Mumbai: Several big business houses are considering holding at least a part of their stake in flagship companies through limited liability partnership (Llp) firms, seeking both to save taxes and smoothen succession planning.
Currently, most Indian promoters hold stakes in their company through a clutch of private limited firms that are liable to pay taxes such as the dividend distribution tax and minimum alternate tax. Llp firms in India are exempt from such taxes, making them an attractive holding vehicle for corporate houses.
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“At least a dozen business houses have asked us for advice on how they could utilize the Llp structure in the promoter group holding,” said Dinesh Kanabar, deputy chief executive officer and chairman of taxation at KPMG India Pvt. Ltd. He refused to identify the business houses, citing client confidentiality.
The tax savings from adopting an Llp structure could be considerable, according to N.C. Hegde, mergers and acquisitions and tax leader at consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd.
“As per the present law and factoring for different situations like surcharge and cess, there could be a difference of 11% in tax rates in case of Llp, as the company has to pay surcharge and also a dividend distribution tax,” Hegde said.
The concept of Llp firms was brought to India through the enactment of the Limited Liability Partnership Act by Parliament in 2009. An Llp firm is defined by the ministry of corporate affairs (MCA) as an alternative business vehicle that provides the benefits of limited liability, but allows its members the flexibility of organizing the internal structure as a partnership based on a mutual agreement.
According to the MCA website dedicated to disseminating details about the Llp format, the structure was introduced to “enable professional expertise and entrepreneurial initiative to combine, organize and operate in a flexible manner”.
Over time, people have realized the benefits that can accrue to a company’s holding structure through Llps, Kanabar said.
Aravali Polymers, one of the holding firms of EIH Ltd that sold a stake to Reliance Industries Ltd (RIL) on Monday, had been classified as a private limited firm on the Bombay Stock Exchange (BSE) until the June quarter. In its announcement on Monday, Aravali Polymers was categorized as an Llp firm, which will help it save taxes.
In August, Mukesh Ambani-controlled RIL rejigged its promoters’ shareholding by transferring a 34.17% stake from 32 promoter group entities to 61 such companies.
The acquirer firms included 27 Llps, all of which were formed in the June quarter. The 1.059 billion shares transferred would be valued at Rs97,306.21 crore based on the closing price of RIL’s shares on the BSE on Tuesday.
“Though the tax benefits are obvious, a lot of back-end planning also went into the restructuring that would help smoothen out succession within the group,” a person familiar with RIL’s plans said.
Without divulging how exactly any future succession process would become easier with Llp firms holding the promoters’ stake, the person, who did not want to be identified, said the rejig had been structured in such a manner that any “logjam” at the holding firm-level, arising out of any potential dispute in the future between successors, would not have any impact on the operational firm, which is RIL.
According to Girish Vanvari, executive director at KPMG, since any transfer of shares during a succession would be seen as a transfer between the partners of the firm, it would also be exempt from any taxation.
Jayant Thakur, a chartered accountant at Mumbai-based Jayant M Thakur and Co., said a lot of companies would look at the Llp holding structure although there were certain grey areas that needed clarity. “Norms such as allowing foreign investment into Llps and Reserve Bank of India’s guidelines on Llps are still being worked out. So there may be some issues when it comes to Llps securing bank credit or settling legal disputes in a court of law, compared with a private limited firm, where regulations are well-defined,” said Thakur.
Asked if firms will continue to benefit if the government ever decided to tax Llp firms as well to shore up its revenue base, analysts said it wouldn’t make much of a difference.
“The worst that can happen is that the tax advantages would be lost, but it would not make much difference to the ownership pattern or the way in which the company operates,” Thakur said.
Vanvari said taxing Llps at par with private limited firms would go against the government’s philosophy behind introducing them in the first place. “The Llp form was allowed in India to help promoters conduct business without fear of unlimited liability and facilitate better pass-through taxation treatment,” he said.