Data & Intelligence
Structuring Funds for Investment in India: Maximizing Tax Efficiency for U.S. Investors
By Olivier De Moor and Brett Fieldston, Akin Gump Strauss Hauer & Feld LLP
The typical private equity model seeks to return capital and profits to investors with little to no entity or investment level taxation, leaving potential tax drag, if any, at the investor level. In practice and in line with a global tax paradigm where capital gains are generally sourced to the residency of the investor, this means that tax on the exit of a portfolio company is generally imposed exclusively by the jurisdiction in which the investor is resident and not by the jurisdiction in which the portfolio company is located. Where local tax rules do not follow this paradigm, income tax treaties may reduce or eliminate local capital gains taxes, or to provide a credit for local capital gains taxes against taxes imposed by the investor’s home jurisdiction.
Investing in a manner that reduces or eliminates local taxes is crucial to enhancing returns to tax-exempt investors, as they make up a large Structuring Funds for Investment in India: Maximizing Tax Efficiency for U.S. Investors portion of the investors that seek exposure to emerging market funds and, very generally, they are not subject to taxation in their home jurisdictions. In addition, for taxable investors reducing or eliminating local taxes may simplify tax reporting requirements in their jurisdictions of residence and limit the chance for “tax leakage” where the local tax rate exceeds the home tax rate or less than all of the local taxes are creditable.
In the case of India-focused investment platforms, fund sponsors often domicile their funds in Mauritius, where until recently they sought to avail themselves, among other potential benefits, of an exemption of Indian capital gains tax on disposition gains realized on a transfer of shares by a Mauritius resident fund under the India-Mauritius tax treaty. Effective as of April 1, 2017, subject to a transition period, the India-Mauritius tax treaty no longer provides for exemption from such Indian capital gains tax.
Renuka Ramnath | Founder, Managing Director & Chief Executive Officer, Multiples Alternate Asset Management Private Limited
Brian Lim | Partner and Head of Asia and Emerging Markets, Pantheon Ventures
David Rubenstein | Co-Founder and Co-Executive Chairman, The Carlyle Group
Dr. Andrew Kuper | Founder and CEO, LeapFrog Investments
Torbjorn Caesar | Senior Partner, Actis
Drew Guff | Managing Director & Founding Partner, Siguler Guff & Company