Section 9A of the Income Tax Act provides a special tax regime for certain eligible offshore investment funds and their fund managers located in India. Key conditions include the fund being established outside India, having a minimum of 25 non-connected members, and the fund manager being registered with SEBI. The remuneration paid to the fund manager must be at least a prescribed amount calculated based on assets under management. This was introduced to incentivize offshore fund managers to relocate to India while avoiding creating a taxable presence for the offshore fund. However, challenges remain in the tax regime for offshore funds to fully realize the potential of developing an offshore fund management hub in India.
3. Legends used in the Presentation
AD Authorised Dealer
ALP Arm’s length price
AO Assessing Officer
AUM Assets Under Management
CBDT Central Board of Direct Taxes
CG Central Government
FPI Foreign Portfolio Investor
KYC Know Your Customer
DTAA Double Taxation Avoidance Agreement
PAN Permanent Account Number
PY Previous Year
SEBI Securities Exchange Board of India
TPO Transfer Pricing Officer
The Act Income-tax Act
4. Presentation Schema
Introduction In Indian Context
Sec 9A - Certain
Activities not to
Constitute Business
Connection in India
Business
Connection in India
Definitions
Eligible Investment
Fund
Eligible Fund
Manager
Other Conditions
Renumeration to
Fund Manager
Proposed Rules for
Prescribed
Remuneration
Form 3CEJA
Status of the Indian
Financial Services
Sector
Scope for Asset
Management
Industry
Offshore Fund
Management
Challenges in the
Tax Regime for
Offshore Funds
High Level Advisory
Group
Policy
Recommendations
by High Level
Advisory Group
Conclusion
5. Introduction
would not be
considered a
resident for tax
purposes solely
based on its fund
manager being
located in India
Under these
provisions, on
satisfying a set of
eligibility
conditions, an
offshore fund
with effect from
April 2016, the
Government
introduced
provisions under
Sec 9A of the
Income Tax Act
To incentivize
offshore fund
managers to
relocate from
offshore
jurisdictions to
India to manage
such funds
6. In Indian Context
Offshore Funds are funds, such as mutual funds, that exist and operate abroad, usually in offshore financial centers
Offshore funds largely pool and manage international investment influx into a Country
Offshore funds are located in tax and regulatory friendly jurisdictions
The Activity of Managing such funds is known as Offshore Fund Management
Offshore Funds are reluctant to employ an Indian Entity for Fund Management as it would create tax
implications for the Fund’s profits
Attracting such funds to operate to India and to employ Indian Fund Managers would attract further inflow of
foreign investment and generate income for the country via financial services
7. Sec 9A - Certain Activities not to Constitute Business
Connection in India
Sec 9A provides for a special taxation regime in respect of certain Offshore funds in the context of their
fund managers being located in India
In case of an Eligible investment fund, the Fund management activity carried out, through an Eligible fund
Manager acting on behalf of such fund, shall not constitute Business Connection in India of the said fund
An eligible Investment fund shall not be said to be resident in India, merely because the Eligible Fund
Manager, undertaking fund management activities on its behalf, is located in India
8. Business Connection in India
Sec 9 of the Act provides for Incomes that would be deemed to accrue or arise for Income-tax purposes
It, inter alia, provides that all income accruing or arising, whether directly or indirectly, through or from
any business connection in India shall be deemed to accrue or arise in India
Income from Business Connection
Person acting on behalf of a non-resident Significant Economic Presence
9. Definitions
Associate
being more than 15% of its share capital or interest
holds, either individually or collectively, share or interest,
or a director or a trustee or a partner or a member of the fund manager of such fund,
a director or a trustee or a partner or a member or a fund manager of the investment fund
