Q. Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India?
- An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
- A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
- An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
- A foreign company transfers shares and such shares derive their substantial value from assets located in India.
Answer: (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India.
Notes:
- Indirect transfers refer to situations where when foreign entities own shares or assets in India, the shares of such foreign entities are transferred instead of a direct transfer of the underlying assets in India.
- For example, suppose a foreign company owns a subsidiary in India, which in turn owns a valuable asset, such as a piece of land or a building. If the foreign company sells its shares to another foreign entity, and those shares derive their value from the Indian subsidiary and the valuable asset it owns, the transaction is considered an indirect transfer.
- The amendments made in the ITA in 2012 clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India. As a result, the persons who sold such shares of foreign companies before the enactment of the Act (i.e., May 28, 2012) also became liable to pay tax on the income earned from such sale.