jurisdiction - Treelife

First Published on 21st August, 2023

The Reverse Flip

What is Reverse Flip?

“Reverse flip” or “re-domiciliation” refers to a corporate restructuring process in which a company changes its country of domicile or legal registration from one jurisdiction to another.

Background

PhonePe was incorporated in 2015 in India
In April 2016, PhonePe was acquired by Flipkart. As part of the acquisition, PhonePe flipped its structure to Singapore
In 2018, PhonePe became a part of Walmart after it acquired Flipkart
In October 2022, PhonePe announced that it has moved its domicile to India (reverse flip) for following key reasons:
- PhonePe wants to focus on India markets for the next couple of decades. PhonePe is a digital payments company that operates primarily in India. By redomiciling to India, PhonePe can be more responsive to the needs of its customers and partners.
- The Indian government has been tightening regulations for digital payments companies in recent years. By redomiciling to India, PhonePe can be more easily compliant with these regulations.
- To be better positioned for an IPO. PhonePe is expected to go public in the next few years

What Happened?

Steps undertaken

PhonePe moved all businesses and subsidiaries of PhonePe Singapore to PhonePe India directly
PhonePe created a new ESOP plan at India level and migrated all group employees to this new plan
IndusOS, owned by PhonePe, also shifted operations from Singapore to PhonePe India

Key Consequences of Reverse Flip to India

Lapse of accumulated losses of USD 900 million
- PhonePe stands to lose the chance to offset its USD 900 million (~INR 7,380 crore) of accumulated losses against future profits as shifting the domicile from Singapore to India is viewed as a restricting event under Section 79 of the Income Tax Act, 1961
- As per the provisions of Section 79, a company is not allowed to carry forward the losses if the change in beneficial ownership of shareholding of more than 50% occurred at the end of year in which losses were incurred
Reset of ESOPs to zero vesting with 1 year cliff
- All employees of PhonePe were migrated to the new India level ESOP plan which stipulates a minimum 1 year cliff.
- Thus, the employees vesting status was reset to zero with a 1 year cliff
Tax payout by investors of almost INR 8,000 cr
- PhonePe investors, led by Walmart, sold their stake in the Singapore entity and invested in PhonePe India
- This means that there was a capital gains tax event in India for the the investors leading to a tax-pay-out of almost INR 8,000 cr