India: Legislative Updates

Francisco A. Laguna

 This week, TransLegal begins a series on recent legislative changes in India. In the following posts, we will analyze some of the more significant ones for foreign investors.

 Capital Markets

 The Securities Exchange Board of India (“SEBI”) has revised insider trading regulations. The new rules, contained in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, enter into force 16 May 2015. One major change introduced by the new rules is that people not in the brokerage sector cannot obtain from an insider, directly or indirectly, any unpublished, price-sensitive information related to a company listed, or proposed to be listed, on an exchange. Insiders are defined as people who have been associated for the prior 6 months with a company that is listed, or proposed to be listed, on an exchange, and who are is in possession of the company’s unpublished, price-sensitive information.

Citizenship Law

The Parliament issued the Citizenship (Amendment) Bill, 2015, which purports to grant the same rights and privileges to persons of Indian Origin as well as Indian citizens living abroad.

Coal Mines Bill

Parliament of India Photo credit: Wikimedia Commons

Parliament of India
Photo credit: Wikimedia Commons

The Lower House of Parliament, the Lok Sabha, approved the Coal Mines (Special Provisions) Bill, 2015. The law seeks to make the process of granting coal mine leases more transparent. The Upper House, the Rajya Sabha, has yet to pass the law. The leasing process has been criticized for lack of transparency and corruption.

Foreign Direct Investment – Generally

The Department of Industrial Policy and Promotion (“DIPP”) is proposing to raise the FDI threshold from 12,000 million rupees to 30,000 million rupees. The Government may increase the threshold at which Cabinet approval for foreign investments becomes necessary, making India a more attractive venue for FDI. The goal is to attract foreign investments, particularly in infrastructure and manufacturing sectors. Currently, investments exceeding the 12,000 million limit require the approval of the Cabinet Committee on Economic Affairs.

TransLegal has advised clients on foreign direct investment regulations in the food & beverage as well as the hospitality sectors.

Foreign Direct Investment – Housing Sector

The Government has relaxed the rules related to repatriating FDI in the housing sector. In December 2014, the Government implemented these new rules by decreasing the required built-up area and capital needs. In March 2015, the DIPP clarified that the existing three-year lock-in will no longer apply, and under normal circumstances, an investor can exit on an automatic basis upon completion of the project or after the construction of basic infrastructure, such as roads, water supply and drainage. The Foreign Investment Promotion Board (“FIPB”) can approve earlier exits on a case by case basis.

The minimum built-up area requirement for development projects has been reduced from 50,000 square meters to 20,000 square meters, and minimum capital investment by foreign companies has been decreased substantially from US$ 10 million to US$ 5 million. In addition, the government has introduced an exemption to the minimum floor area and the capital requirements when an investor / joint venture company commits at least 30 % of the total project cost to low-cost housing.

 Foreign Direct Investment – Insurance and Pension Sectors

 In March 2015, the Indian Parliament passed the Insurance Laws (Amendment) Bill, 2015. The bill raises the foreign direct investment (“FDI”) cap in insurance companies from 26% to 49%. This increased FDI cap directly increases the allowable FDI in the pension sector: the Pension Fund Regulatory and Development Authority Act ties FDI limits in the pension sector to those in the insurance sector. This increase presents important opportunities for foreign companies in both sectors.

National Stock Exchange of India Photo credit: Wikimedia Commons

National Stock Exchange of India
Photo credit: Wikimedia Commons

Import / Export Documentary Requirements 

In March 2015, the Directorate General of Foreign Trade (“DGFT”) issued a notification drastically reduced the mandatory documents required for importing and exporting goods to three (3) documents. For imports, the mandatory documents are: bill of lading / airway bill; commercial invoice / packing list; and bill of entry. For exports, the mandatory documents are: bill of lading / airway bill; commercial invoice / packing list; and shipping bill / bill of export.

Intellectual Property

India’s IP Office now allows electronic filing for new applications for design & geographical indications. Previously, e-filing was only available for trademarks and patent applications.

Labor Law

 The 2015 Union Budget proposes the following amendments to applicable labor laws. First, the government seeks to provide increased flexibility for employee contributions to the Employee Provident Fund (“EPF”). Employees would be allowed to choose to participate in the EPF or a New Pension Scheme (to be developed). The proposal also provides that employees with incomes below certain monthly thresholds would have the option not to contribute to the EPF, without affecting or reducing the employer’s mandated contribution. In addition, the amendments would allow employers to offer employees participation in the Employee State Insurance (“ESI”) or a different health insurance product duly approved by the Insurance Regulatory Development Authority (“IRDA”).

