A symphony of choices: Gauhati High Court confirms that arbitration can be invoked despite availability of an alternate remedy under the provisions of RERA; discretion lies with the allottees to opt for proceedings best suited to them
The Indian startup ecosystem is undergoing a significant transformation, with reverse flipping gaining prominence. The Economic Survey 2022-23 highlighted favorable conditions for startups to relocate to India, supported by government initiatives. Founders are increasingly recognizing India’s growth potential, coupled with global market challenges and ambitions for IPOs, leading to a focus on long-term stability in the home jurisdiction.
The International Financial Services Centre (IFSC) has been a cornerstone of India’s ambition to become a global financial powerhouse, with a key objective to ‘Onshore the Offshore.’ As per a recent trend, startups are evaluating relocation of offshore holding companies to the IFSC through various methods. These include transferring shares of an Indian entity from the offshore holding company to the IFSC holding company, merging the offshore holding company into the IFSC, share swap, and re-domiciling the offshore holding company to the IFSC. The IFSC Expert committee made various recommendations to facilitate reverse flipping of Indian startups including permitting holding company structures in IFSC. Implementation of these recommendations is keenly awaited.
As the government prepares its fiscal plan for FY 2024-25, there is keen anticipation of certain fiscal measures being introduced to enhance tax certainty and facilitate reverse flipping. Certain key expectations regarding expected fiscal amendments to facilitate/fast track such relocation possibilities of startups are as under:
Amendment to Section 9, Section 47 and Section 56(2)(x) of the Income-tax act, 1961 (ITA): Relaxation from capital gains and deemed gift tax provisions on transfer of shares / other capital assets held by the offshore holding company to the IFSC holding company, swap of shares held by a shareholder in the offshore holding company with the IFSC holding company and any indirect transfer of shares of an Indian company (pursuant to relocation to IFSC). It is expected that certain anti-abuse conditions could be imposed while providing aforementioned tax neutrality: For example – Minimum shareholding requirement for an Indian resident at the offshore level, cut-off time for existing investments in offshore structures and intended relocation.
Rationalization of capital gains tax for IFSC holding company on relocation: As per Section 112 of the ITA, tax rate on long-term capital gains arising from the sale of unlisted securities for domestic companies is 20% whereas for non-residents it is 10%. To ensure that on relocation, the IFSC holding company is not in a disadvantageous position as compared to an offshore holding company, an amendment to provide parity in capital gains tax rate (10%) is expected. A relevant amendment w.r.t. extension of existing cost of acquisition and holding period is also expected.
Carry forward of tax losses upon relocation: Section 79 restricts carry forward losses if there is a change in beneficial ownership of 51% or more. Reverse flipping of the structure and relocation of the holding company to IFSC would involve substantial change in the shareholding pattern of the Indian startup. Suitable amendment in Section 79 to provide an exception in case of relocation of overseas holding company to IFSC is expected.
Conclusion
By extending tax benefits and rationalizing provisions to avoid unintended tax consequences for startups flipping back, the Union Budget 2024 has the potential to create significant opportunities. If these expectations are realized, reverse flipping through the IFSC may become a reality.
We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.comor write to our authors:
