CTC - Conference on Estate & Succession Planning - Trusts under FEMA - 02.02.2013

2nd Feb. 2013 P. P. Shah & Associates 1
The Chamber Of Tax Consultants
Full Day Conference On Estate & Succession
Planning, New Delhi
Trusts – Implications & Treatment under FEMA
Presented by:
Mr. Paresh P. Shah
P.P. Shah & Associates
Chartered Accountants
Email: ppshahandassociates@gmail.com

Overview of Presentation
 Concept of Trust
 Purposes & Evolution
 Types of Trusts
 Typical Structure of Trusts
 Onshore & Offshore Trusts
 FEMA aspects of Trust:
 Overview
 Definitions under FEMA
 Residential Status
 Transactions & FEMA applicability
 Resident Trust – Example
 FEMA Implications – Resident Discretionary Trust
 FEMA Implications – Offshore Discretionary Trust
 FEMA Implications – Different Scenarios & Case-Study
 Conclusion - Issues

Concept of Trust
Definition of Trust [Section 3 of Indian Trust Act, 1882]
 A Trust is an obligation annexed to the ownership of
property (“trust property”), and
 arising out of a confidence reposed in and accepted
by the owner, or declared and accepted by him
(“trustees”),
 for the benefit of another, or of another & the owner
(“beneficiaries”).

Concept of Trust
A Trust thus is:
 An equitable obligation
 Binding a Person (“trustee”)
 to deal with Property over which he has control (“trust property”)
 for the benefit of Persons (“beneficiaries”) of whom he may himself be
one and any one of whom may enforce the obligation
Briefly this leads to the concept of “Equity’s interference with common law
rights in pursuit of justice”

Concept of Trust
Dual Ownership
 Legal Ownership with trustees who have control,
management & possession
 Beneficial Ownership of beneficiaries that involves
benefit, use & enjoyment of asset

Concept of Trust - implications
 A Trust is not an artificial juridical person
 It is not an AOP (as it cannot act as AOP under law) / BOI (BOI has no
powers or role)
 It is only an obligation accepted by the Trustees under law; it is a
relationship whereby property is held by one party for the benefit of
another
 In order to sue a trust, one must sue the trustee in his capacity as
trustee for a specific trust; conversely, if the trust needs to sue
someone, the lawsuit must be brought by the trustee in his capacity as
such.
 Hence, Trust has no legal existence independent from its main
constituents viz. trustees & beneficiaries

Purposes of Trust
 Evolution of Trust
 Use of Assets vs. Transfer of Assets
 Protection of Purposes
 Succession Planning
 Ownership succession
 Venture Capital Fund
 Private Equity
 Special Purposes
 Wealth Management
 Taxation
 Types of Trust is a consequence of above purposes

Types of Trust
Implied Express
Constructiv
e
Resulting Executed Executory
Revocable Irrevocable
Discretionary
.
Non
Discretionary
These types of Trusts may not
exist in India owing to the Benami
Transactions (Prohibition) Act,
1988

Types of Trust
Fixed Employee
Benefit
Asset
Protection
Accumulation
& Maintenance
Life
Interest
Hybrid Bare Star Charitable

Trust, A Typical Structure
Settlor/Grantor
Trust
Trust Assets
Beneficiary/ies
Protector
Prescribes the objective of trust
& its conditions, functions of
trustee, Protector/s & appoints
beneficiary/ies
Trustee/s controls the assets
A guide to
the Trustee

Types of Trusts – Discretionary Trust
Beneficiaries Trustees
• No Equitable Interest or
Ownership in Trust Income or
Capital.
• Mere members of the Class to
whom the Trustees have discretion
to apply Trust Income or Capital.
• Limited right to require Trustees to
exercise powers in terms of the
Trust Document.
• Have Discretion :
– to select who shall receive benefit
from Trust Income or Capital.
– to determine the extent of such
benefit.
– to decide whether to
distribute Trust Income or
accumulate it.

