On January 20, the Indian Supreme Court handed down a major victory for foreign investors in the landmark case of Vodafone International Holdings B.V.

The Vodafone case arose from Vodafone’s 2007 acquisition of an indirect stake in Hutchison Essar Limited, an Indian telecom company (HEL). The acquisition involved the purchase by a Vodafone subsidiary of shares in a Cayman Islands holding company that owned a 67% interest in HEL.

Under Indian law, the purchaser of an asset located in India is required to withhold tax on payments to a non-resident seller. In the Vodafone case, the Indian tax authorities attempted to look through the Cayman Islands holding structure and treat the transaction as if it were the direct sale of the Indian assets of HEL and thus subject to withholding tax. The Bombay High Court ruled in favor of the government, exposing Vodafone to a potential tax liability in excess of $2 billion.

The case was significant for a number of reasons. Most investors use a holding company jurisdiction such as Mauritius to hold their investments in India. The practice is not uncommon for other jurisdictions as well. If the Indian government had been successful in Vodafone, other jurisdictions with similar taxing regimes might look to the decision and seek to apply a similar rule.

The Indian Supreme Court refused to disregard the form of the taxpayer’s transaction and reversed the lower court’s decision.

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