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Direct Tax Alert - Update on Taxation regime for Offshore Funds

08 August 2017

Relaxation of Section 9A eligibility conditions for Category I and II FPIs

What is Section 9A of the Income-tax Act, 1961 (‘the Act’) all about?

Section 9A of the Act provides relief to offshore funds managed from India from constituting business connection in India.  To avail relief from such tax risk, the section provides for certain conditions to be fulfilled by offshore fund to avail shelter under this Section.

Key Conditions under Section 9A(3) of the Act

  1. The fund is a resident of a country with which India has either a tax treaty or an information exchange agreement or the fund is incorporated in a country of specified territory to be notified by the Government;
  2. The aggregate participation or investment in the fund by Indian residents shall not exceed 5% of the corpus of the fund;
  3. Investor protection regulations in the country or territory where the fund is established/ incorporated/ resident, shall be applicable to such fund and its activities;
  4. The fund has a minimum 25 members;
  5. Members of the fund along with connected persons shall not have any participation interest exceeding 10%;
  6. Aggregate participation interest of 10 or less investors (directly or indirectly along with their associates) shall be less than 50%;
  7. Monthly average of the corpus of the fund shall not be less than INR 1000 Mn.;
  8. The fund shall not carry on or control and manage any business in India;
  9. Remuneration paid by the fund to an eligible fund manager shall not be less than the arm’s length price.

Latest notifications

  • Countries / specified territories notified[1] :

Finance Act, 2016 amended Section 9A of the Act to notify and extend benefit of this section to offshore fund set-up in specified countries / territories. In pursuance to such amendment the Government has now notified a list of 121 countries / specified territories.

  • Relaxation of certain conditions for Category I and Category II Foreign Portfolio Investors(‘FPI’)[2]

Presently, the condition specified in clause e, f, & g of Section 9A (3) of the Act are not applicable to an investment fund set up by the Government or the Central Bank of a foreign State or a sovereign fund. These relaxations have been further extended for Category I and Category II FPIs registered with Securities and Exchange Board of India (‘SEBI’).

Both the above notifications are applicable prospectively from August 3, 2017.  

Our comments

  • This is a welcome move for offshore fund structure where the investment advice flows from India as it shall ease down structuring complexities and dual reporting models.
  • The strenuous conditions of being a broad-based fund in case of Category I and Category II FPIs registered with SEBI are now effectively done away with.
  • Such relaxations shall attract fund manager community to set up shop in India without any tax risks of such FPIs being taxed differently in India.
  • These amendments gradually fall in line with tax practices and incentives in other established financial hubs such as Singapore and Hong Kong. However, there is no impetus to a manager of global fund to set-up shop in India.
  • The export of investment advice shall qualify as zero-rated supply under the newly introduced GST regime. Accordingly, no GST shall be levied on service by investment manager in India to offshore fund.

For any content related queries, you may please write to the respective service line experts at [email protected]

[1] Notification No. 78/2017/F. No. 142/15/2015-TPL

[2] Notification No. 77/2017/F. No. 142/15/2015-TPL