Taxation Laws & Classification
-Onshore & Offshore Trusts
Onshore Trust
 Normally situated in tax neutral / High tax jurisdiction
 Settlor normally a non resident, can be resident also
 Normally Non resident beneficiary/ies and could be
resident also
Offshore Trust
 A word “offshore” indicates “off the shore”, outside
the place.
 Normally a jurisdiction with low tax or no tax
 Formed by Non Resident settlor and Non resident
beneficiary/ies

Selection of Trust - Criterions
 General purpose or Special purpose
 Jurisdiction offering the ease to accomplish the
General purpose or Special purpose may be
surveyed for concluding the place of formation of the
Trust
 Taxation
 Domestic Tax system/factors
 International Factors

FEMA aspects of Trusts - Overview
 What is the Residential Status of Trust / Transacting
Parties
 What is the nature of the transaction – Capital
account or Current account
 Whether transaction is generally permissible or
whether specific permission required under relevant
FEMA Notification / Regulation

FEMA – Relevant definitions
 S. 2(e) – Capital Account transaction
 means a transaction which alters the assets or liabilities, including
contingent liabilities, outside India of persons resident in India or
assets or liabilities in India of persons resident outside India, and
includes transactions referred to in sub-section (3) of Section 6
(Alteration in assets or liabilities in India of PROI;
Alteration in assets or liabilities outside India of PRII)
 S. 2(j) – Current Account transaction
 means a transaction other than a capital account transaction and
without prejudice to the generality of the foregoing such transaction
includes –

payments due in connection with foreign trade, other current business,
services and short-term banking and credit facilities in ordinary course of
business

payments due as interest on loans and as net income from investments

remittances for living expenses of parents, spouse and children residing
abroad, and

expenses in connection with foreign travel, education and medical care of
parents, spouse and children

FEMA – Relevant definitions
 S. 2(u) – Person
 includes – (i) an individual, (ii) a Hindu Undivided Family, (iii) a
company, (iv) a firm, (v) an AOP / BOI whether incorporated or not,
(vi) every artificial juridical person, not falling within any of the
preceding sub-clauses, and (vii) any agency, office or branch owned
or controlled by such person
 S. 2(v) – Person resident in India
 (i) person residing in India for more than 182 days during preceding
financial year but does not include ………..(omitted as applicable to
individuals only),
 (ii) any person or body corporate registered or incorporated in India,
 (iii) an office, branch or agency in India owned or controlled by a
person resident outside India,
 (iv) an office, branch or agency outside India owned or controlled by
a person resident in India

FEMA aspects of Trusts – Residential
status of Trust
 What is the Residential Status of Trust
 Is Trust a ‘Person’ as defined under FEMA?
 Can FEMA definition of ‘Person resident in India’ or ‘Person
resident outside India’ apply to Trust?
 If not, how to determine Residential Status of Trust
 Is it Place where management / operations of Trust is
located i.e. where Trustee is Resident?
 Is it Place where settlor is Resident?
 Is it Place where beneficiary/ies are Resident?
 Is it the Location of the Assets under trust?

Residential status of Trusts –
Connecting Factors
Type of
Trust
Residential
status
Rationale
Discretionary That of Trustee(s) • Beneficiaries shares are
indeterminate and have no
Equitable interest or ownership in
Trust income or assets
• Trustee has complete discretion
and control over assets & income
Specific (Non
-discretionary)
That of Beneficiary
(s)
• Beneficiaries shares clearly
defined
• Beneficiaries have Equitable
interest or ownership in Trust
assets and income

Trusts – Resident Trust example
Notes: (i) Settlor could be resident or Beneficiaries could be resident
(ii) If Trustee is non-resident, Trust would be treated as Non-resident
Settlor
(non-resident)
Discretionar
y Trust
Trustee(s)
(resident)
Beneficiaries
(non-residents)
 Inward Remittance
• From NRE/NRO A/c
• Gifts of
 Shares in Indian Co
 Debt Instrument of Indian Co
 Immovable Property in India

