09 June 2020

NovoJuris Legal

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Pursuant tothe recent notification by the Central Board of Direct Taxes("CBDT"), there has been an amendment tothe income tax rules in relation tothe minimum remunerationpayable by an offshore fund to its India based fund manager("Fund Manager").

Income-TaxAct provides for a special taxation regime for certain eligibleinvestment funds, in the context of their fund managers beinglocated in India. To further encourage fund management from India,Section 9A of the Income-Tax Act, 1961, subject to otherconditions, was introduced to provide safe harbour rules whichfacilitated onshore management of offshore funds; thereby implyingthat, an offshore fund is not categorised as a resident in Indiasimply because its fund manager undertaking fund managementactivities on behalf of the offshore fund is located inIndia.

Previously,as a condition under the law, an offshore fund was required toensure that remuneration paid to the Fund Manager is not less thanthe arm's length price. This condition has been supersededafter April 1, 2019 and the remuneration thresholds have beenrevised to refine the provisions of the Act.The prevalentmethodology in relation to the minimum remuneration is tabulatedbelow:

OffshoreFund

Minimumremuneration payable to the Fund Manager

Category IForeign Portfolio Investor

atleast0.10%of the assets under management (i.e. theannual average of the monthly average of the opening and closingbalances of the value of such part of the fund which is managed bythe Fund Manager)

othereligible investment funds

i)0.3% of the assets under management; or

ii)10% of profits derived by such fund in excess ofthepre-defined threshold beyond which the fund agrees to paya share of the profits earned by the fund from the managementactivity undertaken by the Fund Manager (i.e the specified hurdlerate), where the remuneration is only income or profit linked;or

iii)50% of the management fee,attributable to the managementactivity undertaken by the Fund Manager, as reduced by the amountincurred towards operational expenses including distributionexpenses, if any.

However, incase the amount of remuneration is lower than the amount determinedas per the amended rules, the fund will be entitled to avail theopportunity to apply to the CBDT seeking approval for that loweramount to be the amount of remuneration. Upon receipt of suchapplication from the fund, the CBDT may, after considering therelevant facts, approve such lower amount as theremuneration.

Additionally,pursuant to the notification, the Fund Manager is also required toobtain a duly verified report from an accountant in the mannerspecified in Form No. 3CEJA, in respect of any activity undertakenby the Fund Manager for the fund. The report procured from anaccountant must certify that the fee received by the Fund Manageris in compliance with the prescribed rules.

Itmust be noted that the above regime is only applicable in relationto offshore funds which undertake fund management activities fromIndia and is not relevant in any other scenario.

Theincome-tax notification can be read here.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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