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ABC Inc and ABC (India) Pvt. Ltd are the US and Indian faces of the same entity providing BPO services. The Indian entity will be the execution arm while the US entity will focus on Sales and Marketing effort besides providing transformation or consulting services. Shareholder A is resident in US while shareholder B is resident in India.

The following questions are involved:

a. Should there be a parent-subsidiary relationship between the US entity and Indian entity?

b. If so, which should be the parent and which one should be the subsidiary?

c. What are the tax considerations in US that will govern this? If the Indian company is a parent company, will the income of the parent company get taxed in the hands of the US entity which is a subsidiary company? Conversely if the Indian company is a subsidiary company, then how does it impact the tax liability of the US company?

d. What is the impact if the shareholders in US and Indian entity are exactly the same or substantially similar? Can the IRS consider these entities to have some kind of parent-subsidiary relationship? And even if it does, what is the implication thereof? Currently the way these companies are structured: both have same shareholding pattern, shareholders A & B holding 50% stake each in both the companies.

Option A:

ABC Inc. (US entity) : Shareholder A 50%

Shareholder B 50%

ABC India (Pvt) Ltd. (India): Shareholder A 50%

Shareholder B 50%

There is no exclusivity between them. A Transfer Pricing agreement will exist between them. Will income of Indian entity get clubbed with the income of the US entity for taxation purposes under CFC provisions?

Option B:

ABC Inc. (US entity) : Shareholder A 51%

Shareholder B 49%

ABC India (Pvt) Ltd. (India): Shareholder A 49%

Shareholder B 51%

There is no exclusivity between them. A Transfer Pricing agreement will exist between them.

Will income of Indian entity get clubbed with the income of the US entity for taxation purposes under CFC provisions?

Option C:

ABC Inc is the holding company and ABC (India) is the subsidiary company. Shareholders A and B hold equal stake in ABC Inc. (the US entity). Over a period of time, additional shareholders will get added to the Indian entity by virtue of investment in the Indian venture. However, ABC Inc will always try to maintain majority stake in the Indian venture.

Option D:

ABC Inc is the subsidiary company and ABC (India) is the holding company. Shareholders A and B hold equal stake in ABC (India) Inc. (the Indian entity) to start with. Over a period of time, additional shareholders will get added to the Indian entity by virtue of investment in the Indian venture.

Option E:

ABC Inc. (US entity) : Shareholder A 50%

Distant-relative of B 50%

ABC India (Pvt) Ltd. (India): Distant-relative of A 50%

Shareholder B 50%



There is no exclusivity between them. A Transfer Pricing agreement will exist between them.

Will income of Indian entity get clubbed with the income of the US entity for taxation purposes under CFC provisions?

What we know:

i. US charges tax on world-wide income. Not sure what conditions need to be satisfied for the Indian income to get taxed in the US. Will it only apply if the US entity is a parent company or even when Indian entity is the parent company.

ii. Under Indian Income-tax Act, income is exempt until 2010, however if and when this income will get clubbed with US entity's income, it will effectively get taxed in the US.

iii. In US, the concept of Controlled Foreign Corporation can result in imposition of taxes on the US entity since the US entity may hold >= 50% of the stake in the Indian company under one of the options above.

Questions:

Which of the above options is beneficial from a short-term taxation perspective? We know that the Indian company will make losses in the initial 2-3 years.

Which of the above options will prove to be beneficial from a capital gains perspective?