Pursuant to the recent notification by the Central Board of Direct Taxes (“CBDT”), there has been an amendment to the income tax rules in relation to the minimum remuneration payable by an offshore fund to its India based fund manager (“Fund Manager”).
Income-Tax Act provides for a special taxation regime for certain eligible investment funds, in the context of their fund managers being located in India. To further encourage fund management from India, Section 9A of the Income-Tax Act, 1961, subject to other conditions, was introduced to provide safe harbour rules which facilitated onshore management of offshore funds; thereby implying that, an offshore fund is not categorised as a resident in India simply because its fund manager undertaking fund management activities on behalf of the offshore fund is located in India.
Previously, as a condition under the law, an offshore fund was required to ensure that remuneration paid to the Fund Manager is not less than the arm's length price. This condition has been superseded after April 1, 2019 and the remuneration thresholds have been revised to refine the provisions of the Act. The prevalent methodology in relation to the minimum remuneration is tabulated below:
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Offshore Fund |
Minimum remuneration payable to the Fund Manager
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|
Category I Foreign Portfolio Investor |
at least 0.10% of the assets under management (i.e. the annual average of the monthly average of the opening and closing balances of the value of such part of the fund which is managed by the Fund Manager)
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|
other eligible investment funds |
i) 0.3% of the assets under management; or ii) 10% of profits derived by such fund in excess of the pre-defined threshold beyond which the fund agrees to pay a share of the profits earned by the fund from the management activity undertaken by the Fund Manager (i.e the specified hurdle rate), where the remuneration is only income or profit linked; or iii) 50% of the management fee, attributable to the management activity undertaken by the Fund Manager, as reduced by the amount incurred towards operational expenses including distribution expenses, if any. |
However, in case the amount of remuneration is lower than the amount determined as per the amended rules, the fund will be entitled to avail the opportunity to apply to the CBDT seeking approval for that lower amount to be the amount of remuneration. Upon receipt of such application from the fund, the CBDT may, after considering the relevant facts, approve such lower amount as the remuneration.
Additionally, pursuant to the notification, the Fund Manager is also required to obtain a duly verified report from an accountant in the manner specified in Form No. 3CEJA, in respect of any activity undertaken by the Fund Manager for the fund. The report procured from an accountant must certify that the fee received by the Fund Manager is in compliance with the prescribed rules.
It must be noted that the above regime is only applicable in relation to offshore funds which undertake fund management activities from India and is not relevant in any other scenario.
The income-tax notification can be read here.
