On January 20, 2012, the Supreme Court of India (the "Supreme Court") delivered a landmark judgment in Vodafone International B.V. v. Union of India & Anr. ruling that the transfer of shares of a company incorporated outside India from a seller resident outside India to a buyer resident outside India is not taxable by the Indian tax authorities even if such transfer indirectly transfers an asset in India.
The Supreme Court judgment provides clarity to international investors in structuring a variety of cross-border transactions involving India in a tax efficient manner. The Supreme Court has validated legitimate tax structuring to implement transactions which are justified by overall commercial and business rationale. While the tax authorities may try to use some of the imprecise language in the Supreme Court judgment to challenge legitimate tax structures, if parties pay careful attention to overall commercial objectives, corporate formalities, corporate substance and proper documentation governing a transaction, legitimate tax structures should be able to withstand such challenges. International investors investing in India should consider reviewing their corporate structures and determine if their future corporate strategy would be better served by the existence of intermediary entities especially in countries like Mauritius, Singapore and Cyprus, which have favorable tax treaties with India, to hold assets in India.
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© 2012 White & Case LLP