Trusts – Resident Trust example
Notes: (i) Settlor could be resident or Trustee could be resident
(ii) If Beneficiaries are non-resident, Trust would be treated as Non-
resident
Settlor
(non-resident)
Specific
Trust
Trustee(s)
(non-resident)
Beneficiaries
(residents)
 Inward Remittance
• From NRE/NRO A/c
• Gifts of
 Shares in Indian Co
 Debt Instrument of Indian Co
 Immovable Property in India

Residential Status of Trust under FEMA
AOP / BOI
2(u)(v)
“Resident”
2(v)
Trust
“Person”
2(u)
“Any Person”
…. in India
2(v)(ii)
Residential Status of
Trustees
Legal Owners of
Trust Property
Trusts Act
Section 3
Residential Status of
Beneficiaries
Beneficial Owners
Substantive Rights
Trusts Act
Sections: 3,11,55,56,58
Place where Trust
is set up
Trust is not a
Person
Transaction is
carried out for
others
Not the legal owners of the
assets; right to execute the
Trust only; cannot deal on
their own
Two Views:
• FEMA provisions applicable to Non-Residents are
applicable to Trust having non-resident beneficiaries,
since
a Trust is mere pass-through entity
• Cannot determine Residential Status in a straight
manner

Basic Rules of Transactions under FEMA
PROI
• All current income
• Legitimate
expenses in India
out of NRO A/c. ,
etc.
• US$ 1 mn
scheme
Current A/c. transactions
Transaction to draw or receive Foreign Exchange
Capital A/c. transactions
PRII PROI PRII
• Schedules I, II &
III of Foreign
Exchange
Management
(Current Account
Transactions)
Rules, 2000
• Foreign Exchange
Management
(Permissible
Capital Account
Transactions)
Regn, 2000
i.e. Ntf. FEMA 1
• Foreign Exchange
Management
(Permissible
Capital Account
Transactions)
Regn, 2000
i.e. Ntf. FEMA 1

Basic Rules of Transactions under FEMA (con’t)
PROI
Current A/c. transactions
Transaction to draw or receive Foreign Exchange
Capital A/c. transactions
PRII PROI PRII
• US$ 200K
Scheme
• Hospitability to
PROI.
• Credit card
payments.
• Section 6(4)
• RFC A/c
• Schedule II to
Capital account
transactions.
• Section 6(5)
• US$ 1 mn
scheme
• Schedule I to
Capital account
transactions.
• Section 6(4)
• US$ 200K
Scheme

Trusts – Transactions & applicable
FEMA Rules / Notifications
Nature of Transaction FEMA Rule / Notification
applicable
Gift / Donation, purchase of shares /
immovable property, etc. by resident
individuals
Liberalized Remittance Scheme [A.P.
(Dir Series) Circular No. 64 dt. 4th
Feb. 2004
Capital account transactions Notification No. FEMA 1/2000-RB dt.
3rd
May 2000
Deposits & Bank Accounts Notification No. FEMA 5/2000-RB dt.
3rd
May 2000
Acquisition & Transfer of Immovable
Property outside India
Notification No. FEMA 7/2000-RB dt.
3rd
May 2000
Realisation, Repatriation &
Surrender of Foreign Exchange
Notification No. FEMA 9/2000-RB dt.
3rd
May 2000

Trusts – Transactions & applicable
FEMA Rules / Notifications (con’t)
Nature of Transaction FEMA Rule / Notification
applicable
Remittance outside India of assets
in India
Notification No. FEMA 13/2000-RB
dt. 3rd
May 2000
Investments in India under FDI /
Portfolio Investment Scheme / Non –
repatriation basis
dt. 3rd
May 2000 – Schedules I, III &
IV
Acquisition & Transfer of Immovable
Property in India
dt. 3rd
May 2000
Investment in Firm or Proprietary
concern in India
dt. 3rd
May 2000

