Tax considerations of pre-deal restructuring: Focus on China, Japan, and India The Dbriefs M&A Tax series Danny Po / David Bickle / Pushkar Khire /

Tax considerations of pre-deal restructuring: Focus on China, Japan, and India The Dbriefs M&A Tax series Danny Po / David Bickle / Pushkar Khire / William Lee 27 September 2016

Agenda Introduction a typical business carve out China Japan India Key takeaway Question and answer 2016. For information, contact Deloitte Touche Tohmatsu Limited. 2

Introduction 2016. For information, contact Deloitte Touche Tohmatsu Limited. 3

Introduction A typical business carve out Share deal vs. asset deal Deal process efficiency vs. tax efficiency The seller s perspective Transactional tax cost Historical tax issues Tax representation and warranty The buyer s perspective Basis step up Debt push down 2016. For information, contact Deloitte Touche Tohmatsu Limited. 4

China 2016. For information, contact Deloitte Touche Tohmatsu Limited. 5

China: overview of tax considerations Enterprise income tax / individual income tax Gains and losses from the transfer of assets and subsequent sale of shares Fair value requirement Special tax treatment for intra-group restructuring Value added tax VAT implications from the sale of assets and subsequent sale of shares Possible exemption on total business transfer Other taxes Deed tax Stamp duty 2016. For information, contact Deloitte Touche Tohmatsu Limited. 6

Scenario 1 2016. For information, contact Deloitte Touche Tohmatsu Limited. 7

Scenario 1: share deal (carve out target assets via corporate split) Target assets Target assets Step 1: transfers target assets to Newco in exchange for Newco shares via corporate split China tax considerations Subject to EIT on fair value gain Other transaction taxes including VAT and stamp duty (possible VAT exemption) Special tax treatment on group restructuring Step up in basis? Yes Subject to deed tax (for land and immovable properties) and stamp duty Jointly bear historical tax risks with 2016. For information, contact Deloitte Touche Tohmatsu Limited. 8

Scenario 1: share deal (carve out target assets via corporate split) (cont d) Cash Step 2: sells Newco shares to in exchange for cash China tax considerations (PRC Co) Subject to EIT on gain on transfer of shares Subject to stamp duty No step up in basis Subject to stamp duty Target assets 2016. For information, contact Deloitte Touche Tohmatsu Limited. 9

Scenario 2: share deal (carve out target assets via business transfer) Step 1: sells target assets to Newco in exchange for debt China tax considerations Target assets Loan Target assets Subject to EIT on fair value gain Other transaction taxes including VAT and stamp duty (possible VAT exemption) Step up in basis? Yes Interest deduction available? Subject to transfer pricing rule Subject to deed tax (for land and immovable properties) and stamp duty No acquisition of historical tax risks or attributes 2016. For information, contact Deloitte Touche Tohmatsu Limited. 11

Scenario 2: share deal (carve out target assets via business transfer) (cont d) Loan Cash Target assets Step 2: sells Newco shares to in exchange for cash China tax considerations Subject to EIT on gain on transfer of shares Subject to stamp duty No step up in basis Subject to stamp duty 2016. For information, contact Deloitte Touche Tohmatsu Limited. 12

Scenario 2: share deal (carve out target assets via business transfer) (cont d) Loan Cash Cash Target assets Step 3: capitalizes Newco with debt and / or equity China tax considerations EIT / WIT / VAT on interest to be derived from Stamp duty on new debt Subject to stamp duty on new debt and equity Interest deduction available? Subject to transfer pricing rule 2016. For information, contact Deloitte Touche Tohmatsu Limited. 13

Scenario 2: share deal (carve out target assets via business transfer) (cont d) Cash Cash Step 4: Newco repays debt to China tax considerations No tax implications repays debt to Target assets 2016. For information, contact Deloitte Touche Tohmatsu Limited. 14

Scenario 3: share deal (carve out non target assets via business transfer) Non-target assets Loan Target Co Target assets Non-target assets Step 1: Target Co sells non-target assets to Newco in exchange for debt Subject to EIT on fair value gain Other transaction taxes including VAT and stamp duty (possible VAT exemption) Step up in basis? Yes Interest deduction available? Subject to transfer pricing rule Subject to deed tax (for land and immovable properties) and stamp duty 2016. For information, contact Deloitte Touche Tohmatsu Limited. 16

Scenario 3: share deal (carve out non target assets via business transfer) (cont d) Cash Non-target assets Target Co Target assets Step 2: sells Target Co s shares to in exchange for cash China tax considerations Subject to EIT on gain on transfer of shares Subject to stamp duty Loan Acquisition of historical tax risks or attributes No step up in basis Subject to stamp duty 2016. For information, contact Deloitte Touche Tohmatsu Limited. 17

