Transfer of Shares of an Indian Company From Non-Resident To Non-Resident
Prepared by Khusbu M Kinger
Income Tax Act, 1961 compliances:
As per Section 9(1)(i) of the Income Tax Act, 1961, any income which has been accrued or arising, whether directly or indirectly, through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India.
Hence, on the transfer of shares of an Indian company from one non-resident to another company, the resultant capital gains on such sale of shares of an Indian company shall be taxable in the hands of the Non-resident.
Also, TDS (tax deducted at source) requirement shall also apply to the Non-resident and such TDS shall be treated as Withholding tax.
As per Explanation 6 to Sec 9(1)(i), The share of Interest shall be deemed to derive its value substantially from the assets located in India, on the specified date, the value of such assets
- Exceeds Rs. 10 Crores and
- Represent at least 50% of the value of all assets owned by the company.
Since the above conditions are not satisfied, Sec 9(1)(i) is not applicable.
Taxability in the hands of Transferor:
The unlisted shares (other than debt or mutual funds) or securities of an Indian company, if held for more than 24 months, are classified as long term capital gain assets.
As per Section 112, tax liability of such securities for non-residents is 10% without indexation and currency fluctuation benefit plus education cess 4% and surcharge as applicable.
The Non-resident buyer is required to deduct tax at 10% on Long Term Capital Gains.
Determination of Value of Sale Consideration of Shares:
As per Section 50CA, where shares of an unquoted (unlisted) company are sold below the prescribed fair market value (“FMV”), such fair market value is deemed to be the value of sale consideration for the purpose of the computation of capital gains.
If shares are sold at a price higher than the fair market value of such shares, the actual sale price of the securities shall be used to compute capital gains arising from such sale.
Taxability in the Hands of Transferee:
As per Section 56(2)(x), any person who receives any property other than immoveable property, for a consideration less than fair market value exceeding fifty thousand rupees, then the aggregate fair market value of such property as exceeds such consideration shall be chargeable to tax in the hands of the transferee.
Rule 11UA prescribes the method of determining the fair market value of unquoted shares:
For the purposes of Section 50CA and 56(2)(x), the fair market value of the shares shall be determined on the valuation date ie. the date on which the shares are transferred.
Fair Market Value of Unquoted Equity Shares = (A+B+C+D – L) × PV/PE, where,
- A = Book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,
- Any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
- Any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset.
- B = The price which the jewellery and artistic work would fetch if sold in the open market based on the valuation report obtained from a registered valuer.
- C = Fair market value of shares and securities as determined in the prescribed manner provided in this rule.
- D = The value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property.
- L = Book value of liabilities shown in the balance sheet, but not including the following amounts:
- The paid-up capital in respect of equity shares.
- The amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company.
- Reserves and surplus other than those set apart towards depreciation.
- Any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits.
- Any amount representing provisions made for meeting liabilities, other than ascertained liabilities.
- Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
- PV = The paid-up value of such equity shares.
- PE = Total amount of paid-up equity share capital as shown in the balance-sheet.
Rule 11UA prescribes the method of determining the fair market value of unlisted shares:
For the purposes of Section 9(1)(i), the fair market value of the shares shall be determined by a Merchant Banker or an Accountant in accordance with any internationally accepted valuation methodology for valuation of shares on arm’s length basis as increased by the liability, if any on the specified date.
Specified date means the:
- Date on which the accounting period of the company ends preceding the date of transfer of a share or an interest; or
- Date of transfer, if the book value of the assets of the company on the date of transfer exceeds the book value of the assets as on the above date by 15%.
COMPANIES ACT COMPLIANCES
- The Articles of the Company must authorise transfer of shares.
- Share Transfer Agreement needs to be entered between Transferor and Transferee.
- The Share Transfer Form (SH-4) should be duly stamped, dated and executed
- The stamp duty payable of transfer of shares in physical form shall be 015% of the total market value of the shares. Market Value means Price /consideration mentioned in the share certificate.
- The stamp duty is required to be paid by the transferor to the State Government.
- Either the transferor of the Shares (Seller) or the transferee (Buyer) must, in order to effectuate the share transfer, deliver the Instrument of Transfer within 60 days of the date of execution along with the share certificate to the Company.
- The Company shall place the agreement in a Board meeting and pass resolution accordingly.
- The Company shall issue share certificates in the name of the transferee within a period of one month from the date of receipt of instrument of transfer.
- The Company whose shares are being transferred should update its Register of Members.
Valuation of Shares:
For Issue of share valuation is required, for transfer of share there is no related provision on the valuation of shares under the Companies Act.
In case of issue of shares, valuation is to be done by a registered Valuer.
The methods used can be Asset approach, market approach and yield approach.