Money Laundering

Presidential Standard of India Photo credit: Wikimedia Commons

Presidential Standard of India
Photo credit: Wikimedia Commons

Amendments to existing laws have been proposed to prevent money laundering. Two independent laws have been submitted to address unaccounted-for monies held offshore and dubious domestic transactions. Persons found to violate the law will be subject to prosecution and steep penalties. To implement these measures, amendments have been proposed to the Prevention of Money Laundering Act (“PMLA”), 2002 and the Foreign Exchange Management Act (“FEMA”). Under the proposed amendments, concealment of income and assets and evasion of tax related to foreign assets will be subject to prison sentences of up to 10 years. Each transaction in violation of the law will be treated separately, and offenders will not be allowed to reach an out-of-court resolution through the Settlement Commission. Those found guilty of tax evasion will be subject to penalties of 300% the tax that would have been paid on the concealed income and assets.

Call TransLegal with your questions concerning Indian laws and regulations and how they may impact your proposed FDI projects.

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Permanent Establishments in Developing Countries

Francisco A. Laguna & Jimmy Wang

An emerging issue of cross border investments or foreign direct investment is the double taxation created by the competition between developed and developing countries regarding how profits should be allocated (and taxed) between the source country and the country of residence. One of the factors that creates this problem is the existence of a permanent establishment (PE). A PE will give the country where the PE is found the right to tax a portion of business profits resulting from the foreign investment. Developed and developing countries generally have different views as to what constitutes a PE. Although it is a legal issue, it is also a highly political one since it involves countries’ revenue collection. This also causes the deviation of legal standards between developed and developing countries. In general, developing countries have lower PE thresholds in order to collect more tax from foreign investments, and developed countries vice versa. This post will explore the PE concept from the developing countries’ perspective.

Construction Site in Chile Photo Credit: oreopriest via Wikimedia Commons

Construction Site in Chile
Photo Credit: oreopriest via Wikimedia Commons

A PE is a “fixed place of business” through which the business of an enterprise is wholly or partly run. A multinational enterprise (MNE) of a developed country that engages in a trade or business through fixed places within the territory of a developing country would give the developing country the right to tax a portion of the income generated from the business operations. The threshold question here is what constitutes a PE that would allow the taxing authority of the developing country to tax a portion of income allocable to that PE. Developing countries usually follow the United Nations Model Tax Convention to define the PE threshold; and developed countries follow the OECD Model Tax Convention. Under the UN Model Tax Convention, the following types of PE are created, which encompass a broad category of industries. Continue reading

BITCOIN: Future Developments Look Profitable

Francisco A. Laguna & Wojciech Kornacki

 This week, we conclude our series on bitcoins and virtual currencies. Previously, in Part I, we defined virtual currencies, and their legal framework.  In Part II, we discussed various risks, opportunities, and dangers associated with using virtual currencies.  Today, we examine the future outlook for virtual currencies and new developments. Contact us at Translegal with any questions or to discuss the use of virtual currencies.

New Developments

Litecoin has been in existence since 2011, but it has not been in the news as often as Bitcoin.  According to its website, it confirms each international transfer of virtual currency in as little as less than 3 minutes.  Litecoin also claims to offer more cost-effective mining than Bitcoin.  Courtesy of http://www.wikipedia.com

Litecoin has been in existence since 2011, but it has not been in the news as often as Bitcoin. According to its website, it confirms each international transfer of virtual currency in as little as less than 3 minutes. Litecoin also claims to offer more cost-effective mining than Bitcoin. Courtesy of http://www.wikipedia.com

Bitcoin and other virtual currencies gain wider and wider acceptance. With more regulation, their value should stabilize, and they will become greater market participants.  The primary concern of the U.S. Federal Government and its European counterparts about virtual currencies involve anti-money laundering measures, terrorism-financing, and taxation.  In the United States, the individual states may take an active role in setting new regulatory standards on day-to-day exchanges of virtual currencies.  Also, many businesses see the benefits of virtual currencies.  Most recently, in April 2014, Bloomberg, began providing bitcoin pricing for its subscribers. Continue reading

BITCOIN: Your Opportunities, Risks and Dangers

Francisco A. Laguna & Wojciech Kornacki 

This second part of our series focuses on the risks and opportunities associated with BITCOIN, the new virtual currency.  As Bill Maher, pointed out, if you have virtual currency, it may virtually disappear.  On the other hand, it is also possible to virtually find it, and, indeed, in March 2014, Mt. Gox, a virtual currency exchange, lost 850,000 bitcoins and 200,000 bitcoins, previously thought stolen, were found in a virtual wallet that was thought to be empty.

