With the exodus of a large number of Indian high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs), foreign family trusts and foreign private trusts have become the go-to option for estate and succession planning for such non-resident HNIs or UHNIs. Even UHNIs or HNIs who are overseas and looking to relocate to India following the pandemic are looking at private trusts as a viable option to hold their assets overseas. Such trusts have also been increasingly deployed by global business families to hold assets in India, owing to various commercial and legal exigencies. Further, the lucrative legal or tax regimes offered by various countries, such as Singapore and the United Arab Emirates, to attract foreign investments have acted as a catalyst for the popularity of such investment or succession structures. Therefore, private wealth planning in more modern forms of foreign private trusts has assumed special significance.
The Indian courts have, on various occasions (eg, in the case of Commissioner of Wealth Tax, Rajkot v Estate of HMM Vikramsinhji of Gondal (1) and Jyotendrasinhji v S.I. Tripathi(2)) indirectly recognised the applicability of the of the Indian Income-tax Act 1961 (IT Act) to foreign private trusts and have applied the provisions to the relevant extent. Thus, it becomes significant to analyse the tax implication from an Indian perspective wherever a foreign private trust has any Indian element (ie, Indian assets or Indian beneficiaries).
A recent judgment by the Bombay High Court in the case of Abu Dhabi Investment Authority v Authority for Advance Ruling, (Income Tax), Mumbai Bench specifically upheld the applicability of the IT Act to foreign private trusts,(3) which could have a noteworthy impact on the jurisprudence of foreign private trusts holding assets or earning income from India. While the judgment is in the context of the Abu Dhabi Investment Authority (ADIA), which enjoys a special status under both the IT Act and the India-UAE Double Taxation Avoidance Agreement, the principles expounded by the Court could be applied in the instance of foreign private trusts as well, especially to the extent that the judgment upholds the applicability of provisions of the IT Act to foreign private trusts.
The judgment, inter alia, held the following:
- Even in the absence of India's ratification to the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985, foreign trusts would be recognised under the IT Act, as the Supreme Court previously confirmed in HMM Vikramsinghjit of Gondal.
- Sections 61-63 of the IT Act, which provide for taxation of income from revocable transfers (including revocable trusts) in the hands of the transferor or settlor, do not stipulate that the said provisions would only apply to a trust under the Indian Trust Act 1882 (unlike certain other provisions of the IT Act, which specifically provided so). Thus, these sections would equally apply to foreign trusts.
- Section 160(1)(iv), read together with section 161(1) of the IT Act (which provides that the income accruing or arising from the trusts should be taxed in the hands of the trustee in a representative capacity in the "like manner and to the same extent" as the beneficiary), should also apply to foreign trusts subject to conditions therein.
Relying on the principles enunciated in this judgment, HNIs and UHNIs – if they would like to deploy a foreign trust for the purposes of their succession planning or to structure their holdings in India – should bear in mind that the benefits or relief provided to ADIA in terms of treaty benefits or relief were conferred on a sole beneficiary or settlor of the trust.
It would be pertinent to analyse the applicability of the principles enunciated in this decision to the facts and pattern of each case. For example, the Court held that the trustee could be taxed in the same manner as the beneficiary under section 161 of the IT Act as ADIA was the sole beneficiary. However, complexities might arise in more intricate scenarios where there are multiple beneficiaries under the trust structure, whose shares are not determinable or known. Thus, it would be advisable that the terms of the trust deed of foreign private trusts and the overall structures of such trusts are vetted from an Indian law perspective – if such trusts have or propose to have any nexus with India.
For further information on this topic please contact Kunal Savani or Bipluv Jhingan at Cyril Amarchand Mangaldas by telephone (+91 22 2496 4455) or email ([email protected] or [email protected]). The Cyril Amarchand Mangaldas website can be accessed at www.cyrilshroff.com.
(1) (2014) 45 taxmann.com 552 (SC).