CA. Divakar Vijayasarathy · 12/2/2010 3 For tax parlance, death means:-Death of a living...

12/2/2010

1

CA. Divakar Vijayasarathy

Introduction

Tax and Regulatory Regime in India

Global Estate Tax Regime

Possible Estate Planning Structures

Practical Perspective to Estate Tax Planning

11/24/2010Divakar Vijayasarathy & Associates

12/2/2010

2


Death leads to movement of property from the deceased to their successors

Succession could be testamentary or intestate

Intestate succession could lead to appointment of an administrator

Taxes shall be applicable on:• Succession

• Appointment of administrator

• Transfer of property from administrator to ultimate successor


12/2/2010

3

For tax parlance, death means:

- Death of a living person

- Prolonged absence of a living person.

- Presumption based on period of absence &

- Judicial review


Succession law in most countries have

multiple implications

There could be a State/Provincial as well

as a Central Legislature


12/2/2010

4

Nature of Succession Law Countries

A single succession law applies throughout the

country

Argentina , Brazil, Germany

and Venezuela

Existence of plural legislations where state/

province has the autonomy to legislate on

succession laws

Australia, Canada, Mexico ,

UK and USA

Religion or Community based succession law India and Spain

Succession is governed by central laws

however local law may govern successions

regarding agriculture and farming

Austria,Germany and India

Succession law applies through the

metropolitan territory but special rules exist

for overseas territories and overseas

collectivities

France and Denmark

Divakar Vijayasarathy & Associates 11/24/2010

Broad classification:Law of ownership (identify assets that are

owned by the deceased upon his death)Matrimonial LawContract law (succession pacts)

Succession laws are considered operational predominantly through two modes namely:

- Direct transmission- Indirect transmission


12/2/2010

5

Situation Countries

Principle of direct transmission from

deceased to the heirs. Transfer is not

assimilated to a sale and hence not

regarded as a taxable event for capital

gains purposes.

France, Argentina,Belgium, Brazil,

Chinese Taipei, Colombia, Czech

Republic, Germany, Greece,

Hungary, Korea, Italy, Japan,

Luxembourg, Mexico, Peru,

Poland, Switzerland and Uruguay

Principle of indirect transmission

under which assets, rights and

obligations are first transferred from the

deceased person to a personal

representative and then the net assets

are transferred to the legal heirs

Denmark,Norway, Sweden and all

common law countries (Canada,

Bhutan, New Zealand, Hongkong,

Ireland etc)


Taxation based on the domicile of the deceased

In some countries residence must have been maintained for a certain period. (5 years in the case of Netherlands)

In common law countries (also in Belgium, France, Ireland, Israel, Korea, Luxembourg and Ukraine), scope of residence or domicile based taxation is restricted only to immovable properties


12/2/2010

6

Nationality based taxation (Croatia,

Chinese Taipei, Germany, Greece, Italy,

Japan, Poland, Portugal, Spain and Serbia)

Multiple parameters being adopted by

central and state legislature


Type of Tax Description Countries

Inheritance tax

(IHT)

Tax levied on the legal

heir

Luxembourg,, Czech Republic

etc

Estate tax (ETA) Tax levied on the estate France, Greece, Hungary, Italy,

Norway, Poland, Netherlands,

Chile, Croatia etc

Capital gains

Tax

Tax levied on transfer

of estate

Russia, Ukraine etc

ETA and IHT ETA is levied based on

the value of the estate

UK, Belgium, Chinese Taipei,

Korea and Denmark

Gift tax (in

addition to IHT

and ETA)

Tax on receipt of

estate without

consideration

France, Germany,

Luxembourg, Italy, USA etc


12/2/2010

7

Estate tax or Inheritance Tax is a tax

levied at the time of death or succession.

Such tax is levied on the value of estate of

the deceased or donor.

Some legislations levy capital gains tax at

the time transfer of estate to successor.



12/2/2010

8

Estate Duty Act 1953 was repealed w.e.f

16th March 1985

Gift Tax Act was abolished by Finance

Act 1998 w.e.f 1st of October 1998.

Finance Act (2)2004 introduced Sec

56(2)(v) for taxation of gifts subject to

exceptions


Wealth Tax is payable @ 1% on Net

Wealth exceeding Rs 30 lacs.

Hence there is no estate or inheritance

tax payable in India

Wealth of 1% is leviable on net wealth

exceeding Rs 100 lacs effective 01-04-

2012 (as per DTC)


12/2/2010

9

India is a safe place of Domicile

There is no tax on succession hence it is

always suggested to have India as an

investment intermediary


Investment outside India:

• Remittance up to USD 2,00,000 p.a permitted for

specified transactions

• Specified transactions include:

Investment in Foreign Securities

Transfer of immovable property outside India

Other respective guidelines need to be

adhered at the time of investment.


12/2/2010

10

Investment in foreign securities

permitted for a resident in India and a

company registered in India.

