1 Outbound Investments and Cross Border Financing April 2008 Mumbai, India Itzik Amiel, adv.
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Transcript of 1 Outbound Investments and Cross Border Financing April 2008 Mumbai, India Itzik Amiel, adv.
1
Outbound Investments and
Cross Border Financing
April 2008
Mumbai, India
Itzik Amiel, adv.
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Agenda
ANT/AMACO Introduction;
International M&A Techniques: Structuring outbound Investments;
Cross-border Financing;
Proven Tax Structuring opportunities with India.
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ANT/AMACO
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IntroductionIntroduction
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ANT/AMACO Group’s Profile
About Us
Origin: ANT - 1897, Amaco - 1956;
Independent - maintain a position of absolute independence towards its business partners and clients;
International - international scope; strategically positioned to cater to the strong international growth in demand for our services;
In-Business - positioning ourselves as partner in business to help the strength and the growth of our clients;
Tradition of Trust - established track record and long-lasting relationship.
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ANT/AMACO Group’s Profile
About Us
We are a genuinely international management, trust, corporate and asset administration group;
A growing global network - ANT Group continues to grow. To build extra capacity, we are investing heavily in human resources, technology and infrastructure, and in the next few years, we expect to increase the size of our network also to other jurisdictions;
Acts under supervision of the Dutch Central Bank as per the WTT (Act on Supervision Trust offices) and under the Netherlands Antilles central bank [while the NV is under the supervision of AFM];
Strong emphasis on professional skills, such as; Language skills (English, French, Dutch, German, Italian, Spanish, Portuguese, Greek,
Arabic, Croatian, Bulgarian, Chinese and Hebrew) at “operational level”; Qualifying (Tax) Legal degrees; Qualifying Accounting degrees.
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The Added Value of ANT/AMACO
Reasons to involve ANT/AMACO:
The solid financial background and track-record; High commitment/ loyalty of clients; Close contacts with advisers and clients. Administration capabilities for Implementation of tax
planning (based on a tax lawyer’s advice); Administration capabilities for Implementation of
financial engineering advice (based on the financial advise);
Confidentiality; The global network (intermediaries; clients etc.). Proven successful experience with Indian clients.
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The Added Value of ANT/AMACO
Benefits for client:
Global platform Geographical platform providing a range of services
for trust and fiduciary services from which to develop new business opportunities
Expertise High quality workforce with extensive experience in
rendering administration services for structuring of, private and corporate wealth/ transactions, and long commitment of employees to ANT/AMACO.
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The Added Value of ANT/AMACO
Benefits for client:
Quality High level compliance and risk management
minimizing reputation risk for the business and its partners.
Independence Focused independent service provider with minimal
conflicts of interest with its partners or clients.
Inpersonal We know our clients and our clients know us.
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Types of Clients
Main types of clients of ANT/AMACO:
Large-medium national and multinational companies;
Institutional clients;
High Net Worth Individuals.
We are proud to have the largest Indian clients portfolio
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ANT/AMACO - Products and Services
Tax Driven:
Management & Domiciliary services (for Holding, finance, royalty and investment companies);
Corporate Services; International Licensing and Collection services; Off-shore trading/re-invoicing companies; Anglo-saxonTrust Services; Business Center Facilities (for substance purposes); Captive Insurance companies (in some of the
locations); Off-shore banking.
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Licensing & Financial Services
Two dedicated subsidiaries:
A Dutch company focusing on the exploitation of intellectual property rights (“IP Rights”) and other intangible assets company incorporation or sale of existing companies.
NCS Universal Rights B.V.
NCS Finance B.V.
A Dutch company focusing on the rendering financial services like escrow arrangements and back-to-back loans and also focusing on the ownership of Special Purpose Vehicles.
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ANT/AMACO - Products and Services
Non-Tax Driven:
Structured Finance Services: Securitization Deals; Special Purpose Vehicles; Other Special Products.
Escrow Services;
Custody services;
Trustee services;
Paying Agent services;
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ANT/AMACO - Products and Services
Non-Tax Driven (continued):
Asset Administration Services: Electronic Voting; Employee Benefit Programs; Securities Investment systems; Custodian for Investment Funds.
Registrar and Shareholder Services: Administration of shareholders registers; Personal Consult and Support.
Fund Administration Services.
