Rationalization of Safe Harbor Regime for Offshore Funds

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In order to facilitate location of fund managers of offshore funds in India, Section 9A of the IT Act provides a specific safe harbour regime whereby an ‘eligible investment fund’ will not be construed to have a business connection in India or be regarded as a tax resident in India merely because an ‘eligible fund manager’ undertaking fund management activities on its behalf is located in India. The availability of benefit under Section 9A is subject to the conditions prescribed therein. This Section also provides conditions for the eligibility of the fund. These conditions, inter alia, relate to residence of fund, corpus, size, investor broad basing, investment diversification and payment of remuneration to fund manager. In this regard, the following developments have taken place:

i.    One of the conditions for availing the benefit of Section 9A is that the remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken on its behalf should not be less than the amount calculated in the prescribed manner. The manner for calculation of the minimum amount of remuneration that should be paid to the eligible fund manager in India by an offshore fund has now been prescribed by the CBDT[1]. The Notification also provides for a pre-approval mechanism under which a fund can seek approval at its option from the CBDT for remuneration lower than the prescribed remuneration under Rule 10VA of the Income-tax Rules, 1962; and

ii.   Further, the CBDT has issued a Notification[2] suspending the conditions specified in clauses (e), (f) and (g) of Section 9A(3), which provide that (a) the fund has to have a minimum of 25 members who are, directly or indirectly, not connected persons; (b) any member of the fund along with the connected persons will not have any participation interest, directly or indirectly, in the fund exceeding 10%; and (c) the aggregate participation interest, directly or indirectly, of ten or less members along with their connected persons in the fund, will be less than 50%, in case of an investment fund set up by a Category-I FPI registered under the SEBI (FPI) Regulations, 2019. This Notification will come into force retrospectively from September 23, 2019.

[1] Notification No. 29/2020/ F. No. 142/15/2015-TPL dated May 27, 2020.

[2] Notification No. 41/2020/F. No. 142/15/2015-TPL- Part (1), dated June 30, 2020.

Published In:Inter Alia - Quarterly Edition - June 2020 [ English
Date: June 30, 2020