‘All my bags are packed, I’m ready to go…’
-John Denver
The opening line of John Denver’s iconic song ‘Leaving on a jet plane’ may seem prosaic at first glance, but it describes the single most important act before embarking on any journey – packing your bags! While packing for a vacation in Monaco or St. Tropez is fairly easy, ‘packing’ for an offshore migration is likely to parachute you into a regulatory and compliance maze.
According to a report by the Global Wealth Management Review, over 5,000 Indian millionaires moved abroad in 2020 alone. Moreover, the data from the Ministry of External Affairs indicates that over 6,00,000 Indians have given up their citizenship in the last five years. While the US, UK and Singapore continue to attract a large pool of Indian High Net-worth Individuals (‘HNIs’), the citizenship-by-investment/ golden visa programmes of European countries are equally popular.
For those contemplating such a move, it is critical for you to review your current holding structures in India and implement appropriate compliance measures. In this article, we briefly explore a checklist of items that every business owner should be mindful of before bidding adieu to Indian shores.
I. Management and control of Indian entities
Indian business entities
The Indian regulatory regime compels promoters of Indian businesses to restructure the management of various Indian entities prior to migrating overseas. Under the Companies Act, 2013, only a person who is a resident in India[1] is eligible to be appointed as a Managing Director (‘MD’), Whole-time Director or Manager of a public limited company in India. However, private limited companies are not subjected to such conditions in India.
Evidently, non-residents can continue to remain Designated Partners of a Limited Liability Partnership (‘LLP’) in India. However, at least one of the Designated Partners of the LLP should be a resident in India[2].
Individuals migrating abroad can also continue to remain partners in a partnership firm formed under the Indian Partnership Act, 1932. However, such non-residents shall not be eligible to make any further investments in a partnership firm that is engaged in any prohibited sector, such as real estate. Such investments shall also be subject to applicable repatriation restrictions under the Indian exchange control regulations.
Position of Trustee or Managing Trustee in private family trusts set-up in India
There is no embargo on having non-residents as Trustees or Managing Trustees of Indian Trusts. However, it must be noted that where the Trust is managed by person(s) domiciled abroad, Section 60 of the Indian Trusts Act, 1882 (‘Trusts Act’), grants the beneficiaries a right (subject to the provisions of the instrument of trust) to ensure that the trust property is protected, held and administered by proper persons and proper number of persons. While there is insufficient Indian jurisprudence on the said provisions, English Courts[3], in some instances have taken a view that a mere fact of residence abroad should not entitle beneficiaries to seek removal of a trustee. Furthermore, Section 73 of the Trusts Act provides that where a trustee leaves India for a continuous period of six months or leaves India for the purpose of residing abroad, a new trustee may be appointed in his place (i) by the persons specified in the instrument of Trust for such a purpose; or (ii) by the settlor of the Trust; or (iii) by the surviving trustees, if any; or (iv) by the retiring trustees with the consent of the court. Being a pre-independence enactment, these provisions of the Trusts Act are archaic and do not consider the present-day global scenario. It can be argued that unless there is a clear necessity for judicial intervention (such as for safeguarding the interests of the beneficiaries), such powers for removal of non-resident trustees should not be routinely exercised by the Courts.
It is important for a trustee (of a private trust) migrating abroad to consider the above provisions of the Trust Act, particularly in a scenario wherein the relationship between the trustees (whether among themselves or with the beneficiaries) is not cordial. Appropriate amendments to the Trust deed, along with the appointment of other resident family members, a Private Trustee Company (‘PTC’) or institutional trustees may be considered to mitigate any risks related to the control and management of Indian Trusts post migration.
Contribution to and trusteeship of charitable institutions
Indian charitable institutions are prohibited from accepting donations from individuals who are foreign citizens, unless such charitable institutions register with the Ministry of Home Affairs (‘MHA’) and undertake necessary compliances under the Foreign Contribution Regulation Act, 2010 (‘FCRA’). Notably, donations from “Indian citizens”, who have become non-residents, can be accepted without the registration and compliance requirements under the FCRA.
The MHA has clarified that foreign nationals (except persons of Indian origin) cannot be office bearers or trustees of a charitable institution. Furthermore, Charity Commissioners (i.e. public officials) are given wide powers to supervise the administration of public Trusts in India, including the power to remove a trustee who is absent from India for a continuous period of six months without leave of the Charity Commissioner. Therefore, it is advisable to seek leave from the Charity Commissioner (in states like Maharashtra, Gujarat, etc.) by the office bearer/ trustee before migrating overseas.
