Understand Treaty impact on Adani-Holcim deal.

 

The Adani recently announced aquisation of Cement companies ACC & Ambuja cement from Holcim group based in Switzerland. Currently, the equity (covered by the deal) is held by the Holcim group as under:

 

Ambuja Cements Limited – 63.55% stake is held by Holderind Investments Limited, a Mauritius entity ('Holding entity'). In turn, the Holding entity is owned by Holderfin B.V, a Netherlands entity ('Intermediate Holding entity') which is ultimately owned by Holcim Limited, Switzerland ('Ultimate Holding entity').

ACC Limited - 50.05% stake is held by Ambuja Cements Limited, whereas the Holding entity owns a 4.48% stake.

 

The Intermediate Holding entity has entered into a binding agreement to sell the entire stake in the Holding entity (which owns Ambuja Cements Limited and ACC Limited) to Endeavour Trade  and Investment Ltd (Mauritius entity ultimately controlled by the Adani's). The sale of shares in the Indian companies indirectly (through stake transfer in the Holding entity) is potentially taxable under Section 9(1)(i) (read with Explanation 5 and 6) of the Income-tax Act, 1961 ('the Act'). It is, however, claimed that the Intermediate Holding entity is eligible to claim the benefit of Article 13(5) of the India- Netherlands tax treaty ('Netherlands DTAA') (which gives the right of taxation to the resident State) and thus, not liable to pay taxes on capital gains (if any) made on sales of shares. In this background, we are of theof the view that the treaty benefit will be subject to the satisfaction of the following conditions:

 

1.  Principal purpose test – Treaty abuse is not permissible

 

The Netherlands DTAA explicitly provides for the denial of treaty benefits where it can be reasonably concluded that obtaining the benefit was one of the principal purposes of the transaction that resulted directly or indirectly in that benefit, except where such benefit would be in accordance with the object and purpose of the relevant provisions.

 

Applying the above to the transaction under purview, the Intermediate Holding entity needs to establish that the granting of treaty benefit is in accordance with the object and purpose of the Netherlands DTAA. In other words, it needs to be proved that the Intermediate Holding entity was not formed solely for obtaining the treaty benefits. It further needs to be proved that despite Ambuja Cements Limited and ACC Ltd being Indian listed companies, why the transaction was routed through the Intermediate Holding entity via sale to another Mauritius entity, i.e. Endeavour Trade and Investment Ltd., owned by Adani's.

 

2.  Double non-taxation – not entitled by treaty

 

The preamble of the Netherlands DTAA interalia states that the purpose is not to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Therefore, in the given transaction, it needs to be seen whether the tax on the capital gains is payable in any jurisdictions or not? If tax is not payable in either jurisdiction, the entitlement of the Intermediate Holding entity to invoke the Netherlands DTAA may be questioned.  The preamble further clarifies that the purpose of the Netherlands DTAA is not to allow treaty-shopping arrangements aimed at obtaining reliefs provided for the indirect benefit of residents of  third jurisdictions. Hence, it needs to be proved that the capital gains exemption is not aimed at benefiting the Ultimate Holding entity (through the Netherlands DTAA as a treaty shopping arrangement).

 

 

 

3.  Beneficial owner of the share of the holding entity

 

Before conferring the treaty benefits, the beneficial ownership criteria have been looked into more thoroughly in relation to transactions executed in the last few years. The facts of the case under analysis, Intermediate Holding entity may be the legal owner but whether it is the beneficial owner of the shares being transferred is to be examined. The Act seeks to tax the real owner of the income If the real owner is found to be the Ultimate Holding entity, then the recourse to the Netherlands DTAA will not be available.

 

The concept of a real owner is akin to a beneficial owner. The person who has control over the income is treated as the beneficial owner and not the mere recipient of the income. There may be a situation where a person is a registered owner but is not a beneficial owner. In such cases, the treaty entitlement may be disputed. In this regard, reference may be made to the decision of Aditya Birla Nuvo Ltd.,wherein the Court denied the treaty benefit for want of beneficial ownership. The High Court of Eastern Denmark has consistently denied treaty benefits to the interposed entities in the recent past.

 

The substantive verification of the beneficial  ownership condition (e.g. real economic activity, control over income, declarations regarding beneficial ownership etc.) instead of mere reliance on the certificate of tax residence, therefore, assumes importance. Accordingly, it needs to be substantiated that the Intermediate Holding entity is the beneficial owner while claiming the Netherlands DTAA benefit.

 

4.  Residential status of the Mauritius entities

 

Article 13(5) of the Netherlands DTAA gives the right of taxation on the sale of shares to the resident State. However, such a tax right to the resident State is not absolute.

 

Article 13(5) of the Netherlands DTAA also provides that where the share of the company (say, Holding entity) which is a resident of the other State (hypothetically say, India)is transferred to another person (say, Endeavour Trade and Investment Ltd) who is a resident of the other State (hypothetically say, India), then the gain may be taxed in the State of residence of the company (here Holding entity). It is worth noting that the residential status of a Mauritius company is also determined based on control and management apart from the incorporation criteria solely prevalent in many jurisdictions.

 

Considering that Mauritius entities in question are investment companies, it would be interesting to see the residential status of such companies, as the same would have a bearing on the eligibility of benefit under Article 13(5).