration under the laws of BVI and Mauritius will be considered as the transfer of underlying assets (viz. shares of Indian companies) and be subject to Capital Gains Tax in India?
As stated above, while globally there are few jurisdictions which permit and recognize redomicile or migration of an existing company, presently, under Indian Law there is no such provision. Accordingly, the Indian Income-tax Law is silent and has no specific provisions on taxability or otherwise when FZ, originally incorporated in BVI is now again re domiciled in Mauritius under same name or with minor change in name.
In case of redomicile, at any point in time only one legal entity would survive. Thus, until Mauritius does not complete redomicile procedure and incorporate FZ in Mauritius, the company would continue in BVI. Immediately on re-domicile process completion, FZ, BVI would be struck-off in BVI.
In essence, the Company, FZ remains same, with same assets/same liability and only the legal seat changes. In fact, on reading the Mauritius laws, it appears that such re-domiciliation is recognized as “Continuation’ of the entity in Mauritius. In regard, reference is made to S. 296(1) of the Mauritius Companies Act, 2001 which reads as “(1) A company incorporated under the laws of any country other than Mauritius, may, where it is so authorised by the laws of that country, apply to the Registrar to be registered as, and continue as, a company in Mauritius as if it had been incorporated in Mauritius under this Act.”
S. 300 of the Mauritius Companies Act 2001, which deals with ‘Effect of Registration’, categorically provides that such registration in Mauritius does not create a new legal entity, does not affect its continuity as a legal entity, does not affect the property, rights or obligations of the company and does not affect the proceedings by/ for /against the company.
A look at S. 184 of the BVI Business Companies Act, 2004 also indicates that BVI laws permit ‘Continuation’ of the company under foreign law.
Further, in case of re-domiciliation, the tax implications would depend upon various factors such as whether there is extinguishment of shares in FZ, BVI and fresh issue of shares by FZ, Mauritius or depending upon applicable laws, whether the existing share capital of the company remains valid, whether there is issue of new shares or new share certificates. The tax implications would also depend upon laws of both the countries and be subject to tax treaties.
Nonetheless, if there is a transfer of shares by shareholder of FZ, then since FZ derives its value substantially from India, indirect tax provisions could get triggered.
“Transfer” is defined u/s. 2(47), which inter alia includes, relinquishment sale, of any extinguishment of rights therein.
Considering definition of “sale” under Sale of Goods Act, 1930, since redomicile neither involves any consideration nor the transaction is between two parties, it is not “Sale”.
If no fresh shares are issued by FZ, Mauritius to shareholder of FZ, BVI, arguably, there is no reciprocal transfer of any property and hence, not “exchange”.
Relinquishment means giving away the property and rights therein such that said property otherwise continues to exist, which is not the case in the present case. Lastly, there is no extinguishment of rights in an asset by the shareholder. In fact, the rights of existing shareholder would continue post re-domiciliation.
In general terms too, it connotes passing of rights in property from one person to another. Thus, for a transfer, there must be two separate and legal distinct persons; transferor and transferee. If re-domiciliation does not involve two parties and shareholders continue to hold the same shares and there is no consideration for transfer, then arguably it is not a ‘transfer’. In fact, one cannot make profit out of himself. The Hon’ble Bombay HC in CIT vs. Texspin Engg. & Mfg. Works (2003) (263 ITR 345) where when a partnership was converted into Part IX Company, observed as under:
“Generally in the case of a transfer of a capital asset, two important ingredients are : existence of a party and a counter-party and, secondly, incoming consideration qua the transferor. When a firm is treated as a company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the limited company. It is, no doubt, true that all properties of the firm vest in the limited company on the firm being treated as a company under Part IX, but that vesting is not consequent or incidental to a transfer. It is a statutory vesting of properties in the company as the firm is treated as a limited company. On vesting of all the properties statutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm is now treated as a company, after a given date. In the circumstances, there is no transfer of a capital asset as contemplated by section 45(1).”
Thus, on same logic, if under laws of BVI and Mauritius, it can be substantiated that, in effect and substance, same person survives and continues to hold underlying assets and there is no consideration and no two distinct separate persons coupled with the legal continuance of FZ, its rights, liabilities, assets, etc. being unaffected, it may be arguable there is no “transfer” u/s. 2(47) and hence, even indirect transfer provisions would not apply. Needless to add, since India does not recognize this process coupled with no judicial precedents in India, litigation cannot be ruled out.
One may also have to examine GAAR provisions. If it can be substantiated that the main purpose of re-domicile was not to take any tax benefit but was for other strong commercial and business rationale, including higher leveraging power at better terms, consolidation of entities, mandatory step to merge BV and NP etc., supplemented by reduction in compliance requirement, administrative costs, etc., then one may defend invocation of GAAR. However, if Tax Department is able to prove that main purpose was to take some tax benefit then, it may be difficult to challenge GAAR.
Whether the redomiciled FZ in Mauritius would be entitled to DTAA benefits?
Once FZ is redomiciled in Mauritius and the process of redomiciliation is complete, generally, FZ would be able to obtain a TRC from the Mauritian Tax Authorities on compliance with certain conditions. Needless to add, once place of legal seat has changed, FZ would have to ensure even POEM is in Mauritius. In order to claim DTAA benefit, a valid TRC and Form 10 as mandated by Indian Tax Authorities would be required to apply India – Mauritius DTAA.
In this regard, attention is invited to Hon’ble Mumbai Tribunal decision in case of Asia Today Limited (TS-620 ITAT-2021) wherein the Tribunal observed that redomicile means essentially that the Company ceases to “live” in one jurisdiction, and is deregistered there, but via a transfer by way of the continuation process, is alive and well in another jurisdiction and that it is fact of life. The Tribunal further observed “A redomiciliation of the company by itself cannot lead to denial of treaty entitlements of the jurisdiction in which the company is re domiciled, though, of course, the fact of redomiciliation of the company could at best trigger detailed examination or the re domiciled company being actually fiscally domiciled in that jurisdiction”.
Thus, while prima-facie, the Tribunal observed that mere redomicile would not ipso facto lead to denial of treaty benefit, it also observed that a detailed examination could be undertaken by the Tax Department. Thus, on facts, the Tribunal rejected denial of treaty entitlement as canvassed by the Tax Department.
However, on present facts, FZ once redomiciled in Mauritius would be required to substantiate that there were enough commercial and business reasons for redomicile in Mauritius, it would have to also substantiate that even the POEM has now been shifted to Mauritius, so that it is a resident of Mauritius. FZ would have to demonstrate that redomicile was not solely or with the main objective of obtaining tax benefits. The proposal including future merger, fund raising, etc. would also need to be evaluated.
Conclusion
To summarise, while redomicile of corporate entities is new normal, any MNE when undertaking a redomicile would have to keep in mind the applicable laws of both countries (including corporate, foreign exchange, tax), other implications on underlying investments/assets, commercial and business reasons, substantiation of facts, demonstrate POEM and also importantly, keep in mind GAAR, or any treaty abuse provisions like Principal Purpose Test, LOB, etc.