FPI conversion may take longer for want of Parliament green light

FPIs were aiming for the conversion to gain relief from the surcharges announced in Budget 2019

August 02, 2019 / 10:36 AM IST

Foreign Portfolio Investors (FPIs) may have to wait at least until the next Budget for conversion to companies from tax neutral trust structures.  FPIs were aiming for the conversion to gain relief from surcharges announced in Budget 2019, reports the Economic Times.

The Budget for FY21, to be traditionally announced on February 1, is six months away.

The permissions required for this, however, would entail amendments to provisions (related to direct taxes) in the income tax (I-T) laws, which would need Parliament approval, it added.

As per the report, some required tweaks would be to Section 47 to provide a specific exemption for the conversions, separate immunity from the General Anti Avoidance Rules, and ring-fencing from the Section 9(1) provision applicable on indirect transfers.

During her Budget 2019 speech on July 5, Finance Minister Nirmala Sitharaman had proposed levy of an additional surcharge on 'individuals and trusts' earning more than Rs 2 crore and Rs 5 crore, respectively. After this announcement, FPIs began mass exodus from the country.


Meanwhile, Sitharaman during a discussion on the Finance Bill in the Parliament on July 18 suggested that FPIs could consider the option of structuring themselves as companies rather than trusts to avoid paying the increased surcharge.

Finance Bill 2019 is wider and covers all taxpayers other than companies and partnership firms. Once implemented, the move may adversely impact FPIs that are set up as non-corporate vehicles.

Typically, FPIs are set up as trusts or limited partnerships in their home jurisdictions. The definition of a partnership firm under Indian tax law refers to the Indian Partnership Act, which does not recognise foreign partnerships or limited partnerships.

However, after the initial furore, the Central Board of Direct Taxes (CBDT) Chairman Pramod Chandra Mody offered a simple 'panacea' to such FPIs: restructure themselves as corporate entities.

Outlining some of the difficulties, the paper quoted Rajesh H Gandhi, Partner, Deloitte Haskins & Sells, as saying, "Most of the time it will not be possible for the FPI to convert from a trust to a company because the company structure will not allow the FPI to operate as an open-ended fund in the home country."

"Laws of many of those countries will not permit the fund to be converted to a corporation though. Interestingly, from a tax point of view, such trusts are allowed to be treated as corporations in their home country," Gandhi added.
Moneycontrol News
first published: Aug 2, 2019 10:27 am

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