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From Natraj’s Perspective
Natraj grew up in Chennai, and around 20 years ago, he started a tech services company with his inner circle. Life took him in various directions and Natraj ended up moving to California to pursue other opportunities. He remained a co-founder on the company board, and although he was involved for the critical first years, after that it was his friends who continued to grow the company out of India. Natraj became a resident of California (CA).
This company is now perched for an IPO, and Natraj would like to know how best he can prepare for taxes, given the company is Indian and going public in India. For the stock he holds after the IPO, Natraj would be eligible to the lower rate applicable in India for long term stock at 10% plus cess plus surcharge. However, his US tax bill will remain 37.1%
We advised Natraj to make a partial exit before the IPO, and then stay the course for 6 months after the IPO date, after which he will be eligible to sell in the open market in India.
From Aarti’s Perspective:
Aarti, who is also from Chennai, an Indian citizen and resident, currently living in Chennai, but was a founder of a US data-analytics company with her friends from Stanford, where she did her undergraduate studies. Aarti felt compelled to move back to Chennai because his father was ailing and the family had a long established business in India she had to run. Aarti continued to hold her shares in her US company while her friends took the company forward. Now this data-analytics company is poised for an IPO on the NYSE.
The question is, how should Aarti look at her taxes in the US and in India. Since she is an NRA and spends practically no time in the US (by taxation laws less than 183 days is the criteria), she is not subject to tax in the US on gains from the sale of the capital asset. This is true of the initial stocks sold pre-IPO and the subsequent sale of stocks in the open market, and whether short or long term.
We informed Aarti that she has an opportunity to make a mini exit to a private equity firm prior to the IPO and then has to hold onto the rest of her shares for the next 18 months, after which she is free to sell in the open market.The fact that Aarti has not state residency in the US and is an NRA has saved her both state and the US Net investment income taxes.
Aarti would be subject to taxes in India only. Her taxation in India would be as per domestic laws per article 13 of the US India DTAA and would be at the rate of 23.92% assuming she’s held the stock for 24 months. Further, since Aarti wants to buy that home by the beach she’s been dreaming of for her and her parents, she can invest up to Rs. 10CR of proceeds in India and avail the exemption under section 54F.
From Salma’s perspective:
Salma, a resident of CA, who had started a banking services company about 20 years ago with her school friends in Chennai. Salma later decided to leave India to get a business degree and shift to consulting. She remained a cofounder of the business, but once she got busy with her studies, it was her friends and co-founders who fine-tuned the company’s services until they expanded.
The company is now perched for an IPO and Salma would like to know how to be prepared for taxes given that the company is Indian and going public in India.
We advised Salma to make a partial exit before the IPO and will have to stay the course for 6 months after IPO date and then be eligible to sell in the open market in India.
The company issued bonus stocks on the multiples of original holding 6 months prior to the IPO. Salma now holds 10x of her original shares (say 1,000,000 shares).
50% of shares sold pre-IPO (500,000 shares)
Contact Ventura Pranas, for such customised solutions to complicated tax-related issues.