The investee company must be listed and

fulfill the conditions prescribed.

Investment subject to limits prescribed.


ODI possible through a Joint Venture of

Wholly Owned Subsidiary outside India

Total financial commitment of the Indian

Party not to exceed 400% of net worth

(200% in case of partnership firms)

Investments in Nepal can be made only

in Rupees

Investment in Pakistan is not permitted


12/2/2010

11

JV or WOS must be engaged in a

bonafide business

Indian Party (IP) is not mentioned in any

caution/ defaulters list of RBI.

IP routes all the transactions through an

authorised dealer and fulfills the

compliance procedures prescribed.


Investment through miscellaneous

remittance of upto USD 200,000

permissible per year per resident

individual.


12/2/2010

12

Permissible through proceeds in RFC

account.

Permissible if foreign exchange was

earned when assessee was a resident

outside India.

Miscellaneous remittance route adopted

in most circumstances.

In any other case, approval is required.



12/2/2010

13

Domicile/citizen based estate taxation.

Estate includes all tangible and

intangible property.

Assets considered at retail value on

succession

Estate Tax Rate : 55% (proposed for 2011)


Estate tax applies on:

• Assets at US

• US Citizens

• Non resident citizens

• Non resident and non citizens

Full / proportionate tax credit is available

if there is another estate transfer within

10 years.


12/2/2010

14

Direct legacy to a spouse who is a US

citizen is exempt.

Basic exemption of USD 1.0 MM (2011

onwards)- reduced from USD 3.5 MM in

2009.

Estate tax was temporarily repealed for

the year 2010


YearExclusion

Amount

Max/Top

tax rate

2001 $675,000 55%

2002 $1 million 50%

2003 $1 million 49%

2004 $1.5 million 48%

2005 $1.5 million 47%

2006 $2 million 46%

2007 $2 million 45%

2008 $2 million 45%

2009 $3.5 million 45%

2010 * Repealed * 0% *

2011 $1 million 55%


12/2/2010

15

There is no estate tax or inheritance tax

on death

One of the few OECD countries which

does not have an estate tax

However capital gains tax may arise on

death or succession

Roll over benefits are available on capital

gains arising on death


Roll over benefits not available for “tax

advantaged entities” (tae)

Tae includes individual or entity who is a

foreign resident

In case of assets held abroad, succeeded

by a non resident – capital gains tax shall

arise on death - Possibility of double

taxation cannot be ruled out (refer

illustration)


12/2/2010

16

.Australian

Resident (A)

Property inherited

by a non resident

Australian on death

of (A)

Owns a property in

France

Capital gains tax

shall apply on the

deceased final tax

return


Estate taxes apply on death or absence of an individual

Rate of tax varies from 5% to 45% based on the value of the transfer and relationship

Estate tax applies on all the following situations:• Deceased is a French resident

• Successor is a French resident

• Property is in France


12/2/2010

17

Succession of family business has

exemptions upto 75% of the estate value

subject to conditions

Capital gains tax also arises on death-

however the same is deferred in most

circumstances

Huge possibility of double taxation in

case of assets held abroad.


Huge possibility of double taxation in

case of assets held abroad.

Belgian

Resident (A)

Property inherited

by a French

resident on death of

(A)

Owns a shares of a

French Company

Estate / Gift tax

shall apply in both

France and Belgium


12/2/2010

18

There are no estate and inheritance taxes

in Canada.

Death and consequent movement of

property is regarded as transfer in the

hands of the deceased

Exceptions include transfer to a spouse/

spousal trust

Capital gains arises on death of an

individual


Taxes are levied by Provincial and

Federal Governments

Rates of taxation of capital gains vary

from:

• Federal tax : 15% to 29%

• Provincial tax : 4% to 17%

Tax credit is available on capital gains

paid abroad on inheritence


12/2/2010

19

No credit is available for ET/ IHT paid

abroad. Possibility of double taxation is

very high

DTAA available with US and France.


Hague Convention on the “LawApplicable to Succession to the Estates ofDeceased Persons (1989)”

Conflicts of Laws relating to the Form ofTestamentary Dispositions (1961)

Convention Concerning the InternationalAdministration of the Estates of DeceasedPersons (1973)


12/2/2010

20

UNIDROIT Convention providing a

Uniform Law on the Form of an

International Will (1973)

Regional conventions between Nordic

countries (1934) and certain Latin

American countries



12/2/2010

21

Private Investment Trust

Investment holding companies

Multi - Layered holding

Structuring investment options

The best planning structure is

possible prior to making an

investment


Trusts are regarded as separate legal

entities in most tax jurisdictions

Family members are beneficiaries

Death of a members reduces the number

of beneficiaries

Multiple trusts can be created to suite

domestic regulations

Estate and inheritance tax can be

avoided


12/2/2010

22

Private Specific Trusts : Shares of the

members are determinate

Private Discretionary Trusts: Shares of the

members are not determinate


. Trust has

Business

Income

Trust does not

have Business

Income

Maximum

Marginal Rate:

