Income Tax Department notifies minimum fees for managers of India-based offshore funds

New Delhi: The income tax department has notified the minimum fee to be received by India-based fund managers of an overseas fund. While the minimum remuneration stipulated by the Central Board of Direct Taxes (CBDT) for Category-I Foreign Portfolio Investor (FPI) is 0.1 percent of the fund’s assets under management (AUM). In case of other entities, the minimum fee prescribed by CBDT is either of 0.3 percent of the assets under management; or 10 percent of profits derived by the fund in excess of the specified hurdle rate, where the remuneration is only to income or profit linked. In cases where the fund is paying a management fee to another fund manager also, the minimum fee would be 50 percent share of the management fee from the management activity undertaken by the eligible fund manager, as reduced by the amount incurred towards operational expenses including distribution expenses, if any. The CBDT while notifying the amended income tax rules said in case where the amount of remuneration is lower than the amount arrived at as per CBDT’s minimum fee formula, the fund will have the option to seek approval of the apex direct tax body. In order to encourage fund management from India, the Finance Act, 2015, had introduced Section 9A in the Income Tax Act, 1961, to provide a safe harbour rule for onshore management of offshore funds subject to certain conditions. The Finance Act, 2019, amended one of the conditions for availing the safe harbour by removing the requirement for the eligible fund manager to receive an arm’s length fee for performing the fund management activity and replacing it with a minimum fee to be prescribed by the CBDT. Following this, on 5 December, 2019, the CBDT released the draft rules prescribing the minimum fee to be received by the fund manager in India managing different type of offshore funds. CBDT has now issued a final notification on the same lines as the draft notification. Nangia Andersen LLP Partner Sunil Gidwani said that since the offshore fund would continue to pay lower tax as FPIs or Foreign Venture Capital Investors or FDI investors on its gains from India at capital gains rates or even nil if treaty benefits are available, the government expects minimum income to be reported by the Indian fund manager. “Category-I FPIs have once again been given a favourable treatment as compared to category-II FPIs with a lower floor rate of fee. Private equity funds/ alternative investment funds and FPI Cat-II will have to report higher fees in India,” he said. Gidwani further said the replacement of arm’s length price determined in accordance with a fixed percentage as a minimum amount does away with the use of transfer pricing methodologies and makes it easy for fund managers to plan and conceive a structure and get it approved by CBDT.