Introduction

The article will also touch upon international experience in this matter. Further, this analysis takes a closer look at anti-abuse measures adopted by Organisation for Economic Cooperation and Development (after this referred to as “OECD”) and India to grab the loopholes of corporate re-domiciliation. This paper ends with key observations by Hon’ble Income Tax Appellate Tribunal (after this referred to as “ITAT”) in the above-mentioned case as well as highlights the importance of reasons for re-domiciliation which would play a very critical role in ascertaining the commercial rationale behind resorting to such a decision apart from the Tax Residency Certificate (after this referred as “TRC”) to grant the benefits under the tax treaty.

Facts of the case: Background

• The assessee company was registered, with the name Signpost International Limited, on 15th November 1991 in the British Virgin Islands (BVI) as an ‘international business company’, which sells advertisement time and earns subscription revenue through its Indian affiliates.
• Afterwards, on 24th May 1992, the name of the company was changed to ‘Asia Today Limited’.
• Registrar of Companies issued a certificate that the company is discontinued in the British Virgin Islands, vide certificate dated 30th June 1998 that states that:

  “The Registrar of Companies of the British Virgin Islands hereby certifies that Asia Today Limited, an international business company incorporated under section 3 of the International Business Companies Act of the law of British Virgin Islands has discontinued its operations in the British Virgin Islands on 30th June 1998”.

• As a net result of these actions, a company originally incorporated in the British Virgin Islands stands migrated to and re-domiciled in Mauritius on 29th June 1998 and ceased to exist in BVI.
• The assessee company re-domiciled itself in Mauritius and the Register of Companies issued a certificate of incorporation by continuation which was effective from the date of deregistration of the company in its initial place of incorporation. Further, the TRC dated July 06, 1999, was issued by the Government of Mauritius stating that this company was incorporated in Mauritius on June 29, 1998.

Analysis

Before analyzing the tax department arguments and decision by the ITAT, it shall be imperative to first understand the concept and needs for re-domiciliation of a corporate entity and key tax aspects from the International & Indian perspective.

1.1. Understanding of re-domiciliation of a corporate entity

“Corporate re-domiciliation is the process by which a company moves its place of incorporation from its original jurisdiction to another jurisdiction by changing the country under whose laws it is registered but maintains the same legal identity.”

• Corporate re-domiciliation is also known as ‘Continuation’.
• Re-domiciliation does not alter the status of the company.
• By virtue of corporate re-domiciliation, the company ceases to live in one jurisdiction and is deregistered in that jurisdiction, but it is alive in another jurisdiction by way of the continuation process.

1.2. Need for re-domiciliation

There could be various commercial reasons for re-domiciliation such as:

• Statutory and regulatory environment
• Data privacy law
• Geopolitical situation of the country
• Due to instability of the government
• Opportunities to raise capital
• IP protection, better R&D environment
• Availability of skilled resources, finance, and infrastructure

For the above suggested reasons and a multitude of others, the possibility of corporate re-domiciliation may be considered the preferred option.

1.3 Re-domiciliation in the international context

• Re-naming, re-structuring and even re-domiciliation of corporate entities in the offshore world is a fact of life, however, not all countries allow corporate re-domiciliation.
• There are a few countries across the globe that permit re-domiciliation either inbound or outbound or both which is subject to the fulfilment of prescribed conditions.
• To get the effect of corporate re-domiciliation, it is imperative that re-domiciliation is permissible under both jurisdictions viz., (a) where the company is currently registered and (b) where the company is to be continued.
• Once the company has been re-domiciled, it shall be subject to the prevailing corporate and other laws in the new jurisdiction.

1.4. Re-domiciliation in the Indian context

Currently, Companies Act 2013, does not permit either inbound or outbound re-domiciliation. However, it is important to consider the following key aspects for a better understanding of the re-domiciliation in the Indian context:

1.4.1. Shall Re-domiciliation be considered as a transfer?

As analyzed in Point no. 2.1 above, the only thing that changes due to re-domiciliation is the country of registration and it does not alter the status of the company. Once it is established that there would be no change in the assets held by the company and the shareholders, there would be no transfer of any assets taxable under section 2(47) of the Income-tax Act.

1.4.2. Whether re-domiciliation subject to capital gains tax in India?

As re-domiciliation does not have any impact on the legal status of the company, it should not be treated as a transfer under section 2(47) of the Income Tax Act, 1961. Thus, there ought to be no transfer of shares attracting capital gains tax in the hands of the shareholders.