II. Structuring the ownership of family wealth in India and overseas
Re-alignment of the ownership of family wealth in India
Resident family members are subject to several restrictions under the Indian exchange control regulations from gifting their assets to non-resident relatives. For example, the following assets cannot be gifted by residents to their non-resident relatives without prior Reserve Bank of India (“RBI”) approval:
(i) Funds beyond the limit prescribed under the Liberalised Remittance Scheme (‘LRS’), which is currently USD 250,000 per financial year per individual
(ii) Shares and securities of a private or a public limited Indian company (up to specified thresholds)
(iii) Agricultural land/ farmhouse/ plantation property
(iv) Interest in an LLP
Therefore, it would be prudent for individuals to restructure the ownership of various Indian assets, prior to becoming a non-resident to mitigate any exchange control restrictions in the future and ring-fence it from adverse implications under inheritance taxes/ estate duties or income-taxes in multiple jurisdictions.
Setting-up a tax and regulatory compliant overseas structure
The need to have an international holding company (‘IHC’) for undertaking business activities and investments outside India cannot be underscored. The IHC may be set-up by a Non-Banking Financial Company (‘NBFC’) or a Core Investment Company (‘CIC’) in India. Such a structure enhances the ability to repatriate funds outside India, in excess of the current limit of USD 1 million per financial year, available to non-residents under the Indian exchange control regulations.
At times it is seen that the IHC eventually becomes the global holding company for the operating entities in India as well. It should be noted that such “round-tripping” (i.e. Indian entities or individuals setting-up a foreign entity which has investments back into Indian entities) is not permissible. However, the draft regulations on Overseas Investments[4] (‘Draft ODI Regulations’) propose to provide relaxation to bona fide structures and prohibit only those structures that are designed for the purposes of tax evasion or tax avoidance.
Overseas structures enable individuals to make investments in sophisticated financial products, which are typically not available to resident Indians. With the acquisition of digital assets gaining substantial traction among Indian HNIs, it is expected that establishment of an overseas structure in jurisdictions like Cayman Islands, Malta, Portugal, and Singapore (where the laws on digital assets are more favourable) will be in demand.
Key tax considerations
Individuals frequently visiting India should diligently maintain a record of the number of days they stayed in each country to enable determination of their residential status as per the “residency test”, which is based on the period of stay threshold.
Taking up residency in low tax countries does reduce the personal income tax liabilities of HNIs (which is as high as 42.74%[5] in India on certain income streams) and shield their foreign-sourced incomes from being subjected to Indian taxes. Nonetheless, their India-sourced incomes shall continue to be taxed in India, subject to certain benefits under the applicable tax treaties. Obtaining residency in “zero-tax jurisdictions” such as the UAE may trigger the recently introduced “deemed residency” provisions under the Indian income-tax laws, which state that in specified situations, an Indian citizen shall be deemed to be a resident in India if he or she is not liable to tax in any other country or jurisdiction. Such deemed resident shall be subject to certain additional income-tax liabilities in India even though the individual does not meet the “residency test” threshold in India.
Additionally, place of effective management (‘POEM’) rules under the Indian income-tax laws shall also be kept in mind while planning travel to India. In case, key decisions with respect to foreign entities are undertaken by individuals while on a visit to India, the Indian tax authorities may allege that the POEM of such foreign entities is in India and consequently expose the worldwide income of such foreign entities to taxation in India. Thus, board meetings and key decision-making exercises of various entities in India and abroad should be carefully planned, depending upon an individual’s physical presence in India.
Lastly, it should be noted that management or ownership interest in overseas structures should be appropriately disclosed in the income-tax returns filed in India. Non-disclosure of the same may trigger stringent penalties and prosecution risks under the income-tax laws as well as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of tax Act, 2015.
Au revoir, arrivederci, adios!
While it is relatively easy today for individuals to seek residency in a foreign country, ‘packing your bags’ must be undertaken prudently. Remember that acquiring residency does not translate to acquiring automatic citizenship. This transition is a time bound process, which varies from jurisdiction to jurisdiction. Business owners should undergo an intricate evaluation of their roles or responsibilities towards various entities in India, assess their personal assets here and appropriately restructure the same to prevent getting entangled in the tax and regulatory maze.
It is imperative that business owners seek appropriate jurisdiction-specific tax and legal advice from professionals at each stage of the migration journey to ensure a smooth transition.
For further information, please contact:
Tanmay Patnaik, Partner, Cyril Amarchand Mangaldas
tanmay.patnaik@cyrilshroff.com
[1] a person who has been staying in India for a continuous period of not less than 12 months immediately preceding his appointment. It also includes a person who comes to stay in India for taking up employment or for carrying on a business/ vocation [Part I of Schedule V of the Companies Act, 2013]
[2] a person who has stayed in India for a period of not less than 182 days in immediately preceding 1 year. [Explanation to section 7(1) of the Limited Liability Partnership Act, 2008]
[3] O’Reilly v. Alderson 8 Hare 101; In Re Earl of Stamford [1896] 1 Ch. 296
[4] The Draft ODI Regulations are not yet notified as on the date of publication of this article.
[5] Including highest applicable surcharge and cess