Means an entity in which
Corpus
Means the total amount of funds raised for the purpose of
investment by the eligible investment fund as on a particular date
Definitions
10. Definitions – Contd.
Connected person
Means any person who is connected directly or indirectly to another person and includes
Individual Any relative of that person
Company Director and relative of such director
Firm, AOP or BOI Partner or Member and their relatives
HUF Member and their relatives
Any person who has a substantial interest in the
business of another person or their Connected Persons
11. Eligible Investment Fund
Means a fund established or incorporated or registered outside India, which collects funds
from its members for investing it for their benefit and fulfils the following conditions:
Fund is not a person resident in India
The fund is a resident of a country or a specified territory with which DTAA has been entered into or is
established or incorporated or registered in a country or a specified territory notified by the CG in this behalf
Aggregate direct or indirect participation or investment of Indian Residents in the fund does not exceed 5%
of the corpus
The fund and its activities are subject to applicable investor protection regulations in the country or specified
territory where it is established or incorporated or is a resident
The fund has a minimum of 25 members who are, directly or indirectly, not connected persons
Any member of the fund along with connected persons shall not have any participation interest, directly or
indirectly, in the fund exceeding 10%
The aggregate participation interest, directly or indirectly, of 10 or less members along with their connected
persons in the fund, shall be less than 50%
12. Contd.
The fund shall not invest more than 20% of its corpus in any entity
The fund shall not make any investment in its associate entity
The monthly average of the corpus of the fund shall be at least 100 crore rupees
If fund is established or incorporated in the previous year, the corpus shall be reached within 6 months from
end of month of incorporation or the end of PY, whichever is later
Minimum corpus requirement shall not apply to a fund which has been wound up in the PY
The fund shall not carry on or control and manage, directly or indirectly, any business in India
- The fund is neither engaged in any activity which constitutes a business connection in India
- nor has any person acting on its behalf whose activities constitute a business connection in India
- other than the activities undertaken by the eligible Fund manager on its behalf
The Remuneration paid by the fund to an eligible fund manager in respect of fund management activity
undertaken by him on its behalf is not less than the amount calculated in such manner as may be prescribed*
*Amendment of Union Budget 2019
13. Eligible Fund Manager
The person is not an employee of the eligible investment fund or a connected person of the fund
The person is registered as a fund manager or an investment advisor in accordance with the SEBI
Portfolio Manager and Investment Advisers Regulations
The person is acting in the ordinary course of his business as a fund manager
The person along with his connected persons is not entitled, directly or indirectly, to more than
20% of the profits accruing or arising to the eligible investment fund from the transactions
carried out by the fund through the fund manager
The eligible fund manager means any person who is engaged in the
activity of fund management and fulfils the following conditions:
14. Other Conditions
By virtue of this Sec, Income of the eligible investment fund which would have been
earned even without the fund management activity with the Eligible Fund manager,
shall not be excluded from taxation
Provisions of this Sec shall not have any effect on the scope of total income or
determination of total income of the eligible fund manager
Every eligible investment fund shall furnish Form 3CEK within 90 days from the end of
the FY which contains information relating to fulfilment of conditions in the Sec and
other relevant information
15. Renumeration to Fund Manager
Earlier Provision
Sec 9A(3)(m) provided that the remuneration to a fund manager shall
not be less than the arm’s length price (ALP) for that activity
Amendment by Union Budget 2019
Finance (No 2) Act, 2019 with effect from 1 April, 2019 amended Sec 9A(3)(m) so as to provide that
• the remuneration paid by the fund to an eligible fund manager in respect of fund management
activity undertaken by him on its behalf is
• not less than the amount calculated in such manner as may be prescribed
16. Sub-rule (5) to (10) of Rule 10V – Guidance on Determination
