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

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

  1. 1. 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
  2. 2. 2nd Feb. 2013 P. P. Shah & Associates 2 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
  3. 3. 2nd Feb. 2013 P. P. Shah & Associates 3 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”).
  4. 4. 2nd Feb. 2013 P. P. Shah & Associates 4 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”
  5. 5. 2nd Feb. 2013 P. P. Shah & Associates 5 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
  6. 6. 2nd Feb. 2013 P. P. Shah & Associates 6 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
  7. 7. 2nd Feb. 2013 P. P. Shah & Associates 7 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
  8. 8. 2nd Feb. 2013 P. P. Shah & Associates 8 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
  9. 9. 2nd Feb. 2013 P. P. Shah & Associates 9 Types of Trust Fixed Employee Benefit Asset Protection Accumulation & Maintenance Life Interest Hybrid Bare Star Charitable
  10. 10. 2nd Feb. 2013 P. P. Shah & Associates 10 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
  11. 11. 2nd Feb. 2013 P. P. Shah & Associates 11 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.
  12. 12. 2nd Feb. 2013 P. P. Shah & Associates 12 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
  13. 13. 2nd Feb. 2013 P. P. Shah & Associates 13 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
  14. 14. 2nd Feb. 2013 P. P. Shah & Associates 14 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
  15. 15. 2nd Feb. 2013 P. P. Shah & Associates 15 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
  16. 16. 2nd Feb. 2013 P. P. Shah & Associates 16 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
  17. 17. 2nd Feb. 2013 P. P. Shah & Associates 17 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?
  18. 18. 2nd Feb. 2013 P. P. Shah & Associates 18 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
  19. 19. 2nd Feb. 2013 P. P. Shah & Associates 19 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
  20. 20. 2nd Feb. 2013 P. P. Shah & Associates 20 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
  21. 21. 2nd Feb. 2013 P. P. Shah & Associates 21 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
  22. 22. 2nd Feb. 2013 P. P. Shah & Associates 22 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
  23. 23. 2nd Feb. 2013 P. P. Shah & Associates 23 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
  24. 24. 2nd Feb. 2013 P. P. Shah & Associates 24 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
  25. 25. 2nd Feb. 2013 P. P. Shah & Associates 25 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 Notification No. FEMA 20/2000-RB dt. 3rd May 2000 – Schedules I, III & IV Acquisition & Transfer of Immovable Property in India Notification No. FEMA 21/2000-RB dt. 3rd May 2000 Investment in Firm or Proprietary concern in India Notification No. FEMA 24/2000-RB dt. 3rd May 2000
  26. 26. 2nd Feb. 2013 P. P. Shah & Associates 26 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
  27. 27. 2nd Feb. 2013 P. P. Shah & Associates 27 Consolidated FDI Policy – October 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
  28. 28. 2nd Feb. 2013 P. P. Shah & Associates 28 Consolidated FDI Policy – October 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.
  29. 29. 2nd Feb. 2013 P. P. Shah & Associates 29 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
  30. 30. 2nd Feb. 2013 P. P. Shah & Associates 30 Analysis of the transactions of Trust  Life cycle transaction  Corpus by Non-Resident  Investment by Trust  Income earned by Trust  Distribution by Trust
  31. 31. 2nd Feb. 2013 P. P. Shah & Associates 31 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
  32. 32. 2nd Feb. 2013 P. P. Shah & Associates 32 FEMA Implication – Resident Discretionary Trust 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’
  33. 33. 2nd Feb. 2013 P. P. Shah & Associates 33 FEMA Implication – Resident Discretionary Trust SETTLOR (NRI) GIFTS SHARES IN INDIAN CO. TO TRUST Capital Account transaction FEMA 20: Inbound Investments Alteration of NRI‘s Assets in India General permission: Regn. 9(2)(iii)(a)
  34. 34. 2nd Feb. 2013 P. P. Shah & Associates 34 FEMA Implication – Resident Discretionary Trust SETTLOR (NRI) GIFTS DEBT INSTRUMENTS IN INDIAN CO. TO TRUST Capital Account transaction FEMA 20: Inbound Investments Alteration of NRI‘s Assets in India No General permission for gift of Debt instruments Specific permission required
  35. 35. 2nd Feb. 2013 P. P. Shah & Associates 35 FEMA Implication – Resident Discretionary Trust SETTLOR (NRI) GIFTS IMMOVABLE PROPERTY IN INDIA TO TRUST Capital Account transaction FEMA 21: Immovable Property in India Regn. Alteration of NRI‘s Assets in India General permission for gift to residents: - by NRI Indian Citizen: Regn. 3(b) - by NRI-PIO: Regn. 4(f)
  36. 36. 2nd Feb. 2013 P. P. Shah & Associates 36 FEMA Implication – Resident Discretionary Trust 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
  37. 37. 2nd Feb. 2013 P. P. Shah & Associates 37 FEMA Implication – Resident Discretionary Trust 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 Assets outside India Collection of Income is: - under Settlor’s direction - not by order of or on behalf of NRI beneficiaries No FEMA implication
  38. 38. 2nd Feb. 2013 P. P. Shah & Associates 38 FEMA Implication – Resident Discretionary Trust 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 Alteration of NRI’s 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 Alteration of NRI’s Assets in India Capital account transaction under FEMA FEMA 13 General permission to remit under million $ scheme
  39. 39. 2nd Feb. 2013 P. P. Shah & Associates 39 FEMA Implication – Resident Discretionary Trust DISTRIBUTION & REMITTANCE OF CORPUS OF THE TRUST 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 Corpus received by NRI beneficiary Alteration of NRI’s Assets in India Capital account transaction under FEMA FEMA 13 General permission to remit under million $ scheme
  40. 40. 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
  41. 41. 2nd Feb. 2013 P. P. Shah & Associates 41 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 Assets outside India Capital account transaction under FEMA FEMA 1 – Schedule 1 Permissible transaction
  42. 42. 2nd Feb. 2013 P. P. Shah & Associates 42 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
  43. 43. 2nd Feb. 2013 P. P. Shah & Associates 43 Thank YouThank You

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