Tax Department Proposes Friendlier Regime For Offshore Fund Managers

The Central Board of Direct Taxes has released draft rules aiming to set up a friendlier regime to lure offshore fund managers to manage funds from India.

Budget 2019 had laid the foundation stone for this by providing several concessions including relaxation in remuneration limits of fund managers and extended time limit to achieve the prescribed corpus size.

The income tax department is now seeking stakeholder comments on the rules by Dec. 19.

Here are the key features of the rules:

Remuneration Limits For Fund Managers

Section 9A of the Income Tax Act says that fund management activity carried out through an eligible fund manager in India on behalf of an eligible fund will not constitute a business connection in India for tax purposes. Such fund will not be considered resident in India for tax purposes if it meets the prescribed requirements.

Prior to Budget 2019, income tax rules stated that remuneration paid by an offshore fund to a fund manager in India shouldn't be less than the arm's-length price that is paid for such activity. The Budget removed the need for an arm's-length pricing and stated that remuneration will now be determined through a prescribed method.

In line with the changes brought by the Finance Act, 2019, the new rules state minimum percentage-based remuneration that can be earned by the fund manager, Amit Agarwal, director at Nangia Andersen Consulting Pvt. Ltd., told BloombergQuint. Draft rules provide the much-needed clarity in relation to the minimum remuneration model for fund managers and provide clarity for fund houses, he said.

The tax department has now proposed the following remuneration regime:

Category I Foreign Portfolio Investor Fund Registered With SEBI

The remuneration for a fund manager managing certain Category I FPI Funds will be 0.1 percent of the total assets under management managed by the fund manager. AUM will be computed using a prescribed method.

Following FPIs fall under this category:

• Government-related investors like central banks, sovereign wealth funds, international or multilateral organisations.
• Pension and university funds.
• Insurance entities, banks, asset management companies, portfolio managers etc.
• University endowments.

Other Funds: For funds other than the FPI category I, the remuneration will be 0.3 percent of the fund's AUM which is managed by the fund manager. If remuneration is linked to the profits or income of a fund, the limit will be 10 percent of profits beyond a pre-defined profit threshold. Alternatively, a fund manager may be paid 50 percent of management fees linked to the income earned by an eligible fund in certain cases.

Computation of management fees earned by a foreign fund would be a complex process, Agarwal said. “All direct and indirect fees received by an eligible fund overseas must be taken into account for computing the management fees,” he said, adding that there is a doubt whether the records of overseas funds will have to be furnished in India for this purpose, which may involve business confidentiality issues.

Approval process for registration has been streamlined by relaxing the screening of the registration process through a committee appointed by the tax department.

Certification Requirements

To become eligible for benefits under the revised regime, a fund manager must submit an annual certification from a Chartered Accountant in a prescribed format to the tax department. Among others, the fund manager must provide following information in the report:

• Name, address, details of business activities and SEBI registration details of the fund manager.
• Details of all eligible funds managed by the fund manager, along with total remuneration received from them.
• Description of services provided to eligible funds.