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International M&A Techniques
Structuring outbound Investments
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Recent Headlines on Indian M&A
• Forbes : “2007 isn't even half done, but it’s already been a record year for mergers and acquisitions in India. There has been over $50 billion worth of equity deals from January through May (…)”
• (Article of 12 June 2007 on M&A Report by Grant Thornton Corporate Advisory Services)
• Reuters: “Indian firms flush with funds are expected to spend more than $35 billion (17.7 billion pounds) this year on buying or merging with foreign companies (…) Corporates are not only scaling up the size of their overseas acquisitions, but there have been several instances of Indian firms buying out companies abroad that are far larger in size compared to them”
• (Article of 17 June 2007 on report from Ernst & Young and the Federation of Indian Chambers of Commerce and Industry)
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Tax Objectives of Acquisition Structuring
Must-have’s
• Interest relief
• Avoiding tax leakage
• Efficient exit
Nice-to-have
• Loss utilization
• Double dip
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Basic Techniques: considering 5 levels
1. Treatment of dividend income and capital gains
2. Repatriation (withholding taxes)
3. Local tax exposureLook-through or legal entityGoing public
4. Dividend and capital gains (treaty protection)
5. Local taxes
Investmentvehicle
Investments
InvestmentsInvestments
InvestorsLevel 1
Level 2
Level 3
Level 4
Level 5
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Use of Holding Companies
• Easier to acquire and to divest subsidiaries
• Debt push down strategies (merger/consolidation)
• Capital gains or losses tax planning
• Withholding tax planning
• Consolidation of earnings and/or losses
• Repatriation of earnings
Location: where activities generally take place or can be located
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Acquisitions Structuring Tools
• Debt push down or debt push up
• Treaty or Directive shopping
• Use of hybrid entities through check the box regulations, PE’s,
partnerships, et cetera.
• Double dipping or equity boosters
• Migrating entities (dual residents)
• Converting cash flows (interest vs. dividends)
• Review of business models (commissionaire, IP development)
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Acquisitions Financing Considerations
• Third party debt or shareholder funding
• Debt servicing capacity (free cash flows)
• Security (financial assistance, white wash)
• Arm’s length character of debt (rate, other conditions)
• Tax deductibility of interest (thin cap, anti-abuse)
• Efficiency of interest deductions (set off against profits)
• Accounting issues (re-characterization as equity)
Leveraging acquisitions increases return on investment
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Acquisition Structure – basic structure
• Aims to realize single interest deduction through debt push down
• Interest expenses directly set off against profits of investment by tax consolidation or legal merger
• Issues are generally thin cap and other anti-abuse measures
• Alternative from investors lending funds
Investors
Investmentvehicle
Principleinvestment
Bank loan
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Cross Border Financing
The NetherlandsThe Netherlands
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The Netherlands: Inbound Investments
General considerations:
• Maximize debt in the Netherlands to shelter taxable income → tax consolidation → deduction of interest expense
• No withholding tax on interest
• No step-up of assets/goodwill without gain recognition • Exit planning
→ dividend withholding tax → ‘substantial interest’ tax liability
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The Netherlands: Inbound Investments
Basic acquisition structure:
• Dutch Acquisition Co. And Dutch Targetform ‘fiscal unity’ (tax consolidation);
• Interest payable on bank loan fully deductiblenote: guaranteed loans;
• Interest payable on shareholder loan is deductible, subject to:→ anti-base erosion rules→ thin capitalization rules
Buyer
Dutch Acqu.
Company
Dutch target
bank
loan
Equity+
shareholder loan
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The Netherlands: Inbound Investments
Limitation on tax deductible interest only for related-party debt:
• Related-party debt;
• Anti-base erosion rules (article 10a):→ business reasons for related-party debt?→ lender (Buyer) is subject to tax on interest income (effective tax rate >10%)?
• Thin cap restrictions (article 10d):→ Does taxpayer belong to a “group”?→ excessive debt
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The Netherlands: Inbound Investments
Thin cap – excessive debt – example (simplified):
Equity 85Intra-group loan 300Bank loan 225Interest expense (5%) 15 + 11,25 = 26,25
• fiscal testallowed debt : 3 x 85 = 255actual debt : 525excessive debt : 270not deductible : the lower of (i) 15 or (ii) 270/525 x 26,25 = 13,5
• group testd/e ratio of group : 5 debt : 1 equity (assumed)allowed debt : 5 x 85 = 425not deductible : 100/525 x 26,25 = 5
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The Netherlands: Inbound Investments
Thin cap limitation not applicable in LBO because of definition of “group”
Fund LP
Dutch Acqu. Co.
Dutch target
Shareholder loan
buyer
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The Netherlands: Inbound Investments
Example 1: Structure LBO/ exit structuring
Fund LP
Dutch Coop
Dutch target
Shareholder loan
buyer
Acquisition Company
No dividend withholding tax on distributions by Coöp to Fund LP; Ruling policy: no substantial interest taxation if Fund LP owns Coop as business asset (tbd on Dutch tax principles)
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The Netherlands: Inbound Investments
Example 2: Structure LBO/ exit structuring
Fund LP
Lux Co.
Dutch target
Shareholder loan
LuxCo and Fund LP do not form “group”; Tax treaty / EU P-S Directive prevents dividend withholding and substantial interest taxation
Dutch Acqu. Co.
Shareholder loan
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The Netherlands: Inbound Investments
for US investors: CV/BV-structure
Envisaged tax results:
• Double deduction;
• interest income not currently taxedin US;
• No withholding tax on interest anddividends
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The Netherlands: Inbound Investments
CV/BV – structure / points of attention:
Only for genuine third-party acquisitions. Transactions must meet business motive test. Intra-group transactions caught by Dutch anti-base erosion rules.