Consolidated FDI Policy – October
2012
 Para 3.1.6: FVCI
A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to
100% of the capital of an Indian Venture Capital Undertaking (IVCU) and may
also set up a domestic asset management company to manage the fund. All
such investments can be made under the automatic route in terms of Schedule 6
to Notification No. FEMA 20. A SEBI registered FVCI can invest in a domestic
venture capital fund registered under the SEBI (Venture Capital Fund)
Regulations, 1996. Such investments would also be subject to the extant FEMA
regulations and extant FDI policy including sectoral caps, etc. SEBI registered
FVCIs are also allowed to invest under the FDI Scheme, as non-resident
entities, in other companies, subject to FDI Policy and FEMA regulations.
Further, FVCIs are allowed to invest in the eligible securities (equity, equity linked
instruments, debt, debt instruments, debentures of an IVCU or VCF, units of
schemes / funds set up by a VCF) by way of private arrangement / purchase
from a third party also, subject to terms and conditions as stipulated in Schedule
6 of Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 as amended from
time to time. It is also being clarified that SEBI registered FVCIs would also be
allowed to invest in securities on a recognized stock exchange subject to the
provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time,
as well as the terms and conditions stipulated therein

2012
 Para 3.2: Entities in which FDI can be made
 Para 3.2.1: FDI in an Indian Company
 Para 3.2.2: FDI in Partnership Firm / Proprietory concern
 Para 3.2.3: FDI in Venture Capital Fund (VCF)
 FVCIs are allowed to invest in IVCUs, VCFs and Companies
 If VCF is a Trust, then FVCI / PROI can invest with FIPB approval
only
 If VCF is a Company, auto route is available
 Para 3.2.4: FDI in Trusts other than VCF is not permitted

2012
 Para 3.1.1: Who can invest in India?
 A non-resident entity (other than a citizen of Pakistan or an entity
incorporated in Pakistan) can invest in India, subject to the FDI Policy.
A citizen of Bangladesh or an entity incorporated in Bangladesh can
invest only under the Government route.

Resident Discretionary / Fixed Trust
 Can any transaction specifically not permitted under
FDI Policy be done indirectly?
 Company with step down subsidiary/ies as operating company
in sector with cap – only with FIPB approval
 Partnership Firm with step down companies, etc. – No FDI is
permitted through Partnership Firms
 Immovable Property:
 Only NRI / PIO (individuals) are permitted
 Not allowed to purchase through Indian company with NRI/s as
investor/s
 No Foreign Company with NRI/s as investor/s can purchase
immovable property in India

Analysis of the transactions of Trust
 Life cycle transaction
 Corpus by Non-Resident
 Investment by Trust
 Income earned by Trust
 Distribution by Trust

FEMA Implication – Resident Discretionary Trust
SETTLOR (NRI) CONTRIBUTION
TO TRUST BY INWARD
REMITTANCE
Not a Capital Account
transaction
Current Account
transaction
No Alteration of NRI‘s Assets or
Liabilities in India
Sale of Foreign
Exchange
No FEMA implication

SETTLOR (NRI) CONTRIBUTION
TO TRUST FROM NRE / NRO
ACCOUNT
Capital Account transaction
FEMA 5: NRE / NRO
Scheme
Alteration of NRI‘s Assets in
India
General permission for
‘local disbursements’ /
‘local payments’

SETTLOR (NRI) GIFTS SHARES
IN INDIAN CO. TO TRUST
FEMA 20: Inbound
Investments
India
General permission:
Regn. 9(2)(iii)(a)

SETTLOR (NRI) GIFTS DEBT
INSTRUMENTS IN INDIAN CO. TO
TRUST
FEMA 20: Inbound
Investments
India
No General permission
for gift of Debt
instruments
Specific permission
required

SETTLOR (NRI) GIFTS
IMMOVABLE PROPERTY IN
INDIA TO TRUST
FEMA 21: Immovable
Property in India Regn.
India
General permission for gift to
residents:
- by NRI Indian Citizen: Regn. 3(b)
- by NRI-PIO: Regn. 4(f)

