Ketan Dalal · 2019. 10. 17. · Typical structure issues 7 Shareholders related •Shareholding...
Transcript of Ketan Dalal · 2019. 10. 17. · Typical structure issues 7 Shareholders related •Shareholding...
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Estate Duty - a Trigger for Succession Planning!
Ketan Dalal16 October 2019
BCAS Lecture Meeting
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Estate Duty in India
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• Governing Law - Estate Duty Act, 1953 • Objectives:
➢ Revenue considerations➢ Addressing wealth disparity
• Form of ‘tax’ on total value of properties held by an individual upon his/ her demise
• Exemption for one residential house• A few anti-abuse provisions:
➢ Gifts in contemplation of death➢ Charitable Gifts (within 6 months)➢ Other Gifts (within 2 years)
• Maximum Rate - as high as 85%
Earlier Estate Duty Law
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Scrapping Saga
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• Complex legislation (different rules for valuation of different assets)• Multiple litigation (ownership of properties, valuation of properties,
etc)• Double Tax (Wealth tax was also levied)• Administration cost vis-à-vis revenue
Estate Duty (Abolished in 1985)
• Restrictive definition; from 1993 financial assets excluded (previously, all assets included)
• High administration and compliance cost
Wealth Tax (Abolished in 2015)
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Estate Duty – What could be expected ?
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• Rate ? (global precedents)• Exempt limit could be 3-5 Crs ?• All assets likely to be covered (except one residential
house)• Valuation issues ? (Rule 11UA type provisions likely )
Where do
trusts fit in ?
Country Rate of Tax (%)(Progressive Tax)
Japan 10 – 55
South Korea 10 – 50
Belgium 3 – 80
Denmark 0 – 53
UK 0 – 40
USA Up to 40
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Succession Planning – An Overview
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Succession Planning
Structure amenability
Potential family issues / settlement
Estate duty issues
Estate Duty could be a trigger, but integrated approach needed!
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Structures related
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Typical structure issues
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Shareholders related
• Shareholding pattern vis-à-vis operating contribution
• If shareholding distributed amongst family members, could have major issues
Operating entity related
• Unrelated businesses in one company; major issue vis-à-vis divestment or JV
or IPO
• Similar business in different entities
• Surplus or “personal” assets in company; if strategic initiative, this becomes a
major issue for valuation
• Common services for group companies without any formal structure
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The approach
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Acknowledge the problem
Decide the objectives
Consensus of Family
Monitoring mechanism
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What could a potential restructuring involve?
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• Identification of roles, responsibilities and KRAs• Organisation chart and reporting• Remuneration and perks for family members• New inductions from family ?
Operating structure
• Movement of business to other entities• Merger/ Demergers• Capital Reduction/ Buy-Back• Transfer of shares etc
Shareholding/Entity structure
Addressing operating structure could lead to changes in shareholding and entity structure… and succession planning!
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Succession Planning: Hope for the best, plan for the worst!
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Succession Planning: The Big Picture
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Continuity Planning
Harmony vis-à-vis Conflict Management
Succession Planning
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Succession Planning: The Big Picture
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Death
Dispute
Divorce
Disability
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Delve into the Unique Factual Matrix
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Ownership Business
Family
1 2
4 6
5
7
3
Size of the Family and Family Dynamics
Wealth Complexity: Business and Personal
1. Inactive or passive owners
2. Management and employees
3. Owner managers
4. Inactive or passive owners/ family members
5. Family
6. Family employees
7. Working family owners
Key
Involvement of family members and other professionals in business
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A Bouquet of Complex Wealth Mix
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Identification of Wealth Mix: A bare necessity
Immovable
properties, Insurance
policies, jewellery,
Paintings, sculptures,
lockers, receivables
Shares in HoldCos/
Operating Companies
Domestic/
international
investments: Shares,
Mutual Funds, AIFs,
leases
Are personal assets
ringfenced from
business liabilities?
Liabilites including
hidden liabilities/
Personal guarantees
given
Identification of
business assets used
for family needs
Personal
Business
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Writing on the wall… should you plan ?
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➢ Succession planning is critical but very few want to address this issue !
➢ Estate duty is the unfortunate trigger !
➢ Succession planning has multiple dimensions and needs complete customisation – various hues and colours
• Family structure and dynamics
• Age and health
• Nature of assets (operating businesses add to complexity significantly)
• Trust on children
• Gift versus Trust
• What kind of Trust and which assets?
• Who will be the Trustee(s)?
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Tools to Succession Planning
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Family Charter/ Constitution/ Shareholders’ Agreement: From governance perspective
Wills: From succession of assets perspective
Trusts: Encapsulates Will + Family Charter/ Constitution
Evolution from Family Charter/ Constitution to Trusts dependent upon the inherent factual complexity
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Trusts: A Framework
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Beneficiaries(Directly/ Through Sub-Trusts)
Trust
Shares/ Interests in
entities
Physical Assets
TrusteesSettlor/
Contributories
Fiduciary Capacity to manage the Trust Assets for the benefit of Beneficiaries
Settles/ Contributes the Trust Property
The Big Question: Who would be the Trustees?
May have more than one trust for different
Assets
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Trust as a Holding Vehicle
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Benefits
Trust document to
define governance framework
Income and wealth
distribution framework
No direct ownership/ Control with
family members
Matters like exit & non-
compete
Tax efficiency in
distribution of income and assets
Solution to Inheritance
tax?
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What could a succession planning exercise involve ?
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TrustFamily
Settlement
Restructuring of business
Depending upon objectives, assets and whether business or otherwise
Could either be any one or a combination of any two or all three facets
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Key Issues : trusts, family settlements and restructuring
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Certain Issues - Trust
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• Determination of trustee/ settlor/ beneficiary• Inclusion/ Exclusion of Properties• Nature of trust – discretionary/ specific• Decision making
Commercial
• 56(2)(x) – only for the benefit of ‘relatives’• Taxation of trusts – section 161/ 164• Revocable trust - tax issues
Tax
• Share of listed company : exemption under Regulation 11 – SEBI Circular (22 Dec 2017)
• Other conditions/ undertakings – only individual / relative trustee?
Regulatory (SEBI Takeover Code)
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Certain Issues – Family Settlement & Restructuring
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• Parties to Family Settlement• Properties / assets / businesses involved in Family Settlement• Valuation• Other considerations - Split of costs, dispute resolution, etc
Commercial
• Capital gains – whether a ‘transfer’ u/s 2(47)?• Applicability of 56(2)(x) ? • Company as a party to family settlement ?• Restructuring & GAAR provisions ?
Tax
• Registration of Family Settlement agreement ?• FEMA implications (if a non-resident family member is involved)• SEBI Takeover Code (eg Joint to sole control)• Stamp Duty on Deed/ Agreement / Conveyance (immovable
Property)?
Regulatory
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Key Takeaways
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Key Takeaways
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Need to identify the issues
Need to identify objectives
Investing time in addressing the issues and achieving the objectives
Take steps to ringfence business from family issues
Work towards the objective with realistic time frames, costs and uncertainties