Scenario 4: asset deal Cash Target assets Target assets Step 1: directly sells target assets to in exchange for cash Subject to EIT on fair value gain Other transaction taxes including VAT and stamp duty (possible VAT exemption) Step up in basis? Yes but goodwill not amortizable Subject to deed tax (for land and immovable properties) and stamp duty No acquisition of historical tax risks or attributes 2016. For information, contact Deloitte Touche Tohmatsu Limited. 19

Polling question 1 Which pre deal restructuring step plan do you prefer? Vendor transfers assets to and sells it to the buyer Vendor carves out retained assets and sell target co to buyer Vendor sells assets to buyer directly It depends None of the above Don t know / not applicable 2016. For information, contact Deloitte Touche Tohmatsu Limited. 20

Japan 2016. For information, contact Deloitte Touche Tohmatsu Limited. 21

Scenario 1: share deal (carve out target assets via corporate split) (Japan) Target assets (Japan) Target assets (Singapore) Step 1: transfers target assets to in exchange for shares via corporate split Key tax consideration Corporation tax on built-in gain/ loss on Target assets Step up in basis of Target assets Recognize goodwill for corporation tax purposes (amortized over 5 years) Real estate acquisition and registration taxes Other consideration Typically does not require individual agreement for transfer from each employee and creditor NOLs can not be transferred to Incorporation of as GK rather than KK can reduce registration tax liability 2016. For information, contact Deloitte Touche Tohmatsu Limited. 23

Scenario 1: share deal (carve out target assets via corporate split) (cont d) Step 2: sells shares to in exchange for cash Cash (Japan) (Singapore) Key tax consideration Corporation tax on gain / loss (if any) Other consideration Use of leveraged Japan acquisition vehicle (Japan) Target assets May enable offset of cost of acquisition debt against taxable income from Target assets ( debt pushdown ) Consider TP, thin cap and earning stripping rules if borrowing is from foreign controlling shareholder, or guaranteed by foreign controlling shareholder 2016. For information, contact Deloitte Touche Tohmatsu Limited. 24

Scenario 2: share deal (carve out target assets via business transfer) (Japan) Target assets Loan (Japan) Target assets (Singapore) Step 1: sells target assets to in exchange for debt Key tax consideration Corporation tax on built-in gain / loss on Target assets Charges consumption tax (JCT) Step up in basis of Target assets Recognizes goodwill for corporation tax purposes (amortized over 5 years) Input JCT suffered generally creditable Real estate acquisition and registration taxes Other consideration Requires individual agreement for transfer from each employee and creditor NOLs can not be transferred to Incorporation of as GK rather than KK may reduce registration tax liability 2016. For information, contact Deloitte Touche Tohmatsu Limited. 26

Scenario 2: share deal (carve out target assets via business transfer) (cont d) Loan Cash (Japan) (Japan) Target assets (Singapore) Step2: sells shares to in exchange for cash Key tax consideration Corporation tax on gain / loss (if any) Other consideration Use of leveraged Japan acquisition vehicle May enable offset of cost of acquisition debt against taxable income from Target assets ( debt pushdown ) Consider TP, thin cap and earning stripping rules if borrowing from foreign controlling shareholder 2016. For information, contact Deloitte Touche Tohmatsu Limited. 27

Scenario 2: share deal (carve out target assets via business transfer) (cont d) Loan Cash (Japan) Cash (Japan) (Singapore) Step 3: capitalizes with debt and / or equity Key tax consideration Registration tax on increase in stated capital Consider impact of TP, thin cap and earning stripping rules on deductibility of interest on loans from Target assets 2016. For information, contact Deloitte Touche Tohmatsu Limited. 28

Scenario 2: share deal (carve out target assets via business transfer) (cont d) Cash (Japan) Cash (Singapore) Step 4: repays debt to Key tax consideration N/A repays debt to (Japan) Target assets 2016. For information, contact Deloitte Touche Tohmatsu Limited. 29

Scenario 3: share deal (carve out non target assets via business transfer) Step 1: sells non target assets to in exchange for debt Parent of (Japan) (Japan) Non-target assets Loan (Singapore) (Japan) Target assets Non-target assets Key tax consideration Corporation tax on built in gain / loss on non Target assets Charges JCT No step up in basis of Target assets Step-up in basis of non Target assets Recognizes goodwill for corporation tax purposes (amortized over 5 years) Input JCT suffered generally creditable Real estate acquisition and registration taxes Other consideration Requires individual agreement for transfer from each employee and creditor NOLs can not be transferred to ; remain with Incorporation of as GK rather than KK may reduce registration tax liability 2016. For information, contact Deloitte Touche Tohmatsu Limited. 31