1.4.3. Re-domiciliation: Relevance of Test of tax residency

The test of tax residency becomes more relevant when there is a change in the corporate seat of the company on account of re-domiciliation and there is no change in its management or business operation. Hence, it could result in dual residency case based on the place of effective management which depends upon a case of the facts.

1.4.4. Re-domiciliation: Implication under FEMA and Corporate law

As analyzed in Point no. 2.4.1. above, re-domicile of a corporate entity does not consider as transfer under section 2(47) of the Income-tax Act, 1961 then there should not be any adverse implications under the corporate law or FEMA. However, there will be a reporting requirement under corporate law or FEMA such as disclosures of beneficial ownership as per section 89 of the Companies Act, 2013, change in the place of incorporation of the shareholder, etc.

1.4.5. Re-domiciliation: Anti-abuse measures adopted by India

India has introduced several measures to counter or deny the tax treaty benefits/shopping in certain circumstances by way of:

• Introduction of the ‘Limitation of Benefits’ (LOB) article through amendments to its bilateral tax treaties.
• Introduction of General Anti-Avoidance Rules (‘GAAR’) provisions in the Income Tax Act, 1961.
• The Principal Purpose Test (‘PPT’) under the Multilateral Instrument (‘MLI’) which India adopted and deposited to OECD.

1.4.6. Re-domiciliation: Anti-abuse measures adopted by OECD via Base erosion and profit shifting (BEPS)

“The OECD has also introduced various measures to counter the tax treaty benefit/shopping through the BEPS project particularly Multilateral Instrument (MLI) which are over and above the domestic anti-abuse provisions.”

The OECD has also introduced various measures to counter the tax treaty benefit/shopping through the BEPS project particularly Multilateral Instrument (MLI) which are over and above the domestic anti-abuse provisions. Now, the Principal Purpose Test (PPT) and the Simplified Limitation of Benefit (SLOB) provisions of the MLI may have to be read along with the LOB provisions for the already existing bilateral tax treaties.

Tax department’s objection

• The tax department for the first time in this case during the hearing before the Income Tax Appellate Tribunal argued that the assessee company is not eligible for the benefit of India-Mauritius DTAA as it was incorporated in BVI and re-domiciled in Mauritius.
• Further, the assessee company as per the licence agreement dated 1st January 1995 with El-Zee Television Pvt. Ltd. indicates, it’s a BVI company and the Indo-Mauritian tax treaty benefits cannot be extended to the assessee company.

Issue before the Mumbai’s Tribunal

Can the benefits of the tax treaty be denied due to re-domiciliation?

ITAT’s ruling

Mumbai ITAT made certain key observations that are summarized as follows:

• Corporate re-domiciliation also referred to as ‘Continuation’ is the process by which a company moves its place of incorporation from its original jurisdiction to another new jurisdiction while maintaining the same legal entity.
• Re-domiciliation is a dynamic and constantly evolving concept and there could be various commercial reasons for the re-domiciliation of corporate entities to shift their corporate seat from their country of incorporation.
• To get the effect of corporate re-domiciliation, it is imperative that re-domiciliation is permissible under both jurisdictions viz., (a) where the company is currently registered and (b) where the company is to be continued.
• Once the TRC is produced by the assessee company, it is not open to revenue authorities to doubt the tax residency of the assessee company.
• Revenue authorities cannot revisit foundational matters regarding the granting of the benefit of DTAA to the assessee company before the Tribunal when such benefit had been granted by the tax officer and there is no tangible ground to doubt it.
• The benefit of DTAA cannot be denied just because of the re-domiciliation of corporate entity and the fact of each case needs to be examined in detail whether the re-domiciled company is actually domiciled in that jurisdiction.

Conclusion

• In the Indian tax context, there is no precedence on corporate re-domiciliation and this is a one-of-its-kind judgement wherein Mumbai ITAT provides the much-needed guidance on the way Indian Tribunals are likely to apply the re-domiciliation concept from a tax treaty perspective.
• Mumbai Tribunal held that re-domiciliation of corporate entity does not affect tax treaty benefit and put emphasizes that re-domiciliation may trigger detailed examination that the re-domiciled company is fiscally domiciled in that jurisdiction.
• However, in the current situation, a company should analyse the provisions of limitation of benefits, Principal purpose tax and General Anti-Avoidance Rule vis-à-vis its commercial reasons for the re-domiciliation as such re-domiciliation could be challenged only if the primary purpose of such an act was tax avoidance.

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Author may be reached at: sr1502@rediffmail.com and eboard@icai.in