Business Connection of Offshore Funds in India
Introduction
Section 9A of the Income-tax Act provides a special regime for offshore investment funds, ensuring that the presence of an Indian fund manager does not create a business connection or result in the offshore fund being treated as a resident in India.
Key Provisions of Section 9A
- The presence of an eligible fund manager in India does not establish a business connection for an eligible investment fund.
- The fund will not be considered a tax resident of India merely because its fund management activities are carried out in India.
- This exemption does not apply to:
- Any income of the eligible investment fund which would have been taxable in India if the activity of the eligible fund manager had not constituted the business connection in India of such fund;
- Income earned by the fund manager in India.
Conditions for Exemption
- The fund must be an “Eligible Investment Fund”
- Registered/incorporated outside India.
- Resident of a country with which India has a DTAA or TIEA.
- Indian investment in the fund should not exceed 5% of its corpus.
- Minimum 25 members (other than connected persons).
- No member (along with connected persons) holds more than 10%, and the top 10 investors (along with connected persons) together do not hold more than 50% participation interest.
- No single investment in an entity exceeds 20% of the corpus, and no investment is made in associate entities.
- Monthly average corpus of at least ₹100 crore.
- Not engage in or control business in India (does not hold more than 26% of share capital or voting/power)
- Pay minimum remuneration to the fund manager as per the prescribed limits.
- The fund manager must be an “Eligible Fund Manager”
- Independent of the fund (not an employee or connected person).
- Registered with SEBI or IFSCA.
- Act in the ordinary course of business.
- Is not entitled to more than 20% of the fund’s profits.
Relaxations for Certain Conditions
The conditions of the minimum number of members and ceiling on the participation by members do not apply to the following funds:
- Set up by Governments, Central Banks, Sovereign Wealth Funds, or notified FPIs.
- Funds whose managers are located in an International Financial Services Centre (IFSC) and has commenced operations on or before 31-03-2030.
Compliances for Offshore Funds
- Annual Statement ( Form 3CEK): To be filed within 90 days from the end of the financial year.
- Fund Manager’s Report ( Form 3CEJA): To be filed before 31st October of the relevant assessment year.
- Approval from Member of CBDT: Where the fund pays remuneration lower than the prescribed limit, the fund can seek advance approval under Rule 10VA for that lower amount.
Penalties for Non-Compliance – Failure to file Form 3CEK attracts penalties under Section 271FAB.