ca. divakar vijayasarathy · 12/2/2010 3 for tax parlance, death means:-death of a living...
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12/2/2010
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CA. Divakar Vijayasarathy
Introduction
Tax and Regulatory Regime in India
Global Estate Tax Regime
Possible Estate Planning Structures
Practical Perspective to Estate Tax Planning
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Death leads to movement of property from the deceased to their successors
Succession could be testamentary or intestate
Intestate succession could lead to appointment of an administrator
Taxes shall be applicable on:• Succession
• Appointment of administrator
• Transfer of property from administrator to ultimate successor
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For tax parlance, death means:
- Death of a living person
- Prolonged absence of a living person.
- Presumption based on period of absence &
- Judicial review
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Succession law in most countries have
multiple implications
There could be a State/Provincial as well
as a Central Legislature
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Nature of Succession Law Countries
A single succession law applies throughout the
country
Argentina , Brazil, Germany
and Venezuela
Existence of plural legislations where state/
province has the autonomy to legislate on
succession laws
Australia, Canada, Mexico ,
UK and USA
Religion or Community based succession law India and Spain
Succession is governed by central laws
however local law may govern successions
regarding agriculture and farming
Austria,Germany and India
Succession law applies through the
metropolitan territory but special rules exist
for overseas territories and overseas
collectivities
France and Denmark
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Broad classification:Law of ownership (identify assets that are
owned by the deceased upon his death)Matrimonial LawContract law (succession pacts)
Succession laws are considered operational predominantly through two modes namely:
- Direct transmission- Indirect transmission
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Situation Countries
Principle of direct transmission from
deceased to the heirs. Transfer is not
assimilated to a sale and hence not
regarded as a taxable event for capital
gains purposes.
France, Argentina,Belgium, Brazil,
Chinese Taipei, Colombia, Czech
Republic, Germany, Greece,
Hungary, Korea, Italy, Japan,
Luxembourg, Mexico, Peru,
Poland, Switzerland and Uruguay
Principle of indirect transmission
under which assets, rights and
obligations are first transferred from the
deceased person to a personal
representative and then the net assets
are transferred to the legal heirs
Denmark,Norway, Sweden and all
common law countries (Canada,
Bhutan, New Zealand, Hongkong,
Ireland etc)
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Taxation based on the domicile of the deceased
In some countries residence must have been maintained for a certain period. (5 years in the case of Netherlands)
In common law countries (also in Belgium, France, Ireland, Israel, Korea, Luxembourg and Ukraine), scope of residence or domicile based taxation is restricted only to immovable properties
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Nationality based taxation (Croatia,
Chinese Taipei, Germany, Greece, Italy,
Japan, Poland, Portugal, Spain and Serbia)
Multiple parameters being adopted by
central and state legislature
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Type of Tax Description Countries
Inheritance tax
(IHT)
Tax levied on the legal
heir
Luxembourg,, Czech Republic
etc
Estate tax (ETA) Tax levied on the estate France, Greece, Hungary, Italy,
Norway, Poland, Netherlands,
Chile, Croatia etc
Capital gains
Tax
Tax levied on transfer
of estate
Russia, Ukraine etc
ETA and IHT ETA is levied based on
the value of the estate
UK, Belgium, Chinese Taipei,
Korea and Denmark
Gift tax (in
addition to IHT
and ETA)
Tax on receipt of
estate without
consideration
France, Germany,
Luxembourg, Italy, USA etc
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Estate tax or Inheritance Tax is a tax
levied at the time of death or succession.
Such tax is levied on the value of estate of
the deceased or donor.
Some legislations levy capital gains tax at
the time transfer of estate to successor.
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Estate Duty Act 1953 was repealed w.e.f
16th March 1985
Gift Tax Act was abolished by Finance
Act 1998 w.e.f 1st of October 1998.
Finance Act (2)2004 introduced Sec
56(2)(v) for taxation of gifts subject to
exceptions
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Wealth Tax is payable @ 1% on Net
Wealth exceeding Rs 30 lacs.
Hence there is no estate or inheritance
tax payable in India
Wealth of 1% is leviable on net wealth
exceeding Rs 100 lacs effective 01-04-
2012 (as per DTC)
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India is a safe place of Domicile
There is no tax on succession hence it is
always suggested to have India as an
investment intermediary
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Investment outside India:
• Remittance up to USD 2,00,000 p.a permitted for
specified transactions
• Specified transactions include:
Investment in Foreign Securities
Transfer of immovable property outside India
Other respective guidelines need to be
adhered at the time of investment.