of ALP of Remuneration to Fund Manager – Current Scenario
i.e. Transfer Pricing Provisions would apply
And the Eligible Investment Fund and the Manager are Associated Enterprises
Income-tax provisions shall apply as if transaction between Investment Fund and
the Manager is an international transaction
These are the provisions which are currently applicable for ALP of Remuneration to Fund Manager
Fund Manager shall keep and maintain Documentation required under Sec 92D (Transfer Pricing Documentation)
In addition to Transfer Pricing Report under Sec 92E, the Fund Manager shall obtain a report from an accountant
in Form 3CEJ in in respect of activity undertaken for the fund
If documentation has not been maintained by the Fund Manager, the AO or TPO as the case may be, before
determining ALP shall provide an opportunity to the Fund to provide information for ALP determination
• Benefits of Sec 9A shall not be denied due to non-satisfaction of ALP condition where other conditions are satisfied
• This shall not be applicable if the remuneration is not at ALP for 3 consecutive years or any 3 out of 4 PYs
17. Proposed Rules for Prescribed Remuneration
A draft notification to amend the Rules for prescribing the minimum amount of remuneration has been
released by the CBDT on 5th December 2019, for public consultation, containing the following provisions:
Sub-rule (5) to sub-rule (10) shall not apply on or after the 1st day of April, 2019
The amount of remuneration to be paid by the fund to a fund manager shall be calculated in the following manner:
In case the fund is a Category-I Foreign
Portfolio Investor (FPI) as per SEBI Regulation
In Any other case
0.5% of the Assets under Management
0.3% of the Assets under Management
10% of the profits in excess of specified hurdle rate
50% of management fee whether fixed or profit-
linked received by the Fund as reduced by operational
expenses including distributional expenses if any
OR
OR
“Specified hurdle rate” means a pre-defined threshold
beyond which the fund agrees to pay a share of the
profits earned by the fund from the fund management
activity undertaken by the find manager
General public and Stakeholders can provide inputs electronically at the email address, ustpll@nic.in upto 19th December, 2019
18. Contd.
Asset under management Means the annual average of the monthly average of the opening and
closing balances of the value of the fund managed by the fund manager
and all the provisions of the Act shall apply as if it is a report to be furnished under Sec 92E
obtain a report from the accountant in respect of activity undertaken for the fund and furnish such report
on or before the due date for filing return of income in the Form No. 3CEJA duly verified by an accountant
The fund manager shall, in addition to any report required to be furnished by it under Sec 92E,
In case where
the amount of
remuneration
is lower than
the amount
prescribed,
the fund may, at its
option, apply to the
Prescribed authority*
seeking approval of
CBDT for that lower
amount to be the
Remuneration and
on receipt of such
application CBDT may,
after satisfying itself
considering the relevant
facts, approve such
lower amount
*The Member, Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, North Block,
New Delhi having supervision and control over the work of Foreign Tax and Tax Research (FT&TR) Division
19. Form 3CEJA
“FORM No. 3CEJA
[See rule 10V (13)]
Report from an accountant to be furnished for purpose of section 9A regarding fulfilment of certain conditions by an
eligible investment fund
*I/We have examined the accounts and records of……………………………………………. (name and address of the fund manager
with PAN) relating to the fund management activity and other transactions or services rendered by the fund manager to
the eligible investment fund/ funds during the previous year ending on 31″ March,
1. In*my/our opinion proper information and documents as are prescribed have been kept by the fund manager in
respect of fund management activity and other transactions or services rendered by the fund manager to the fund/funds
so far as appears from *my/our examination of the records of the fund manager.
2. The particulars required to be furnished for the purpose of section 9A are given in the Annexure to this Form.
In*my/our opinion and to the best of my/our information and according to the explanations given to *me/us, the
particulars given in the Annexure are true and correct.
**Signed
Name:
Address:
Membership No.:
Place:
Date:
Notes:
1. *Delete whichever is not applicable.
2. * *This report has to be signed by an accountant as defined in the Explanation below sub-section (2) of section 288.
