The Economic Survey has signalled a worrying trend of Indian companies, particularly start-ups, incorporating their headquarters in countries with a more liberal taxation regime.
The practice is called “flipping” — a process of transferring the entire ownership of an Indian company to an overseas entity accompanied by a transfer of all intellectual property (IP) rights and data owned by the Indian company.
The Indian company becomes a wholly owned subsidiary of a foreign entity, with the founders and investors retaining the ownership via the foreign entity, having swapped all their shares.
The survey has identified jurisdictions such as Singapore, the UAE, Netherlands as popular destinations among founders to incorporate their companies.
In Singapore, there is no tax on dividends at the holding level and there are no withholding taxes when distributing dividends to resident or non-resident shareholders.
A report by Entrepreneur India shows some local unicorns are now based overseas such as Polygon, Amagi, CommerceIQ, Fractal Analytics, BrowserStack, Chargebee, InnovAccer and MindTickle among others.
The Survey has suggested a number measures for “reverse flipping”. These include simplifying the process for the grant of inter-ministerial board (IMB) certification and simplifying the taxation of employee stock options.
“The economic survey recognises the need for ‘reverse flipping’ by, inter alia, simplifying the process of IMB certification. I expect the budget to have relevant proposals to address this very critical issue,” said Jatin Kanabar, partner, Deloitte India.
On alert
■ Indian companies indulge in flipping
■ Ownership transferred to a foreign entity
■ IP rights and data also shifted overseas