Scenario 3: share deal (carve out non target assets via business transfer) (cont d) Cash Parent of (Japan) (Japan) Non-target assets Loan (Singapore) (Japan) Target assets Step 2: Parent of sells shares to in exchange for cash Key tax consideration Parent of Subject to corporate tax on built in gain (if any) Consider impact of Change of Control (CoC) rules on post transaction utilization of NOL Other consideration Acquires Target business comprehensively including contracts, licenses etc. Due diligence recommended on Use of leveraged Japan acquisition vehicle May enable offset of cost of acquisition debt against taxable income from Target assets ( debt pushdown ) Consider TP, thin cap and earning stripping rules if borrowing from foreign controlling shareholder 2016. For information, contact Deloitte Touche Tohmatsu Limited. 32

Scenario 4: asset deal Cash (Japan) Target assets (Japan-PE) Target assets Step 1: directly sells target assets to in exchange for cash Key tax consideration Corporation tax on built in gain / loss on Target assets Charges JCT Step up in basis of Target assets Recognizes goodwill for corporation tax purposes (amortized over 5 years) Input JCT suffered generally creditable, provided has elected to be JCT taxpayer on timely basis Real estate acquisition and registration taxes Other consideration Requires individual agreement for transfer from each employee and creditor NOLs can not be transferred to Target assets may constitute a Japanese PE Income attribution Authorized OECD Approach (AOA) 2016. For information, contact Deloitte Touche Tohmatsu Limited. 34

Polling question 2 Who should take care of basis step up and debt pushdown? Vendor Both of them None of them Don t know / not applicable 2016. For information, contact Deloitte Touche Tohmatsu Limited. 35

India 2016. For information, contact Deloitte Touche Tohmatsu Limited. 36

India: overview of tax considerations Carve out strategy Demerger vs. slump sale Carve out process High court process vs. private arrangement Income tax Capital gains tax implications Availability of cost step up on assets acquired Losses to be transferred only in certain cases Continuity of tax holiday benefits Historical tax risks Value added tax VAT implications on carve out of assets Other taxes Stamp duty 2016. For information, contact Deloitte Touche Tohmatsu Limited. 37

Scenario 1: share deal (carve out target assets via demerger) shareholders (India) (India) Target assets (India) Target assets Step 1: transfers target assets to via high court approved scheme of demerger and consideration to be discharged by way of issue of shares to shareholders of Key tax considerations,, and shareholders No tax implications subject to fulfilment of prescribed conditions No step up in basis of Target assets No value added tax Certain tax holiday benefits may not continue Other considerations and Demerger to be approved by a jurisdictional high court Proportionate tax losses can be transferred to Accounting impact Stamp duty applicable as per state specific laws Time frame ~ 5 to 6 months 2016. For information, contact Deloitte Touche Tohmatsu Limited. 39

Scenario 1: share deal (carve out target assets via demerger) Cash Shareholders (India) (India) Target assets Step 2: Shareholders of to sell their shares to in exchange for cash Key tax consideration Long term or short term capital gains tax on transfer of shares depending upon the period of holding In case of non resident, tax treaty would need to be considered Cost and period of holding of previous owner available Other consideration Stamp duty applicable on the value of shares transferred unless the shares are held in electronic form 2016. For information, contact Deloitte Touche Tohmatsu Limited. 40

Scenario 2: share deal (carve out target assets via slump sale) Debt (India) Target assets (India) Target assets Step 1: sells target assets at mutually agreed value to for a debt Key tax considerations Long term or short term capital gains tax on transfer of target assets depending upon the period of holding Historical tax risk to continue with Step up in basis of Target assets to the extent of transfer value of target assets Tax losses can not be transferred to No value added tax on business transfer Certain tax holiday benefits may be available to Other considerations Stamp duty on business transfer agreement 2016. For information, contact Deloitte Touche Tohmatsu Limited. 42

Scenario 2: share deal (carve out target assets via slump sale) (cont d) Debt (India) Cash (India) Target assets Step 2: capitalizes with debt and / or equity Key tax considerations No tax implications Other considerations New Co Stamp duty applicable on the value of shares / debt issued Stamp duty on increase in authorised capital of and issue of shares to 2016. For information, contact Deloitte Touche Tohmatsu Limited. 43

Scenario 2: share deal (carve out target assets via slump sale) (cont d) Cash (India) repays debt to Step 3: repays the payables to Key tax considerations No tax implications However, if the cash needs to be repatriated to the shareholders, Dividend Distribution Tax would be levied on such repatriation (India) Target assets 2016. For information, contact Deloitte Touche Tohmatsu Limited. 44