20. Annexure to Form No. 3CEJA
Particulars relating to fund management activity required to be furnished
for the purposes of section 9A of the Income-tax Act, 1961
1. Name of the Fund Manager
2. Address
3. Permanent account number
4. Nature of business or activities of the fund manager
5. Status
6. Residential status
7. Details of SEBI registration
(a) Regulation under which registered
(b) Registration number and date
(c) Foreign portfolio investor category, if applicable
8. Previous year ended
9. Whether Fund Manager and Fund are related in terms of provision under section 92B.
10. Aggregate value of remuneration received from the eligible fund/funds as per books of account
11. List of eligible investment funds for whom the fund manager has undertaken the fund management activity
12. Particulars of remuneration received in respect of each eligible investment fund and each activity undertaken (if
such activity is separately remunerated)
13. Particulars in respect of any other transaction undertaken by the fund manager with/on behalf of the eligible
investment fund
21. Status of the Indian Financial Services Sector
India is currently a net importer of financial services, running a small trade deficit of USD 373 million
as of 2017-18.
Financial services exports have averaged about USD 5.2 billion in the recent years, while their share
in total services exports has declined from 5.2% in 2010-11 to 2.6% in 2017-18.
The financial services sector has been identified as one of the Champion Services Sectors by the
Government
> for import substitution of financial services for which India currently relies on global financial
centres, and
> to boost financial services exports and high-skilled employment
22. Scope for Asset Management Industry
However, India still accounts for less than 1% of the global asset management industry
AUM in Alternative Investment Funds (AIFs) increasing ten-folds
AUM in Portfolio Management Services rising three-folds and
with Assets Under Management (AUM) in the Mutual Funds industry more than doubling between 2013-17,
India has one of the fastest growing asset management industry in the world,
One area in financial services with scope for continued expansion is the asset management industry.
23. Offshore Fund Management
One area within the asset management industry with immense potential for development is undertaking fund
management activity of the offshore funds from India.
These offshore funds are located in tax and regulatory friendly jurisdictions, such as Singapore, Mauritius, Luxembourg,
Ireland, Hong Kong and London, which pool and manage foreign portfolio investments (FPIs) coming into India.
Such funds include the India-dedicated offshore funds which invest only in India (with USD 31 billion in AUM as of 2017)
and the Regional/Global diversified funds which have partial investment allocation to India.
Such funds are currently managed by fund managers, often of Indian origin, from these offshore jurisdictions since their
presence in India can create tax implications for the offshore fund’s profits
Addressing the tax implications for such offshore funds would incentivise the fund managers of India-
dedicated funds, and potentially, Regional/Global diversified funds with partial investment allocation to
India to relocate from offshore jurisdictions to India to Manage the funds
24. Potential of Offshore Fund Management
Creation of an asset
management hub in India -
Employment generation for
about 7,500 high-skilled
finance professionals,
including fund managers and
support service providers, risk
managers, research analytics
professionals and tax advisors
Management fee received by
fund managers for managing
the offshore funds could yield
financial services export
revenues of about USD 800
million by 2020 and USD 1.4
billion by 2025 if the India-
dedicated offshore funds
move their fund management
activity to India
Fund managers’
remuneration would yield
income tax revenues of
about INR 1,680 crores by
2020 and INR 2,940 crores by
2025 if the India-dedicated
offshore funds move their
fund management activity to
India
Promotion of Offshore fund management in India would enable greater delegation of fund
management activity of FPIs to India as India continues to attract greater FPI inflows
It would enable Portfolio Managers currently located in India, and managing domestic
funds, to expand their client base to manage the offshore funds from India
Source: Report of High Level Advisory Group of Ministry of commerce
25. Challenges in the Tax Regime for Offshore Funds
Government introduced provisions of Section 9A to incentivize the offshore fund managers to relocate to India
The eligibility conditions under those provisions have been designed to prevent round-tripping and money
