Global financial services major Credit Suisse indicated two out of every three listed companies in India are family-controlled, making it the country with highest presence of family businesses in Asia. Clearly, family-run businesses make for a huge percentage of business houses in India.
In today’s tax and regulatory framework, such promoter structures are fraught with challenges like cascading impact of dividend distribution tax (‘DDT’), Minimum Alternate Tax (‘MAT’) and Deemed Gift Tax on inter-se transfer of shares for inadequate consideration, and so on. Also, the discussions around the re-introduction of Estate Duty or Inheritance Tax will certainly give one more reason to the Promoters and the Families to reconsider and restructure their holding structures for their wealth, in particular, their key operating assets like shares in business ventures. This will have great importance from the perspective of succession planning.
The hunt for possible holding structures sparked since, recently, the Finance Minister, P Chidambaram in one of the leading forums, proposed a debate on Estate Duty which fuelled a speculation that the Duty which was abolished in 1985 might come back in the form of Inheritance Tax.
| TIME TO RE-ALIGN FAMILY ASSETS? |
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The time is right to re-align the promoter structures and eliminate the holding companies and either hold the shares directly or through a vehicle which may provide similar advantages as of a company like control, governance, inter-locking and also results in minimum tax inefficiencies. The answers lie in the Limited Liability Partnerships (LLP’s) and Family Trusts. While the concept of LLP in India is nascent and still evolving, the concept of Trusts has always been considered as efficient holding vehicles.
Holding Family assets through Trusts have significant advantages like demarcation of equity and control, succession planning for future generations, internal dispute resolution, and so on. Also, Trusts, if planned appropriately can also provide efficiencies not only from a tax perspective, but can be a possible way forward to manage inheritance tax, if proposed. The taxation of a Family Trust can either be like an Individual or an Association of Persons (AoP’s) and both currently, or even in future, may not attract MAT or DDT.
With the advantages as stated above, what still needs to be evaluated is how the existing structures will get migrated to the Trusts considering the challenges of taxes in form of Capital Gains Tax, Stamp Duty, Wealth Tax, Deemed Gift Tax and regulatory hurdles of Takeover Code relevant for underlying listed companies, evolving regulations of Non- Banking Finance Companies and Core-Investment Companies. Also, considering the above, the animal in the form of Inheritance Tax is still a surprise since there is no guidance available on how the law may get proposed. While the Law on Estate Duty, which was abolished earlier, indicated certain challenges on the wealth passed on where the asset was gifted within a period of two years prior to the death of the donor or where the Gift was made to relatives for an inadequate consideration. Thus, migration to Trust by merely gifting the shares may not provide a solution for Inheritance Tax in particular when the beneficiary of the asset is also the donor or settler for the Trust.
While the solutions or ideating on the best structure will depend on the facts of each Family or group, holding the asset(s) directly from the Trust is an answer which will clearly support effective succession planning.
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Also, migration of shares in the operating companies directly to the Trust through operation of law through mergers/ de-mergers may find a possible answer from the perspective of Inheritance Tax. This will avoid the need of any gift and help members of the Family to continue with the control of the Trust.
Further, the Trust will inherit the asset in which case there may not be any Inheritance Tax. Further, the mergers and de-merger provide tax neutrality if structured appropriately resulting in exemptions for the merging/ de-merged company and the merged/ resulting company along with their respective shareholders.
Also, the Takeover Code generally provides exemptions for mergers/ de-mergers and therefore, the introduction and migration to the Trust structure through the restructuring may be appropriate. The only caution is the Stamp Duty Laws which are quite unique to each State and thus can be a significant cost.
With multiple bullets which can fly from various directions in the form of transaction costs to include multiple taxes and complex regulatory framework challenges, it is important and imperative to analyse the existing structures carefully and to provide a solution in the basket which will not only achieve the commercial, operational and emotional objectives of the Promoters and their families, but is equally effective considering the existing tax and regulatory framework and Inheritance tax, if proposed in future.
Hiten Kotak is Head of Tax and Partner, KPMG and Prashant Kapoor is Director – M&A Tax, KPMG India
