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Private equity funds take double decker route to escape tax here
September, 20th 2017

Some private equity funds are experimenting with ways to circumvent the law on indirect transfer of shares by setting up two-tiered structures in countries where treaties prevent Indian authorities from taxing the transactions, said people with direct knowledge of the matter.

Often called a ‘double-decker Dutch sandwich’ or ‘double-decker’, these structures are aimed at avoiding getting taxed in India and may run afoul of Indian authorities and the provisions of the General Anti-Avoidance Rules (GAAR).

Rules for indirect transfer of shares — introduced in 2012 after Vodafone won a transfer-pricing tax dispute with the government — provide for taxing overseas transactions in shares of Indian companies if the shares constitute more than 50% of the foreign fund’s total assets (exceeding Rs 10 crore). If caught on the wrong foot, private equity (PE) funds can face about 20% tax on long-term capital gains and higher tax of 30-40% on short-term capital gains, said industry experts.

“Many PE firms have created the structures, known as double-decker structures, where they are creating a buffer company from where investments in India will be made. This is mainly done by foreign companies making strategic investments in India,” said Amit Singhania, partner in law firm Shardul Amarchand Mangaldas.

This is how it works: A fund sets up a firm or pooling vehicle in Netherlands or Germany but does not directly invest in India. It sets up another step-down subsidiary in the same country that makes the investment. At the time of sale, the shares in the subsidiary are sold to be new buyer. These structures are set up only in those countries which prevent Indian authorities from probing such transactions.

While this is a textbook case of indirect transfer of shares, experts said some of India’s tax treaties with these countries may safeguard such investments from the probing eyes of the taxman.

 
 
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