Tax Cheer For Singapore-Based Private Equity Funds
A construction site by the Singapore River in Singapore. (Photographer: Lauryn Ishak/Bloomberg)

Tax Cheer For Singapore-Based Private Equity Funds

Singapore-based investment companies who’ve invested in Indian entities prior to 2017 stand to benefit from a recent order by the Authority for Advance Ruling.

Capital gains arising to a Singapore company from transfer of shares in an Indian entity will not be taxed domestically, the authority has ruled. Such a transaction will only be taxed in Singapore as per the double tax avoidance agreement, it has held.

To recall, many multinational entities invested in India through the Singapore route to take advantage of the beneficial capital gains provisions under the 1994 DTAA. In 2016, the government curtailed the benefits under the Singapore tax treaty to say:

  1. Investment made in Indian shares prior to April 1, 2017 have been grandfathered. Any gains arising from their alienation will only be taxed in Singapore.
  2. Gains from shares acquired between April 1, 2017, to March 31, 2019, will be taxed in India at 50% of the prevailing rate.
  3. Shares acquired after April 1, 2019, will be subjected to capital gains tax in India at prevailing rates.

Anish Thacker, partner at Ernst and Young, said the AAR ruling will act as a guidance for those companies falling in category 1 and who exited their investments after the amendment or plan to do so in the future. “But it will have insignificant value with respect to investments made post the amendments to the DTAA.”

AAR Frames Parameters To Grant Tax Relief

BG Asia Pacific Holdings—a Singapore-based investment company—had acquired more than 65% stake in Gujarat Gas Co., an Indian listed entity in the 1990s. It proposed to transfer the holding to GSPC Distribution Networks Ltd. in 2012 as part of its global restructuring exercise and sought an advance ruling to determine its tax liability.

BG Asia sought capital gains relief in India under the DTAA—a claim that was opposed by the tax department, which said BG Asia was a shell entity for the following reasons:

  • Costs incurred by the company weren’t operating expenses. It didn’t employ anyone for its operations and certain payroll costs were incurred by other entities.
  • BG Asia cannot be treated as a Singapore tax resident as its control and management vested with a U.K. entity. Further, it was not incurring administrative expenses and was only earning dividend income.

BG Asia challenged this citing the Indian shares were acquired in 1997, eight years before the introduction of capital gains exemption in 2005 and had more than $2 billion in net assets a year before the sale. Further, the tax residency certificate issued by Singapore cemented its status as a genuine entity.

Citing the Supreme Court’s ruling in the Vodafone case and after examining BG Asia’s tax residency certificate, financials and payroll records, the AAR observed that the company is eligible for tax relief under the treaty.

The Singapore entity was protected under the DTAA and will not be liable for capital gains tax in India, the AAR said.

Ruling Beneficial For Singapore Based PE Funds, Experts Say

Experts pointed out that this AAR ruling, though applicable only in this case, removes the uncertainty faced by many Singapore-based investors.

The ruling establishes an important fact that an investment holding company is not a shell company for the purpose of treaty benefits, Vaibhav Gupta, partner at Dhruva Advisors, said.

The observation that there is no prescribed requirement for having employees or operating expenditure will be positive for the several private equity funds in India which have invested through Singapore-based investment companies.
Vaibhav Gupta, partner, Dhruva Advisors

Nand Kishore, partner at DSK Legal, agreed the ruling is likely to benefit many Singapore-based investment entities. The AAR had made an important finding—that management of investments by a holding company in its subsidiary is a business operation involving expertise and management skills, he said.

The AAR ruling will have a positive impact on one critical aspect of the Limitation of Benefit conditions under the DTAA—that the Singapore entity should be engaged in bona fide business activities. Having said this, facts of each case will be analyzed on its merits to evaluate whether it is a bona fide business activity or not.
Nand Kishore, partner, DSK Legal

There are two more critical observations by the AAR which can be helpful for firms.

First, that a special purpose company will not be considered a shell entity if investments are done in multiple countries and second, all expenses including the statutory ones will be included when the threshold to meet the minimum expenditure test under the tax treaty is to be determined, Thacker explained.

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