CBDT notifies minimum fee for India based fund managers managing offshore funds
May, 29th 2020
The Central Board of Direct Taxes (CBDT) has notified the minimum fee to be received by the fund manager in India managing different type of offshore funds.
CBDT is the apex policy making body for direct taxes such as Personal Income Tax and Corporate Tax.
Since the offshore fund would continue to pay lower tax as Foreign Portfolio Investor (FPI) or Foreign Venture Capital Investors (FVCI) or Foreign Direct Investment (FDI) investor 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.
Keeping this in mind the CBDT released the draft rules last November prescribing the minimum fee and now final notification has been issued.
Amount of remuneration
Accordingly, the amount of remuneration to be paid by the fund to a fund manager, in case of FPI, will be 0.10 per cent of the asset under management. For other entities (FVCI or FDI), it will be 0.3 per cent of the assets under management; or 10 per cent of profits derived by the fund in excess of the specified hurdle rate, where the remuneration is only to income or profit linked. If the fund is paying management fee to another fund manager also, then 50 per cent of management fee will be taken into consideration for tax purpose. In case, where the amount of remuneration is lower than the amount arrived as aforesaid, the rule provides for seeking CBDT’s approval.
Commenting on the notification, Sunil Gidwani, Partner at Nangia Andersen LLP felt that 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 / AIFs and FPI category II will have to report higher fees in India. While the rules link minimum/floor management fees to fund/asset size or performance beyond hurdle rate, interestingly, the section 9A caps the share of profits (carry) at 20 per cent which is the industry norm for certain types of funds.
“The law requires that approval must be sought before the financial year for which approval is sought. The replacement of arms length price determined in accordance with a fixed percentage as a minimum amount does away with use of transfer pricing methodologies and makes it easy for fund managers to plan and conceive a structure and get it approved by CBDT,” he said.
To encourage fund management from India, the Finance Act, 2015 had introduced the safe harbor rule for managing an offshore fund from India with subject to certain conditions. Relaxation to one of the conditions was brought by the Finance Act, 2019, removing the requirement for the eligible fund manager to receive an arm’s length fee for rendering the fund management activity and replacing it with a minimum fee to be prescribed by the CBDT. The said notification is the result of that change.