India tax authority provides clarity on rules triggering economic double taxation of certain foreign investors

Published: 21 November 2017

On 7 November 2017, the Central Board of Direct Taxes (CBDT) of India issued a circular changing its position established in 2012 where certain offshore capital assets were treated as situated in India and the proceeds from transfer of such assets was considered as taxable income of the non-resident.

These indirect transfer provisions apply to offshore assets such as interests in funds, which substantially derive their value from assets located in India. Many offshore funds invest in listed Indian companies and permit investor subscriptions and redemptions. The funds are subject to short term capital gains tax in India and securities transaction tax. Separately subjecting gains derived by foreign investors at the time of redemption of their shares in the fund amounts to economic double taxation of the same income. The circular has clarified that indirect transfer provisions would not apply to foreign investors if their income has been already subjected to tax in India. This is subject to the requirement that proceeds from the share redemption must not exceed the pro rata share of the non-resident in the total consideration realised by the fund.  The circular does not provide a full solution to the issue and it is hoped that further clarification will be obtained.

For further information, please contact Paul Hale.