AAR: No tax on “sale of shares” to non-resident company

Introduction

The issue of taxability of transfer of shares of a non-resident company to non- resident companies is gaining importance with time due to the surge in cross-boundary corporate restructuring. A company is considered non-resident for tax purposes if it is not an Indian company and if the control and management of its affairs are situated wholly outside India. Double Tax Avoidance Agreements (“DTAA”) provide that the business profits of a company resident in another country can be taxed in India only if it has a permanent establishment (“PE”) in India and to the extent the profits are attributable to the PE.

This bulletin analyses the taxability of shares transferred by a non-resident company to another non-resident company by taking help from the two latest rulings of the Authority for Advance Rulings (“AAR”) which will serve the purpose of a litmus test for companies by ascertaining their tax liabilities on sale of shares to non-residents. In both the cases, the shares in consideration are that of an Indian company and there is a DTAA in place between India and the non-resident country to which the transferor and transferee belong.

1.0  Income tax respite for non-resident company

The AAR ruling in the matter of VNU International B.V. dated March 28, 2011, the AAR New Delhi laid down that capital gain earned by a non-resident company, when there is a DTAA in place with the country to which the transferor is resident, can be taxable according to the laws of that country and be exempted from taxation in India. However, the AAR also emphasized on the requirement of filing of income tax return in India by the non- resident company, even if the return is nil.

1.1 Factual matrix

VNU International B.V. is a company incorporated in the Netherlands and does not have any PE in India. It holds 100% shares in AC Nielsen ONG-MARG Pvt Ltd. (“ACNOM”), a company incorporated in India, which is a solution provider of information services that examines health care, consumer products, financial, retail, and business to business and media performance trends. ACNOM entered into a scheme of arrangement with ORG-IMS Research Pvt. Ltd., an Indian company in 2003. In 2004, VNU transferred 50% shares of ORG-IMS to IMS-AG, a company incorporated in Switzerland. VNU approached AAR, New Delhi seeking the ruling of the authority on the taxability of shares transferred to IMS-AG, keeping in view that there is a DTAA between Netherlands and India.

The following questions of law were raised during the course of this case:

• Whether any capital gain earned by VNU International on transfer of shares of ORG-IMS to IMS-AG would be liable to tax in India as per the provisions of the Act and the DTAA between India and the Netherlands?

• Whether capital gain is not taxable in India?

• Whether the applicant is required to file any return of income under section 139¹ of the Income Tax Act, 1961 (“the Act”)?

• Whether the transfer of shares would attract transfer pricing provisions under sections 92 to 92F² of the Act?

• Whether the transferee was liable to withhold tax at source under section 195 of the Act and if so, on what amount should the tax have been deducted?

1.2 The opinion and ruling of AAR

The AAR held that an assessee has an option to be governed by the provision of the DTAA, if they are more beneficial than the provision of the Act. The transfer of shares of ORG-IMS by VNU would be governed by Article 13(5) of the DTAA Netherlands. The said capital gain would not be taxable in India, as the shares of ORG-IMS are transferred to the purchasers who are residents of Switzerland. The transfer pricing provisions in sections 92 to 92F of the Act would not be attracted as the sale and purchase of shares is between non- resident companies of the Netherland and Switzerland. Since there is no income chargeable to tax, there would be no liability to deduct advance tax under section 195 of the Act. However, AAR ruled that even though the income accrued by transfer of shares is not taxable in India, every company is required to file its return of income, whether it has a nil income or even a loss.

2.0 Capital gains from share transfer gets tax breather under DTAA

2.1 Factual matrix

D.B. Zwirn Mauritius Trading No. 2 Ltd. is a company incorporated in Mauritius and has been issued a tax residence certificate by the Mauritius tax authorities. It is engaged in the business of investments in different sectors and holds equity shares of Quippo Telecom Infrastructure Limited, an Indian company. Zwirn entered into a share purchase agreement to sell these shares to Geraldton Finance Limited, a Mauritius based company in 2009 and approached the AAR in New Delhi on the taxability of the capital gains from the transfer of these shares.

The following questions of law were raised during the course of this case:

• Whether Zwirn is liable to capital gains tax in Mauritius in terms of Article 13(4)³ of the DTAA between India and Mauritius?

• Whether the transaction of sale of shares of an Indian company attracts capital gain tax liability in terms of provisions of the Act and DTAA between India and Mauritius?

• Whether, in respect of the transaction of sale of shares, there is any withholding tax liability under section 195 of the Act?

2.2  The opinion and ruling of AAR

The AAR ruled that the gains arising out of alienation of shares of an Indian company to a company who is a resident of Mauritius is liable to tax in Mauritius in terms of Article 13(4) of the DTAA. The fact that the capital asset is located in India is immaterial as the tax payer is entitled in law to seek the benefit under the DTAA Mauritius.

Conclusion

The fundamental principle is that a non-resident taxpayer is subject to tax with respect to its income from transfer of shares of an Indian company. While a foreign company has a PE in India, the PE is not liable to pay tax in India if the foreign entity pays arm’s-length remuneration to the PE of the company. While section 9(1)(i)⁴ of the Act provides that any capital gain earned by the applicant on the transfer of shares would be taxable in India, but an assessee has an option to be governed by the provision of DTAA, in case they are more beneficial than the provision of the Act.⁵ Thus, investors involved in corporate restructuring through cross-border transfer of shares should check if DTAA is in place between the two countries, so as to get benefit of lower tax liability on share transfer.

Authored by: Priyanka Das

1 Every company, firm, or any other person other than a company, having total income exceeding the maximum amount which is not chargeable to income-tax or is assessable under this Act during the previous year, shall, on or before the due date, furnish a return of his income or the income of such other person during the previous year, in the prescribed form and manner.
2 Any income arising from an international transaction has to be computed at the arm’s length price.
3 Article 13(4) of the DTA