A client proposes routing Indian investments through a holding company in another country mainly to reduce capital gains tax. How do you advise?
What the interviewer wants to hear
- Reviews treaty provisions and recent changes
- Explains GAAR and principal purpose tests
- Checks commercial substance and real activity
- Considers tax residency certificate and beneficial ownership
- Recommends documented commercial rationale or a simpler structure
Model answer
I would explain that such structures face much more scrutiny than before. Many of India’s treaties have been amended so that capital gains on shares of Indian companies are taxable in India, and the multilateral instrument added a principal purpose test that denies treaty benefits if obtaining them was one of the main purposes of the arrangement. India’s GAAR can also apply to impermissible avoidance arrangements. A tax residency certificate is necessary but not sufficient, and the authorities look at beneficial ownership and real substance: local directors who actually decide, office, staff, and genuine business activity. So I would ask what commercial reasons exist besides tax, such as investor preference, regional operations or ease of fundraising. If there is a real business purpose, I would help document it and build adequate substance. If the only reason is tax, I would advise against it and suggest simpler, defensible planning instead.
Can you answer it under time pressure?
Take a timed hard round and get scored on every answer.
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