Article 24(4) of NL/US Treaty denies treaty benefits for payments through ‘hybrid’ entities:
“In the case of an item of income, profit or gain derived through a person that is fiscally transparent under the laws of either State, such item shall be considered to be derived by a resident of a State to the extent that the item is treated for the purposes of the taxation law of such State as the income, profit or gain of a resident.” (cf. IRC Sec. 894(c) Regs)
However, the Netherlands has unilaterally waived the application of 24(4) of Treaty, subject to satisfaction of ‘light’ substance requirements.
US Corp must satisfy requirements for 0% withholding under article 10(3) of Treaty (80% voting for 12 months period plus specific LoB requirements). If not, NL Holding may be organized as a Coöp.
Activities of CV should neither cause CV to have effectively connected income for US purposes, nor a permanent establishment in the Netherlands or any other high taxed jurisdiction.
Transfer restrictions apply regarding LP interest in CV in order to ensure transparency for NL tax.
Ruling possible
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The Netherlands: Outbound Investments
General considerations:
• Participation Exemption;
• Tax deduction of interest expense on acquisition debt;
• Hybrid debt;
• Hybrid companies
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The Netherlands: Outbound Investments
Participation Exemption:
• Scope: full exemption for any benefits derived from a qualifying participation (includingcapital gains upon full or partial exits, dividend distributions, recapitalization distributions, liquidation distributions, certain earn-out payments and results from options and shares). Capital losses are not deductible, except liquidation losses.
• A number of changes as per 2007. Most significant for international planning:→ Participation exemption can no longer be applied to participation of less than 5%,unless affiliate owns 5% interest (3y-grandfathering of existing structures and fornew structures, in case of dilution below 5%).→ Subject-to-tax test and non-portfolio test abolished, but replaced by a specificexclusion for “low-taxed passive subsidiaries”. Under this new test, subsidiariesdisqualify if they fail both the ‘assets test’ and the ‘taxation test’.
Asset test: a subsidiary fails the ‘assets test’ if more than 50% of the directly orindirectly held assets consists of passive investments. Taxation test: effective tax rate of 10% over a taxable base that is determinedaccording to NL standards.
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The Netherlands: Outbound Investments
Other issues:
Tax consolidation;
Tax deduction of interest expense on acquisition debt;
Use of hybrid instruments. Under Dutch tax principles, debt is re-classified as equity only if:
→ profit sharing,→ subordinated, and→ term > 50 years
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The Netherlands: Outbound Investments
Use of hybrid entities (example simplified):
Structure:
→ SC is hybrid entity
→ SC, SL and Target form group in Spain (interest expense tax deductible against operating income of Target)
→ NL buyer deducts interest expense on loan to SC
→ NL buyer claims participation exemption for SL Shares
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The Netherlands: Outbound Investments
Various:
Group Interest Box
→ state aid?
Foreign group financing vehicle
→ participation exemption?
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Proven Tax Structuring
With IndiaWith India
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IndiaCo
DutchCo
LTSub1
10% WHT (article 10 Treaty)
0% CIT (participation exemption)
generally no WHT (domestic law) LTSub2
Holding- Dutch Intermediary Company
100%
100% 100%
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IndiaCo
DutchCo
TaxHaven
Capital
Loan
Holding – use of losses
Interest
losses
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IndiaCo
LuxCo
DutchCo
Capital
Hybrid Loan
Group Financing – Hybrid Loan [1]
Group Loans
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DutchCo
Target
Loan
Group Financing – Hybrid Entity [1]
LP
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IndiaCo
Target
Group Financing – Hybrid Entity [2]
Sub1
bank loan
BelgCo
equity
i/c loan
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IndiaCo
DutchCo
Dividend/Interest/Royalty on sublicense
Loan/license
Foreign Sub
Finance/IP in low tax jurisdiction
100%
100%
Tax HavenCo.
100%
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Caveat
ANT/AMACO does not advise on tax or legal matters. When structures are discussed, the purpose is to find a potential solution for a specific issue, which should subsequently be checked with the client’s tax or legal advisor.
This applies at the beginning of the relationship as well as during its lifetime. It also applies if and when NCS Universal Rights or NCS Finance is involved.
Before actually entering into a relationship ANT/AMACO needs to check and verify the background and the motives of the planned transaction(s) and the reputation and identity of the parties directly and ultimately involved.
WE ARE NOT TAX ADVISERS !
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End Note.
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Albert Einstein We owe a lot to the Indians, who taught us how to count, without which no worthwhile scientific discovery could have been made
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Itzik Amiel, Adv. (LL.B., LL.M.)Director International Business Development
T: +31 20 5222 555M: +31 6 50801285F: +31 20 5222 500E: [email protected]
W: www.Ant-Trust.nl
Thank You!