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Investment in foreign securities
permitted for a resident in India and a
company registered in India.
The investee company must be listed and
fulfill the conditions prescribed.
Investment subject to limits prescribed.
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ODI possible through a Joint Venture of
Wholly Owned Subsidiary outside India
Total financial commitment of the Indian
Party not to exceed 400% of net worth
(200% in case of partnership firms)
Investments in Nepal can be made only
in Rupees
Investment in Pakistan is not permitted
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JV or WOS must be engaged in a
bonafide business
Indian Party (IP) is not mentioned in any
caution/ defaulters list of RBI.
IP routes all the transactions through an
authorised dealer and fulfills the
compliance procedures prescribed.
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Investment through miscellaneous
remittance of upto USD 200,000
permissible per year per resident
individual.
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Permissible through proceeds in RFC
account.
Permissible if foreign exchange was
earned when assessee was a resident
outside India.
Miscellaneous remittance route adopted
in most circumstances.
In any other case, approval is required.
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Domicile/citizen based estate taxation.
Estate includes all tangible and
intangible property.
Assets considered at retail value on
succession
Estate Tax Rate : 55% (proposed for 2011)
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Estate tax applies on:
• Assets at US
• US Citizens
• Non resident citizens
• Non resident and non citizens
Full / proportionate tax credit is available
if there is another estate transfer within
10 years.
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Direct legacy to a spouse who is a US
citizen is exempt.
Basic exemption of USD 1.0 MM (2011
onwards)- reduced from USD 3.5 MM in
2009.
Estate tax was temporarily repealed for
the year 2010
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YearExclusion
Amount
Max/Top
tax rate
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 * Repealed * 0% *
2011 $1 million 55%
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There is no estate tax or inheritance tax
on death
One of the few OECD countries which
does not have an estate tax
However capital gains tax may arise on
death or succession
Roll over benefits are available on capital
gains arising on death
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Roll over benefits not available for “tax
advantaged entities” (tae)
Tae includes individual or entity who is a
foreign resident
In case of assets held abroad, succeeded
by a non resident – capital gains tax shall
arise on death - Possibility of double
taxation cannot be ruled out (refer
illustration)
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.Australian
Resident (A)
Property inherited
by a non resident
Australian on death
of (A)
Owns a property in
France
Capital gains tax
shall apply on the
deceased final tax
return
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Estate taxes apply on death or absence of an individual
Rate of tax varies from 5% to 45% based on the value of the transfer and relationship
Estate tax applies on all the following situations:• Deceased is a French resident
• Successor is a French resident
• Property is in France
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Succession of family business has
exemptions upto 75% of the estate value
subject to conditions
Capital gains tax also arises on death-
however the same is deferred in most
circumstances
Huge possibility of double taxation in
case of assets held abroad.
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Huge possibility of double taxation in
case of assets held abroad.
Belgian
Resident (A)
Property inherited
by a French
resident on death of
(A)
Owns a shares of a
French Company
Estate / Gift tax
shall apply in both
France and Belgium
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There are no estate and inheritance taxes
in Canada.
Death and consequent movement of
property is regarded as transfer in the
hands of the deceased
Exceptions include transfer to a spouse/
spousal trust
Capital gains arises on death of an
individual
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Taxes are levied by Provincial and
Federal Governments
Rates of taxation of capital gains vary
from:
• Federal tax : 15% to 29%
• Provincial tax : 4% to 17%
Tax credit is available on capital gains
paid abroad on inheritence
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No credit is available for ET/ IHT paid
abroad. Possibility of double taxation is
very high
DTAA available with US and France.