BITCOIN Risks

Not insured – There is nothing backing the current value of the bitcoins in your virtual wallet.  Unlike most national currencies which are backed by National Banks, bitcoin is not backed by entity or institution.  In the United States, the Federal Deposit Insurance Corporation (“FDIC”) covers all bank deposits, including checking and saving accounts, money market deposit accounts and certificates of deposit up to a certain amount.  Thus, the FDIC insures almost everything except for investments.  The standard amount is $250,000 per depositor per insured bank per category.  The FDIC was created in 1933 in response to thousands of bank failures during the Great Depression where millions of Americans lost their savings.  The value of bitcoins can virtually disappear overnight, and there is no recourse, as in 1920s.  It is possible that at some point in the future, the FDIC may begin insuring virtual currency as well, but right now, this is a substantial risk.

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BITCOIN: The Evolution of Virtual Currency

Francisco A. Laguna & Wojciech Kornacki

 This is the first of a three part series on bitcoins and virtual currencies.  Today, we explore how U.S. and European governmental agencies view bitcoin and analyze their shaping legal framework as well as bitcoin mining.

What is a bitcoin? 

A ‘real’ bitcoin minted in 2011.  One significant advantage of using bitcoins in virtual transactions over credit cards is that the cost of the transaction is significantly lower.  On the coin it says in Latin ‘Strength in numbers.’  Courtesy of http://www.wikipedia.com

A ‘real’ bitcoin minted in 2011. One significant advantage of using bitcoins in virtual transactions over credit cards is that the cost of the transaction is significantly lower. On the coin it says in Latin ‘Strength in numbers.’ Courtesy of http://www.wikipedia.com

Bitcoin is considered a “virtual currency”.  According to the Internal Revenue Service (IRS), a virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.  Virtual currency is not regulated like traditional real currencies.  The European Banking Authority points out that banks are not involved in virtual currency transactions, which creates risks in itself.  Also, bitcoin savings are not insured, and their value could disappear overnight.

Bitcoin creates an open financial market where you deal directly with other bitcoin users.  With the continued rise of the internet, people have stated that they run into the problem of how to use their real currency on-line.  Paypal or Visa allow them to use real currency on-line but for a fee.  Bitcoin’s fee is significantly lower, and it has its own currency.  Continue reading

Suggestions for Improving Myanmar’s Current Investment Environment

This week, we conclude our series by TransLegal’s correspondent in Myanmar, Oliver Massmann.  Oliver was invited by His Excellence Minister Soe Thane to the President’s office on 22 January 2014 to present on current investment and trade issues faced by foreign investors in Myanmar.  Here are Oliver’s suggestions to improve the investment climate in Myanmar.

Contact TransLegal and Oliver to learn more about investment opportunities and challenges in Myanmar.

Oliver Massmann 

The Future – Recommendations for Myanmar

Myanmar Landscape Photo Credit: Colegota via Wikimedia Commons

Myanmar Landscape
Photo Credit: Colegota via Wikimedia Commons

Following our discussion last week of the challenges facing foreign investors in Myanman, we turn to specific recommendations for how the country can improve its current investment climate to attract foreign direct investment (FDI).

In general, we recommend that Myanmar align standards with international best practices to enhance the country’s competitiveness, pave the way for regional integration and improve the quality of products/level of services for the people of Myanmar. Continue reading

Key Challenges Facing Investors in Myanmar’s Current Investment Environment

This week, we are featuring a two-part guest blog prepared by TransLegal’s correspondent in Myanmar, Oliver Massmann.  Oliver was invited by His Excellence, Minister Soe Thane, to the President’s office on 22 January 2014 to discuss current investment and trade issues faced by foreign investors in Myanmar.  Below is the position paper Oliver drafted after the meeting.

This week, Oliver focuses on the issues facing foreign investors in Myanmar.  Next week’s blog will discuss possible solutions.

Contact TransLegal and Oliver to learn more about investment opportunities and challenges in Myanmar.

Oliver Massmann 

I           The Vision for Myanmar:

Map of Myanmar

Map of Myanmar

Historically, Myanmar was the wealthiest country in Southeast Asia and also once the world’s

largest exporter of rice. It produced 75% of the world’s teak and had a highly literate population.

After such a long time being closed off, however, it is now one of the poorest countries in Asia.

Everything has changed since Myanmar embarked on a major policy of reforms in 2011, and

Myanmar is now a new Asian emerging market.

Myanmar has all the elements required to create another Asian economic miracle, and it has strong potential.  Before realizing that potential, Myanmar has to solve the challenges and impediments hindering its development.

Myanmar must seize the opportunity to become what it once was: a country with a transparent and responsible investment and trade policy.  Continue reading

Taiwan: Recent Developments in International Tax Regime

Francisco A. Laguna & Jimmy Wang

As international businesses expand globally, comprehensive knowledge of intricate international tax becomes even more imperative. In April 2013, Taiwan’s Legislative Yuan proposed the incorporation of two concepts into its international tax regime: controlled foreign corporations (“CFC”); and place of effective management (“PEM”). The proposal is currently awaiting legislative approval. This article discusses the new amendments.

