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).
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