FEMA COMPLIANCES
Form FC-TRS is required to be filed for transfer of capital instruments by way of sale in accordance with FEMA 20(R), from:
- a person resident outside India holding capital instruments in an Indian company on a repatriable basis to a person resident outside India holding capital instruments on a non-repatriable basis;
- a person resident outside India holding capital instruments in an Indian company on non-repatriable basis to a person resident outside India holding capital instruments on repatriable basis;
FC-TRS is not required for:
- for transfer of shares from a person resident outside India holding capital instruments in an Indian company on a repatriable basis to a person resident outside India holding capital instruments on a repatriable basis
The onus of reporting is on the person resident outside India holding capital instruments on a non-repatriable basis.
The form FC-TRS has to be filed with the AD bank within 60 days of receipt/ remittance of funds or transfer of capital instruments whichever is earlier.
Steps involved in Filing Form FC-TRS
- Entity User Registration
- Business User Registration
- Log into FIRMS Portal and file SMF – select Return type
- Details to be filled in:
- Common investment details
- Common details
- Particulars of transfer
- Remittance details
- Shareholding pattern
- Submitting the form
- List of documents to be attached along with form FC-TRS:
- Consent Letter
- Shareholding Pattern
- Transfer Agreement
- Valuation Certificate
- Declaration from Buyer of Securities
- Non Resident Declaration
- Board Resolution
- Transfer Deed
- FIRC/Outward Remittance Certificate
Pricing Guidelines:
As per the NDI Rules, where the equity instruments are held by the person resident outside India on non-repatriable basis, the transfer by way of sale where the transferee intends to hold the equity instruments on a repatriable basis, it shall be in compliance with and subject to the adherence in entry routes, sectoral caps or investment limits, pricing guidelines, documentation and reporting requirements as specified by RBI.
The Fair Market Value shall be determined as per the Internationally Accepted Pricing Methodology on an arm’s length basis, which should be duly certified by Chartered Accountant or Merchant Banker or Cost Accountant or SEBI Registered Merchant.
The Valuation done is valid for a period of 6 months. Therefore, the transaction should be completed within 6 months from the date of valuation.
Internationally Accepted Pricing Methodology
- Market Approach – Valuation is based on using Market price of listed companies & Comparable.
- Income Approach – Using Discounted Cash Flow.
- Cost Approach – Replacement cost of the asset
Valuation of Shares
Basis |
Income Tax Act | Companies Act |
FEMA |
|
Section 9(1)(i) |
Section 56(2)(x) and 50CA |
|||
Requirement |
Valuation to be done as per Rule 11UB |
Valuation to be done as per Rule 11UA(1)(c)(b) | Valuation is required only for issue of shares. For transfer of shares, valuation is not prescribed |
Valuation is to be done when the shares are held by the non-resident on a non-repatriable basis to non-resident intending to hold it on repatriable basis |
Valuer |
Merchant Banker or Chartered Accountant |
Not Prescribed | Registered Valuer |
Chartered Accountant or Merchant Banker or Cost Accountant or SEBI Registered Merchant. |
Method |
Internationally Accepted Valuation Methodology on arm’s length basis plus liabilities. | Book Value (NAV) Method | NAV, DCF or Yield Method |
Internationally Accepted Pricing Methodology on an arm’s length basis |
Validity |
Not Prescribed | Not Prescribed | Not Prescribed | Valuation Report is valid for a period of 6 months |
Basis of Valuation |
Balance sheet drawn on the date of transfer or the last drawn balance sheet | Balance sheet drawn up on the valuation date. | Not Specified |
Not Specified |
Procedural Aspects | Not Applicable | Not Applicable | Form SH-4 should be delivered to the Company |
Form FC-TRS has to be filed with the AD Bank if the transfer is between person holding on non-repatriable basis to any person or repatriable to non-repatriable person |
Conclusion:
On analysing the above provisions of Income Tax Act, Companies Act and FEMA, we can conclude that in case of transfer of shares of an Indian Company from a non-resident to non-resident, the following conditions are applicable:
- As per Income Tax Act, valuation should be done under book value method.
- Long Term Capital Gains will be taxed at 10% without indexation and currency fluctuation benefit and hence TDS has to be withheld at 10%.
- As per Companies Act, no valuation is required in case of transfer of shares. The procedural aspects relating to Form SH-4 need to be compiled with.
- As per FEMA, valuation should be done by Chartered Accountant or Merchant Banker or Cost Accountant or SEBI Registered Merchant as per Internationally Accepted Pricing Methodology on an arm’s length basis if the shares are transferred from a person holding on a non-repatriable basis to a person intending to hold on a repatriable basis. Form FC-TRS needs to be filed.