Controlled Foreign Corporations Rule (“CFC Rule”)

Map of Taiwan

Map of Taiwan

The proposed rule defines a CFC as a corporation, not domiciled in Taiwan, which is either majority owned or controlled by a Taiwanese business entity.  Generally, companies incorporated in Taiwan are taxed on income earned in Taiwan.  Income received from their foreign subsidiaries is taxed when such income is repatriated to Taiwan in the form of dividends. Proponents of the CFC Rule argue that the current law results in a “tax deferral” mechanism and effectively gives companies an interest-free loan from the government until the CFC declares a corresponding, taxable dividend. To close this loophole, the following draft amendment to Income Tax Act has been proposed – informal translation: Continue reading

Taxation of Indirect Share Transfers in China: Landmark Cases under Circular 698

Francisco A. Laguna & Jimmy Wang

This week, we conclude our series on taxation of indirect share transfers in China by examining two landmark cases decided under Circular Guoshuihan No. 698 (Circular 698) issued by the State Administration of Taxation (SAT) in 2009.  The Circular allows China’s tax authorities to tax indirect share transfers that take place outside the country.

Landmark Case I

This case was decided by the Yangzhou tax authority and reported in the China Taxation News on 6 June 2010.  It involved an offshore U.S. holding company that transferred 100% of its shareholdings in a Hong Kong intermediate holding company, which held 49% of the equity of a Chinese company, to a U.S. buyer. The U.S. buyer, thus, indirectly acquired 49% of the equity interest in the Chinese company.

Screen shot 2013-10-08 at 12.35.23 PMThe Yangzhou tax authority applied the Look Through Rule of Circular 698 and held that the H.K. holding company had no business substance besides functioning as an instrument to hold the equity in the Chinese Target.  The basis for its conclusion was that the H.K. holding company had no office, staff or assets other than the equity in the target.  As such, the tax authority disregarded the H.K. holding company and treated the U.S. holding company, i.e., the seller, as having disposed of the Chinese company directly.

The capital gain derived from the transaction was treated as Chinese source income and subject, in China, to withholding tax at the rate of 10%. The U.S. buyer settled the case for 173 million Chinese Yuan (~ USD $28.3 million).

Landmark Case II

A second landmark case was decided by the Kunshan tax authority.  It involved a subsidiary of a Taiwanese group that disposed of its 50% shareholding in a Mauritius company that owned 100% of a Chinese company to an U.S. holding company. The U.S. holding company, which previously owned the other 50% of the Mauritius company, acquired 100% ownership of the Mauritius company as a result of the transfer, thereby indirectly acquiring 100% ownership of the Chinese company.

Screen shot 2013-10-08 at 12.35.02 PM

The Kunshan tax authority held that the Mauritius company had no business substance other than holding the equity of the China Target company. Therefore, based on Circular 698 and applying the Look Through Rule, it disregarded the Mauritius company and assumed that the Taiwan Holding sold its interest in the Mauritius company directly. The authority ruled that the entire capital gain of the Taiwan holding company should be treated as China source income and subject to withholding tax at 10%.  Ultimately, 44 million Chinese Yuan (USD $7.2 million) was collected.

In the cases above, the intermediate holding companies were disregarded for the same reason—lack of business substance, i.e., no business operations, assets, liabilities or employees other than the investments in Chinese companies. Taxpayers who intend to undergo corporate restructuring or investors who are looking at target investments with previous restructuring should pay special attention to this trend and the potential tax liabilities that may arise if the commercial reasonableness at the intermediate holding company level is not well demonstrated.

TransLegal helps clients navigate the often-complex system of doing business in China and assure full compliance with applicable Chinese laws and regulations. Call us with your questions concerning China.

Taxation of Indirect Share Transfers in China

Francisco A. Laguna & Jimmy Wang

This week, we begin a two-week series on taxation of indirect share transfers in China.  In 2009, the State Administration of Taxation (SAT) issued Circular Guoshuihan No. 698 (Circular 698) empowering China’s tax authorities to tax indirect share transfers that take place outside the country.

Indirect share transfers occur when an offshore holding company (Holding Company) sells its stock in an intermediate offshore holding company, often established in a low / no tax jurisdiction (Intermediate Holding), which holds 100% equity of a company in China (China Target), to another offshore company (Buyer).  As a consequence, the Holding Company indirectly transfers the equity in the China Target (PRC Equity) by selling the Holding.  Because the Intermediate Holding exists in a tax haven, little or no tax is imposed on the transfer. Diagram 1 depicts the typical transaction with structures.

Screen shot 2013-09-30 at 8.39.50 PM Continue reading