Fintech unicorn Razorpay has joined a list of startups reverse flipping its country of domicile from foreign jurisdictions such as the US to India, even as they face large tax bills in the process. Experts that FE spoke with said that Razorpay will face multiple challenges including personal taxes in the hands of investors on account of indirect transfer provisions, cap table structuring and other RBI compliances.
The reverse-flipping process may also require moving the funds and intellectual properties (IPs) back to India in addition to tax and regulatory challenges, experts pointed out. To start with, to flip the holding structure back to India, one is required to comply with various regulations including exchange control (FEMA) regulations, corporate laws and taxation laws, said Rohit Jain, managing partner, Singhania & Co.
There can be different ways in which a reverse flip can be achieved and depending upon the preferred alternative, there would be tax and regulatory implications. Bajaj pointed out that in most cases, where the holding structure is outside India, there is an overseas entity holding shares of the Indian startup where the actual business operations are carried out.
“One simple way of flipping the holding structure back to India would be to transfer the shares of an Indian operating company to another Indian entity however, that would involve huge income tax implications in the hands of investors and particularly in the hands of founders,” he added.
Roopal Bajaj, head – funds, Singhania & Co, also said that in the case of a simple share transfer or share swap, there would be capital gains tax implications in the hands of investors.
“While such income tax implications can be minimised by suitably structuring the transaction through court-driven scheme of arrangement, there would be a separate set of challenges due to numerous regulatory and compliance hassles. The benefits of a well-structured exercise may outweigh the complexities and the costs associated with it,” Bajaj added.
Early in January, fintech decacorn PhonePe also announced a change of domicile to India after its separation from Flipkart. The change of domicile came with a hefty tax bill for the company and its investors who had to reportedly pay almost `8,000 crore in taxes.
New-age startups usually consider exploring overseas countries to house their parent entity for various commercial purposes. Especially, early-stage startups seeking to raise money from foreign investors usually set up their parent company in investor-friendly jurisdictions, to save on taxation and other compliances. This is typically referred to as a slip structure and has already become increasingly necessary for early-stage startups seeking to raise money from foreign investors, due to multiple tax burdens including the angel tax.
Experts say that a foreign-registered parent entity structure also provides flexibility to raise funds from global investors, unlock value overseas at a higher business valuation with deeper liquidity, and for flexible exit options to investors.
Bajaj of Singhania & Co, however, predicts that going forward, the Indian startup ecosystem may witness more startups shifting the holding structure back to India from Singapore, the UK, the US and other foreign jurisdictions. “There can be multiple factors for undertaking such reverse flipping, including regulatory challenges being faced in foreign jurisdictions and intentions of listing the business in India,” he added.