INVESTMENT OF TRUST ASSETS IN
SHARES, REAL ESTATE, DERIVATIVE
CONTRACTS, ETC.
No Alteration of NRI’s
Assets in India
No Capital or Current account
transactions under FEMA
No Alteration of Resident’s
Assets outside India
No Foreign Exchange involved
No FEMA implication

COLLECTION OF TRUST INCOME
BY RESIDENT TRUSTEE
No Alteration of NRI’s
Assets in India
No Capital or Current account
transactions under FEMA
No Alteration of Resident’s
Collection of Income is:
- under Settlor’s direction
- not by order of or on behalf of NRI
beneficiaries
No FEMA implication

DISTRIBUTION & REMITTANCE OF
CURRENT INCOME & ACCUMULATED
INCOME
Alteration of NRI’s
Assets in India
Capital account
transaction under
FEMA
Distribution to NRI
beneficiary
FEMA 5 – NRO
A/c.
General permission
to credit legitimate
dues
Remittance of current
income received by NRI
beneficiary
Assets in India
Capital account
transaction under
FEMA
FEMA 5 – NRO
A/c.
General permission
to remit current
income
Remittance of accumulated
income received by NRI
beneficiary
Assets in India
Capital account
transaction under
FEMA
FEMA 13
General permission
to remit under
million $ scheme

DISTRIBUTION & REMITTANCE OF
CORPUS OF THE TRUST
Assets in India
Capital account
transaction under
FEMA
Distribution to NRI
beneficiary
FEMA 5 – NRO
A/c.
General permission
to credit legitimate
dues
Remittance of Corpus
received by NRI
beneficiary
Assets in India
Capital account
transaction under
FEMA
FEMA 13
General permission
to remit under
million $ scheme

2nd Feb. 2013
P. P. Shah & Associates 40
FEMA Implication – Domestic Trust
IRREVOCABLE
Beneficiaries
NRI / PIO
(all present
or potential)
Discretionary
(Like a
Company)
may be treated:
as NRI / PIO
FDI ………………….Ntf.
20
Immovable Prop…
Ntf.21
FD/NRE/NRO A/c…Ntf.
5
Fixed
(Like an AOP
co-owners)
Trustee is legal
owner
Resident or Non-
Resident Foreigner
Advisable to take
approval
Status of Settlor is
important
If non-resident,
Sections 6(4) or
6(5) will apply
No application is
required if settlor
is resident
REVOCABLE
Foreigners
Approval may be
granted
FDI ………………….Ntf.
20
Approval may be
granted
Immovable Prop…
Ntf.21
FD……………………..Nt
f. 5
Approval will not be
granted

FEMA Implication – Offshore Discretionary Trust
FUNDING OF OFFSHORE
DISCRETIONARY TRUST BY RESIDENT
SETTLOR – AN EXAMPLE
No alteration of
Resident’s Assets
outside India
Not a Capital account
transaction under
FEMA
Direct remittance to
settle Offshore Trust
Gift / Donation under
LRS
Current A/c.
transaction
Transfer to Offshore Trust
from overseas bank a/c
opened by using LRS
Alteration of
Resident’s Assets
outside India
Capital account
transaction under
FEMA
FEMA 1 – Schedule 1
Not specified as
permissible transaction
Loan by Resident to
Offshore Trust
Alteration of Resident’s
Capital account
transaction under
FEMA
FEMA 1 – Schedule
1
Permissible
transaction

Trusts & FEMA Implications – Different
Scenarios & Case-Study
I II III IV V VI
SETTLOR Non
-Residen
t
Non -
Resident
Non
-Residen
t
Resident Resident Resident
TRUSTEE Resident Resident Non
-Residen
t
Resident Non
-Residen
t
Non
-Residen
t
BENEFICIARY Resident Non
-Residen
t
Resident Non
-Residen
t
Non
-Residen
t
Resident
Application of FEMA to:
• Creation of Corpus
• Income generation
• Distribution / Remittance
of Income to Beneficiary
• Remittance of Corpus to

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CTC - Conference on Estate & Succession Planning - Trusts under FEMA - 02.02.2013

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