laundering of funds to India
CBDT’s reservations on relaxing the eligibility conditions emanate from concerns around KYC compliance and to
curb revenue loss from the potential misuse of provisions
While several offshore funds are willing to relocate their fund managers to India, the number of applications
being submitted by such funds to CBDT (and being accepted) to avail the safe harbour provisions remain
extremely low even three years after the introduction of the provisions. This is due to:
The offshore funds have to
satisfy a total of 17
eligibility conditions, 13
conditions related to the
offshore fund’s structure,
investor composition and
investment activity, and 4
conditions related to the
fund manager’s activity and
remuneration
Most offshore funds are
unable to satisfy majority of
the eligibility conditions
since they are extremely
stringent, open to varied
legal interpretation
The conditions on the
offshore fund’s structure /
investor composition /
investment activity and the
fund manager’s activity /
remuneration are
incoherent with the
intrinsic structure of the
offshore funds and the
nature of FPI inflows into
India
The need to satisfy several
eligibility conditions results
in dual compliance burden
for the offshore fund
investors since they are also
required to comply with
SEBI regulations
andSEBI/RBI guidelines
26. High Level Advisory Group
Mainstreaming new age policy making
Managing pressing bilateral trade relations and
For boosting India’s share and importance in global merchandise and services trade
To assess the global environment and make recommendations:
The High-Level Advisory Group (HLAG) was constituted by the Minister of
Commerce and Industry, Department of Commerce, Government of India,
HLAG was chaired by Mr Surjit S Bhalla and contained 11 other members
The HLAG deliberated upon these issues and arrived upon certain recommendations on issues
The Final Report was presented on 12th September 2019 to the Department of Commerce, Government of India
27. Policy Recommendations by High Level Advisory Group
The Report of High Level Advisory Group made policy recommendations by
prescribing frame work for foreign investments funds:
Fund and Fund Manager should be fully KYC compliant in home country and SEBI, and shall have PAN
The entity and the fund manager should be free to operate from any physical location as long as the entity in
question is registered with a regulator who is an IOSCO (International Organisation of Securities Commissions)
member or a regulator with whom SEBI has a bilateral agreement or MoU
No requirement of the place of residence or deemed resident should be necessary
The foreign investor entity (AIF, FII, Pension Fund, etc.) has to be registered with the home country regulator.
28. Contd.
Foreign Individual Investors should be allowed to invest in India through permitted Indian and Foreign ADs, with simplified
PAN process, ADs facilitating registration and tax aspects while permitting investment in equity and debt but not in real estate
SEBI should act as Centralised agency for non-compliance and violations
Regulators should avoid bureaucratic delays. SEBI shall prescribe 21 days time limit for KYC registration to ensure no delays
CA certification should be mandated by AD bank for outward remittance
In case the entity and fund manager are registered with SEBI and compliant with SEBI regulations, there should be no tax
residency risk in India for such an entity even if its fund manager is located in India
The entity should be entitled to the tax treatment as agreed in the DTAA, and the accounting firm along with a lawyer in India
should be responsible for compliance certificate on inward and outward remittance
29. IOSCO Non-Members
Country Regulator
BARBADOS Financial Services Commission
BOLIVIA Autoridad de Supervisión del Sistema Financiero
COSTA RICA Superintendencia General de Valores
GHANA Securities and Exchange Commission
KYRGYZ REPUBLIC State Agency for Financial Surveillance and Accounting
PAPUA NEW GUINEA Securities Commission
PHILIPPINES Securities and Exchange Commission
UKRAINE National Securities and Stock Market Commission
UZBEKISTAN Center for Coordination and Control over Functioning of Securities Market
30. Conclusion
Even though tax incentives via exemption from Residency is provided there are several conditions for
eligibility which makes Offshore funds hesitant to migrate to India
Prescription of minimum remuneration to fund managers is yet another deterring provision
Increase in compliance from Income-tax perspective only swells the burden of dual compliance
Considering the importance and future prospects of the Financial Services Sector, Government needs
to contemplate relaxation of norms for Offshore Fund Management