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Hague Convention on the “LawApplicable to Succession to the Estates ofDeceased Persons (1989)”
Conflicts of Laws relating to the Form ofTestamentary Dispositions (1961)
Convention Concerning the InternationalAdministration of the Estates of DeceasedPersons (1973)
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UNIDROIT Convention providing a
Uniform Law on the Form of an
International Will (1973)
Regional conventions between Nordic
countries (1934) and certain Latin
American countries
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Private Investment Trust
Investment holding companies
Multi - Layered holding
Structuring investment options
The best planning structure is
possible prior to making an
investment
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Trusts are regarded as separate legal
entities in most tax jurisdictions
Family members are beneficiaries
Death of a members reduces the number
of beneficiaries
Multiple trusts can be created to suite
domestic regulations
Estate and inheritance tax can be
avoided
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Private Specific Trusts : Shares of the
members are determinate
Private Discretionary Trusts: Shares of the
members are not determinate
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. Trust has
Business
Income
Trust does not
have Business
Income
Maximum
Marginal Rate:
30%
Tax rate applicable
to each beneficiary
Alternatively-
Assessing Officer can
assess the income in
the hands of the
beneficiaries
At rates of an AoP if:
-Trust is declared by
Will
- It is exclusively for the
benefit of any
dependant relative
- The trust is the only
trust declared by the
settlor
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. Trust has
Business
Income
Trust does not
have Business
Income
Maximum
Marginal
Rate
At rates of an AoP if:
-The income of none of the
beneficiaries does not exceed basic
exemption limit
-None of the beneficiaries are
beneficiaries in any other trust
-Trust is declared by Will
- It is exclusively for the benefit of
any dependant relative
- The trust is the only trust declared
by the settlor
At rates of an AoP if:
-Trust is declared by Will
- It is exclusively for the
benefit of any dependant
relative or
- The trust is the only trust
declared by the settlor
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No tax shall be assessable on the grantor
However where the trust is for the
immediate or deferred of the spouse and
minor child – the individual shall be
liable to tax to the extent of their share of
income from the trust.
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Income Slab Tax Rates
Upto Rs 1,60,000 Nil
Above Rs 1,60,000 upto Rs 5,00,000 10%
Above Rs 5,00,000 upto Rs 8,00,000 20%
Above Rs 8,00,000 30%
Note:
- Rates as applicable for Previous year 2010-11
- Cess of 3% shall be levied over and above the tax rates
-Where shares of members are indeterminate, the trust shall be chargeable
to tax at maximum marginal rate or at such higher rates
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Where shares are determinate- Sec 67A:
Share of each beneficiary shall be
proportionately computed
Income shall be part of the personal
income under the respective heads of
income
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Situation Income Taxability
AoP is taxed at
Maximum Marginal Rate
Not included in total
income
No tax liability
AoP taxed as per slab
rates
Included in total income No tax liability
AoP is not liable for tax Included in total income Tax shall apply
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.Family in India
Makes an
Investment abroad
in the name of the
trust
Forms an
Investment Trust in
India or abroad
Multiple trusts can
be created for
investments in
different
jurisdictions
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Investment is made in the shares of a
Holding Company which in turns makes
an investment in the ultimate asset.
Holding company should be located in a
country where IHT/ ET is minimal or
absent eg: India
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In the event of death of a share holder,
the shares are transferred to the nominee
or legal heir of the deceased in the
country of incorporation of the holding
company.
The legal owner of the asset still remains
the holding company.
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Executed in 2009
Family in India
Makes an
Investment at US
Invests in shares of
an Indian Holding
Company
US, at present, does
not have the “Look
Through” provisions
for Estate Taxes
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Benefits:
Ownership remains with the Indian
company irrespective of death of the
promoters
No estate tax upon succession
Disadvantages:
Huge capital gains liability if the asset is
ultimately sold at the US
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Situs of taxation (source vs residence)
Economic double taxation (IHT / ETA vsWT)
Taxation of transfer from administrator(Canada)
Varying definitions of spouse in differentlegislations
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Coordination with Global tax
professionals
Estate planning to be undertaken prior to
investment
Constant change in estate tax laws and
limits
Planning holds good for laws prevailing
at the time of structuring.
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Planning comes at a cost ie certain
benefits are restricted to estate tax
payers eg: US
Pluralism of succession laws of both
countries
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Top management salaried employees
(CFOs, CEOs, CIOs…)
Medium and Large scale exporters and
importers
Industrialists, Film stars, Directors …
Other High Net worth Individual (net
worth exceeding Rs 20 crores)
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Identify the possible tax cost in India
Discuss with the destination professionals
Manage the complete foreign exchange
compliance at the time of investment
Explore the possibility of ODI and ECB
(outside India for investment in a third
country)
Maintain the structure and alter to suit
changing tax laws.
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Indian CA
Legal Counsel in
India
Financial Advisor
Abroad
Legal Advisor
Abroad
Indian Client
and his family
Activity Basis of Payout
Determination of Taxation Cost in India Per Opinion/ Transaction
Determination of FEMA regulations Per Opinion/ Transaction
Structuring the transaction in
consultation with foreign professionals
Fixed fee plus per hour
engagement if it exceeds certain
stipulated hours agreed upon
Maintaining the structure – including
regulatory updates
Fixed Annual fee
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