Scenario 3: share deal (carve out target assets via slump sale) (India) Target assets Issue of shares 99% (India) Target assets Step 1: sells target assets at mutually agreed value and to issue its shares to as consideration Key tax considerations Long term or short term capital gains tax on transfer of target assets depending upon the period of holding Historical tax risk to continue with Step up in basis of Target assets to the extent of transfer value of target assets Tax losses can not be transferred to No value added tax on business transfer Certain tax holiday benefits may be available to Other considerations Stamp duty on business transfer agreement Stamp duty on increase in authorised capital of and issue of shares to 2016. For information, contact Deloitte Touche Tohmatsu Limited. 46

Scenario 3: share deal (carve out target assets via slump sale) (cont d) Step 2: sells shares to in exchange for cash Cash (India) (India) Target assets Key tax considerations No likely capital gains since, cost of acquisition of shares should be equivalent to sale consideration Other considerations If the cash needs to be repatriated to the shareholders of, Dividend Distribution Tax would be levied on such repatriation in the hands of Stamp duty applicable on the value of shares transferred unless the shares are held in electronic form 2016. For information, contact Deloitte Touche Tohmatsu Limited. 47

Scenario 4: share deal (carve out non target assets via slump sale) Step 1: sells non target assets at mutually agreed value to for a debt Parent of (India) Non-target assets (India) Target assets (India) Non-target assets Key tax considerations Long term or short term capital gains tax on transfer of target assets depending upon the period of holding Historical tax risk to continue with Step up in basis of non target assets to the extent of transfer value Debt payable Tax losses can not be transferred to No value added tax on business transfer Certain tax holiday benefits may be available to Other considerations Stamp duty on business transfer agreement 2016. For information, contact Deloitte Touche Tohmatsu Limited. 49

Scenario 4: share deal (carve out non target assets via business transfer) Cash Parent of (India) Non-target assets (India) Target assets (India) Step 2: Parent of sells shares to in exchange for cash Key tax considerations Parent of Long term or short term capital gains tax on transfer of shares depending upon the period of holding In case of non resident, tax treaty would need to be considered Debt payable Lapse of tax losses, if any in entity on account of change in shareholding by more than 49% Other considerations Stamp duty applicable on the value of shares transferred unless the shares are held in electronic form 2016. For information, contact Deloitte Touche Tohmatsu Limited. 50

Scenario 5: asset deal Cash (India) Target assets Target assets Step 1: directly sells target assets to in exchange for cash Key tax considerations Long term or short term capital gains tax on transfer of target assets depending upon the period of holding Historical tax risk to continue with Step up in basis of Target assets to the extent of transfer value of target assets Tax losses can not be transferred to No value added tax on business transfer Certain tax holiday benefits may be available to Other considerations Stamp duty on business transfer agreement 2016. For information, contact Deloitte Touche Tohmatsu Limited. 52

Polling question 3 Which implication of business carve out affects you the most? Continuity of tax losses Continuity of tax holiday benefits Timelines None of them Don t know / not applicable 2016. For information, contact Deloitte Touche Tohmatsu Limited. 53

Key takeaway 2016. For information, contact Deloitte Touche Tohmatsu Limited. 54

Key takeaway Vendor to manage its transactional tax costs, which could be huge and not recoverable, consider different alternative step plans Available internal restructuring tax regime s transactional tax costs may or may not be minimized Basis step up through deal price allocation Debt pushdown is possible Anti avoidance considerations Minimal tax representation and warranty No one-size-fit-all solution in any country, consult your tax advisors as early in the deal process as possible 2016. For information, contact Deloitte Touche Tohmatsu Limited. 55

Question and answer 2016. For information, contact Deloitte Touche Tohmatsu Limited.

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Join us 13 October at 2PM HKT (GMT +8) as our India Spotlight series presents: Update on recent Indian transfer pricing cases and their impact For more information, visit www.deloitte.com/ap/dbriefs 2016. For information, contact Deloitte Touche Tohmatsu Limited.

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Contact information Danny Po Asia Pacific Regional Leader M&A Tax Deloitte Hong Kong, China dannpo@deloitte.com.hk David Bickle Tax Partner Deloitte Tokyo, Japan david.bickle@tohmatsu.co.jp Puskar Khire Tax Senior Manager Deloitte Mumbai, India pkhire@deloitte.com William Lee Tax Director Deloitte Hong Kong, China willilee@deloitte.com.hk 2016. For information, contact Deloitte Touche Tohmatsu Limited.

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