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Reasons for RBI Policy change for founders holding shares through India SPV in startups with Global HQs and impact thereof
1. The RBI has recently made a significant policy shift, directing founders to establish Indian vehicles for holding shares in their overseas HQ companies.
This marks a departure from the past practice of acquiring shares individually, often through the gift route.
2. Historically, founders acquiring shares individually presented a tax challenge. If the company failed, tax authorities gained little.
However, if valuations soared, founders could move to low-tax jurisdictions, avoiding significant capital gains tax in India.
3. Founders often became non-residents for a year or two, bypassing capital gains tax that otherwise would have contributed to government revenue.
This loophole has been a concern for Indian tax authorities.
4. Realizing founders' preference for global HQs for funding purposes, the government now offers an alternative: founders can set up global HQ companies but must hold shares through a Special Purpose Vehicle (SPV) in India. 5.
With this structure, even if a founder relocates outside India, any gains accrue to the Indian SPV and are thus taxable.
Founders can then withdraw funds from this SPV, aligning their interests with tax obligations.
6. Typically, partnership firms or LLPs are used to create these SPVs.
This approach, however, raises several questions regarding its implementation and impact on founders and investors.
7. First question: Should there be one SPV for multiple promoters or a separate SPV for each?
This decision impacts the control and distribution of shares among founders.
8. Second question: How to structure vesting agreements in this new setup?
Traditionally, individual shares were linked to employment with the company, posing a challenge in the SPV model.
9. Third question: How can it be ensured that founders do not divest their stake in the SPV?
This is crucial from an investor's standpoint, as founder shares often carry transfer restrictions.
10. On a positive note, this structure offers flexibility for succession planning.
Founders can appoint nominees at the SPV level, simplifying the transfer of shares in case of their demise.
11. As new headquarters adopt this structure, its effectiveness and challenges will become clearer over time.
It's a significant change for Indian startups, marking a new era in corporate structuring and taxation.
#RBI #StartupIndia #CorporateStructuring #TaxPolicy #GlobalHQ #SPV #Founders #VentureCapital #BusinessStrategy #SuccessionPlanning
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