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Slideshare, LinkedIn and Indian Taxes

Slideshare has just been bought by LinkedIn for $119 million. Slideshare allows you to share documents on the web, and lets you embed them on web sites or view them online. Slideshare saw about 29 million unique visitors in March. (This is, let’s see, just 1000x the number that Capital Mind sees, so my valuation is….*slap*)

Slideshare was founded by Rashmi Sinha, Jon Boutelle (who are a couple. There goes another myth that you don’t mix business with family) and Amit Ranjan, in Oct 2006. They have an office in New Delhi and  55 employees (according to their website). They have offices in New Delhi and San Francisco (not in that order).

Of course, the two created a Slideshare(d) presentation:

The tax implications: The deal is 45% cash and 55% in LinkedIn stock. Every employee that owns stock, or has options that are vested, will receive compensation. Now I don’t know how much of the money will be received immediately, and how much later – usually some of the money is paid after some time, to ensure there are no "surprises". The acquisition will be done in Q2 2012 (that’s the current quarter).

Assuming an employee has Rs. 100 worth of vested stock, he’ll get Rs. 45 worth of stock and Rs. 55 worth of LinkedIn (US) shares. The tax department doesn’t, in my opinion, care that you got only Rs. 45 in cash. They will tax you on the full Rs. 100.

The tax is on capital gains. Since this is not an acquisition on an Indian stock exchange and STT has not been paid, taxes will be charged under a more strict capital gains regime, like those that apply for Gold. The idea is to reduce your acquisition cost (the price at which SlideShare shares were granted to the employee) from what you receive, and what remains is the capital gain.

So if you were granted shares at Rs. 20 (or dollar equivalent) and you get Rs. 100 (45 in cash, 55 in stock), you get taxed on the gain of Rs. 80.

  • For shares that have vested less than a year earlier than the acquisition date: the "gain" is added to the employee’s income and taxed under the appropriate tax bracket.
  • For shares that have vested more than a year back: you calculate the gain as sale proceeds minus "indexed cost of acquisition" and pay 20% tax on the gain. For details, see: https://www.capitalmind.in/2011/01/how-to-calculate-long-term-capital/

Notes:

  • Vesting needn’t include only the already vested set of shares – usually, exits provide for "acceleration". Acceleration of a year means all those options will vest which would have vested a year forward.
  • Remember, for every Rs. 45 an employee gets paid, the government might actually demand a tax of Rs. 20! (if the grant price is really tiny) This might even have to be deducted at source, so employees might see a lower payout than they expect.

Will Vodafone Tax type of rules apply?

I don’t know. Indian residents (employees) are taxed anyhow. I assume that all options are in the Slideshare US company, not in the Indian entity.

  • The concept is that LinkedIn US will acquire Slideshare US.
  • Slideshare US probably owns 100% of Slideshare (India).
  • THis is not different from when Vodafone (Holland) acquired Hutchison (Cayman Islands) which owned Hutch (India).
  • The Indian government said that Vodafone will need to have deducted Indian taxes at source, because the acquisition was equivalent to acquiring the Indian operation.
  • They will definitely believe that the change of ownership in Slideshare US will result in a change of ownership in Slideshare India.

The new tax rule change now taxes a purchase by a non-resident (Linkedin) from a non-resident (investors, VCs, US resident employees),

This is applicable if the company derives it’s value "substantially" from it’s assets in India. Meaning, if this "substantial" clause is met, even VCs like Dave McClure and Mark Cuban will need to have some Indian taxes deducted from their payments, even though they are non-resident non-Indians.

The "substantial" definition is not strict – does it mean most of the (worldwide) revenue was recognized in India? Does it mean most of the costs were in India? What does it really mean? (See Point no. 4, explanation 5 of the Finance Bill if you are sufficiently equipped with aspirin) If Indian taxes do apply, then it will only apply to the part that is "attributable" to the operations in India.

The dealmakers might be able to get around the hazy definition by having LinkedIn India acquire Slideshare India at some cost from Slideshare US and pay the appropriate Indian capital gains taxes. Then LinkedIn US can acquire Slideshare US (which will then have no assets inside India). That way the VCs and Investors in Slideshare don’t get bothered. But tax lawyers and firms will have to deal with "fair market valuation" of the Indian entity, and explaining that to Indian tax authorities.

But I am not a lawyer or tax accountant. So the pinch-of-salt rule applies – if you find anything wrong here, please let me know and I’ll change it.

Oh, and congratulations to the Slideshare team! Taxes or not, this is a great exit. You make us struggling entrepreneurs proud and give us hope. Keep it flowing!

  • dheeraj says:

    Deepak,
    I’m not sure but I think you should check.
    Since this is a case of an unlisted company (Slideshare), long term capital gains will apply only after 3 years, and not one.
    Once again, as I said – I’m not sure but have a strong feeling this will be taxed as short term capital gain and not long term.

    • Dheeraj, just rechecked section 2 – definitions – in the IT act. Short term capital gain is less than 12 months, applicable for shares of a company (including foreign companies). Another reason I think the one year is correct is that I checked with an accountancy firm when a company I worked with got acquired 🙂