30%

Tax rate applicable

to each beneficiary

Alternatively-

Assessing Officer can

assess the income in

the hands of the

beneficiaries

At rates of an AoP if:

-Trust is declared by

Will

- It is exclusively for the

benefit of any

dependant relative

- The trust is the only

trust declared by the

settlor


12/2/2010

23

. Trust has

Business

Income

Trust does not

have Business

Income

Maximum

Marginal

Rate


-The income of none of the

beneficiaries does not exceed basic

exemption limit

-None of the beneficiaries are

beneficiaries in any other trust

-Trust is declared by Will

- It is exclusively for the benefit of

any dependant relative

- The trust is the only trust declared

by the settlor


-Trust is declared by Will

- It is exclusively for the

benefit of any dependant

relative or

- The trust is the only trust

declared by the settlor


No tax shall be assessable on the grantor

However where the trust is for the

immediate or deferred of the spouse and

minor child – the individual shall be

liable to tax to the extent of their share of

income from the trust.


12/2/2010

24

Income Slab Tax Rates

Upto Rs 1,60,000 Nil

Above Rs 1,60,000 upto Rs 5,00,000 10%

Above Rs 5,00,000 upto Rs 8,00,000 20%

Above Rs 8,00,000 30%

Note:

- Rates as applicable for Previous year 2010-11

- Cess of 3% shall be levied over and above the tax rates

-Where shares of members are indeterminate, the trust shall be chargeable

to tax at maximum marginal rate or at such higher rates


Where shares are determinate- Sec 67A:

Share of each beneficiary shall be

proportionately computed

Income shall be part of the personal

income under the respective heads of

income


12/2/2010

25

Situation Income Taxability

AoP is taxed at

Maximum Marginal Rate

Not included in total

income

No tax liability

AoP taxed as per slab

rates

Included in total income No tax liability

AoP is not liable for tax Included in total income Tax shall apply


.Family in India

Makes an

Investment abroad

in the name of the

trust

Forms an

Investment Trust in

India or abroad

Multiple trusts can

be created for

investments in

different

jurisdictions


12/2/2010

26

Investment is made in the shares of a

Holding Company which in turns makes

an investment in the ultimate asset.

Holding company should be located in a

country where IHT/ ET is minimal or

absent eg: India


In the event of death of a share holder,

the shares are transferred to the nominee

or legal heir of the deceased in the

country of incorporation of the holding

company.

The legal owner of the asset still remains

the holding company.


12/2/2010

27

Executed in 2009

Family in India

Makes an

Investment at US

Invests in shares of

an Indian Holding

Company

US, at present, does

not have the “Look

Through” provisions

for Estate Taxes


Benefits:

Ownership remains with the Indian

company irrespective of death of the

promoters

No estate tax upon succession

Disadvantages:

Huge capital gains liability if the asset is

ultimately sold at the US


12/2/2010

28


Situs of taxation (source vs residence)

Economic double taxation (IHT / ETA vsWT)

Taxation of transfer from administrator(Canada)

Varying definitions of spouse in differentlegislations


12/2/2010

29

Coordination with Global tax

professionals

Estate planning to be undertaken prior to

investment

Constant change in estate tax laws and

limits

Planning holds good for laws prevailing

at the time of structuring.


Planning comes at a cost ie certain

benefits are restricted to estate tax

payers eg: US

Pluralism of succession laws of both

countries


12/2/2010

30

Top management salaried employees

(CFOs, CEOs, CIOs…)

Medium and Large scale exporters and

importers

Industrialists, Film stars, Directors …

Other High Net worth Individual (net

worth exceeding Rs 20 crores)


Identify the possible tax cost in India

Discuss with the destination professionals

Manage the complete foreign exchange

compliance at the time of investment

Explore the possibility of ODI and ECB

(outside India for investment in a third

country)

Maintain the structure and alter to suit

changing tax laws.


12/2/2010

31

.


Indian CA

Legal Counsel in

India

Financial Advisor

Abroad

Legal Advisor

Abroad

Indian Client

and his family

Activity Basis of Payout

Determination of Taxation Cost in India Per Opinion/ Transaction

Determination of FEMA regulations Per Opinion/ Transaction

Structuring the transaction in

consultation with foreign professionals

Fixed fee plus per hour

engagement if it exceeds certain

stipulated hours agreed upon

Maintaining the structure – including

regulatory updates

Fixed Annual fee


12/2/2010

32


http://www.dvsca.com/

mailto:[email protected]

CA. Divakar Vijayasarathy · 12/2/2010 3 For tax parlance, death means:-Death of a living...

Documents

Transcript of CA. Divakar Vijayasarathy · 12/2/2010 3 For tax parlance, death means:-Death of a living...