Offshore Licensing Structures: Indian Holding Companies vs. Singaporean Subsidiaries

Introduction

Globalization has brought about a new front in businesses, with companies- particularly those engaged with either technology or intellectual property aspects- adopting offshore structures in order to ensure complete optimization of all the tax, regulatory, and operational efficiencies. With this regard, Indian businesses are opting for two prominent models for offshore licensing and IP governance: one being that of Indian holding companies and the other being that of Singaporean subsidies.

In essence, offshore licensing is essentially the setting up of a legal entity in foreign jurisdictions to supervise the operations, regulations and managements of intellectual property and other aspects. The primary objective behind such structures is to ensure that there is tax modulation, flexibility of operations as well as regulations and also securing smooth transactions across borders. As such, Indian holding companies and Singaporean subsidiaries provide two modes of approaches to affirm the achievement of such goals.

Indian holding companies are domestic entities that own majority ownership stakes in one or more subsidiaries, location of which may be in India or foreign countries. The structure brings about the centralization of pertaining legal title to intellectual property, the administration of licensing frameworks, and the attainment of royalties from affiliated subsidiaries or third parties.^[1] On the other hand, Singaporean subsidiaries are companies which are incorporated in Singapore, and are oftentimes fully owned by an Indian parent company.^[2] It presents as an IP holding company engaged in the licensing of IP to either Indian parent companies or other group entities as well as collecting royalties within a favourable taxation framework.

Regulatory Frameworks

The Indian holding companies operate within regulatory frameworks such as that of the Companies Act (2013), Income Tax Act (1961), and the Foreign Exchange Management Act (FEMA). These companies must ensure that there is strict compliance with the governance as well as the disclosure of important requirements like that of the consolidated accounts and broad oversight.^[3] When it comes to investments abroad, the Indian companies must adhere to the rules of the Reserve Bank of India’s (RBI) Overseas Direct Investment (ODI) that limits the number of subsidiaries and mandates full disclosures for the prevention of activities like that of evasion of taxes.^[4]

In contrast, Singaporean subsidiaries are governed by the Singapore Companies Act, the Income Tax Act, as well as the Personal Data Protection Act. Incorporation in Singapore requires at least one local director, an office that is registered, and a company secretary.^[5] Compliance mandates the maintenance of statutory registers, the conduct of annual general meetings as well as the filing of annual returns. There is also implementation of transfer pricing and anti-avoidance rules to efficiently carry out related-party transactions at arm’s length^[6].

Taxation and Financial Considerations

Usually, Indian holding companies are modulated by standard corporate taxes, ranging between 22% to 30%^[7], which depends upon the turnover reported as well as the selected tax framework. Royalties which are received from all the affiliated subsidiaries or external parties are subject to taxation based on the business income. Transfer pricing regulations must be affirmed when it comes to all inter-company transactions. The Place of Effective Management (POEM) rule must also be adhered to by companies as it ensures that companies incorporated outside are taxed as Indian residents if they exercise effective control in India.^[8]

Singaporean subsidiaries can effectively enjoy the benefit of a 17% corporate taxation rate. Moreover, various incentives can lower the taxation rate to as low as 5% to 15% in order to qualify for IP income.^[9] The country offers estimated deductions as well to qualify for IP licensing expenditure. Additionally, the IP Development Incentive (IDI)^[10] provides enhanced as well as significant taxation reliefs for businesses based on IP transactions.

The double-taxation treaty regime of Singapore leads to a reduction or elimination of the withholding of taxes on royalties remitted to Singapore. Moreover, there is no taxation when it comes to capital gains, thereby, making it an attractive destination for IP sales and exits. But there must be strict adherence or compliance when it comes to related-party transactions^[11].

Strategic and Operational Advantages

When it comes to advantages, Indian holding companies offer the benefit of having a centralized control framework which enables IP as well as other valuable assets to be managed efficiently at the group level. This ensures that there is proper facilitation of group-wide licensing and protection. Moreover, the aspect of isolating IP in a holding company provides protection by shielding the valuable assets from any regulatory risks and the insolvency of subsidiaries. It provides transparency to the investors which is particularly ideal for startups seeking an IPO in India.^[12]

On the other hand, Singaporean subsidiaries provide the aspect of global fundraising. Its reputation as the hub of finance as well as its strong legal system serves as an incentive for international investors. Additionally, Singaporean subsidiaries can also act as regional headquarters, enable the managing of international relations as well as the facilitation of global fundraising efforts. Its generous tax incentives, low corporate tax rates^[13] as well as its robust IP protection regime serves as an ideal jurisdiction for the commercializing of IP.

Risks and Compliance Challenges

The RBI ensures compliance of overseas structures with the ODI rules^[14] which thereby results in Indian holding companies facing strict regulatory scrutiny. If there is any non-compliance, it could result in penalties, fines as well as restructuring of existing operational frameworks. Moreover, any non-compliance with the POEM rule can also result in the taxation of global income in India^[15] if proper management of the structure is not adhered to. Lastly, complexities as well as complications with regards to compliance multiplies when layers of subsidiaries and cross-border transactions are included, increasing the risk of audits as well as regulatory intervention.

There must be the demonstration of a real business for Singaporean subsidiaries to receive taxation benefits and incentives. This implies that there must be the appointment of local directors^[16], employees as well as a proper decision-making dominant authority in Singapore. Additionally, compliance requirements such as annual filings, conduct of board meetings, statutory audits among other mandates must be affirmed with penalties and fines being a result of non-compliance.

When it comes to understanding Indian holding companies and Singaporean subsidiaries, several differences come to the forefront. Although Indian holding companies are subject to higher rates of corporate taxes as well as a complex compliance mechanism, it offers a centralized mode of control which are well-suited for as well as opted by businesses that are driven towards domestic markets or those which are planning an Indian IPO.

The latter, on the other hand, offer the incentives of decreased tax rates, a strong IP protection system, as well as the opportunity of building global funding. This makes it ideal for businesses that are driven towards international markets and IP centric models. Moreover, the ease of setting up in Singapore as well as its investor-friendly environment proves to be attractive and thereby, enhances its appeal.

Several Indian startups begin with the initial incorporation of offshore holding companies, most often in Singapore or Delaware, in order to attract foreign investors. However, they later on “reverse flip” to India for domestic IPOs.^[17] What this ideation does is that it enables the startups to enjoy the benefits of both the structures.

Typically, the reverse flip is that IP is transferred to a Singaporean subsidiary which is then licensed back to the Indian parent company or other affiliated subsidiaries. This approach allows the setup of tax-efficient royalty flows as well as access to international markets. However, with the recent tightening of the ODI rules and the implementation of the POEM framework, Indian businesses are mandated to ensure genuine economic substance and maintain compliance in their offshore structures.

Conclusion

When it comes to the establishment of either an Indian holding company or a Singaporean subsidiary for offshore licensing, it primarily depends on the strategic goals and objectives as well as the risk management of the company. As such, focusing on either the domestic or international markets will enable the option of choosing between the two structures.

Nonetheless, both the structures require proper planning and management so as to ensure complete compliance with all the mandated regulations and also ensure its alignment with the evolving regulatory landscape of both India and Singapore. Therefore, a well designed offshore licensing structure is required to protect valuable assets as well as propel a sustainable global growth.