INDIA Law and Practice Contributed by: Rishabh Shroff, Kunal Savani and Chirag Shah, Cyril Amarchand Mangaldas
8. Family Business Succession Planning 8.1 Succession Strategies
agreements and voting agreements are being used to formalise promoter branch rights and obligations, including exit provisions, rights of first refusal and vot- ing arrangements. 8.2 Legal and Tax Considerations There are no estate, inheritance or generational-skip- ping taxes in India. Taxation of relevant entities is set out below. • Taxation of partnerships and LLPs – the income of a partnership firm and an LLP is taxed at a flat rate along with the applicable surcharge and cess and accordingly, the distribution of such income to the partners is not subject to tax in the hands of the partners. This significantly simplifies the overall tax burden as well as the legal and compliance requirements. • Company taxation – the income of a domes- tic company varies depending upon the regime chosen by such company. Further, dividends paid out by the company are taxed in the hands of the shareholder. • Taxation of discretionary trusts – please refer to 10.2 Taxation of Trusts . It is worthwhile to note that income from long-term capital assets is taxed at a flat rate plus applicable cess and surcharge for all such entities (partnership firms, LLPs, companies and private trusts). 9. Trusts, Foundations and Related Entities 9.1 Choice of Planning Vehicle As noted in 6.1 Common Planning Techniques, private trusts are the preferred vehicle for estate and succes- sion planning. Promoters/business families who set up private trusts often bequeath their business assets and holdings (to the extent held by them personally) under their wills in favour of such trusts for the benefit of their family members who are beneficiaries. For a private trust involving non-residents, the extant provisions of the Foreign Exchange and Manage-
Notably, Indian business families prefer to undertake business through various types of entities. Popular vehicles for business entities in India include partner- ships, LLPs and companies. Noteworthy Succession-Related Aspects Partnerships and LLPs Succession to partnership interest in the partnership firm and in the LLP is typically dealt with according to the provisions of the requisite constitutional docu- ments (being partnership deeds/LLP deeds). While the applicable law provides flexibility to structure the suc- cession of partnership interest, it becomes important to ensure that the relevant constitutional documents are aligned with the testamentary instruments of pri- vate clients. Professional service family businesses (law firms, accounting firms, consultancies) increas- ingly use LLP structures, which offer flexibility in profit sharing, easier partner entry/exit, and limited liability. Company Succession of the shareholding in a company is typi- cally dealt with according to the wills of private clients unless such shares are already moved to private trust structures. It becomes important to ensure that such testamentary instruments are aligned with the respec- tive nominations. From an estate planning standpoint, discretionary pri- vate trusts continue to be the preferred vehicle with an increasing number of Indian family businesses (listed as well as unlisted) now adopting private business trusts to hold promoter-level shares and other busi- ness assets. Beyond entity structures, Indian family businesses show a marked preference for control retention strat- egies such as holding trusts, differential voting rights and family governance agreements, with growing emphasis on governance best practices as busi- nesses mature across generations. Families are also embracing family constitutions (charters), which set out governance aspects, succession eligibility and next-generation entry rules. In addition, shareholders’
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