09/11/22

INDIA: GIFT IFSC may become new mecca for family offices.

As published on financialexpress.com, Wednesday 9 November, 2022.

A number of family offices are evincing interest in setting up shop at GIFT IFSC (International Financial Services Centre), with the new norms allowing such offices to set up as an authorised fund management entity (FME) and utilise the corpus for investment outside India or for re-investment purposes.

“The challenges, which existed earlier in respect of Indian resident entities not permitted to invest into an overseas fund, no longer exist. While for resident individuals, the limit of $250,000 per year may apply, resident entities may be permitted to invest up to 50% of their net worth into the family office investment fund,” said Parul Jain, head of fund formation and international tax practice, Nishith Desai Associates.

GIFT IFSC specifically permits family offices to pool money as a Family Investment Fund, or FIF, under the FME regulations, which came into force in August this year. There are certain exemptions from net-worth criteria and resident Indians are permitted to invest in an IFSC fund as portfolio investments.

“GIFT has become almost fully capital account convertible for financial investments overseas. Families may look to establish their single family offices in GIFT City and set up structures which will enable them to invest globally. The regime works as good as any other offshore structure, while at the same time it is closer to the ground in India,” said Divaspati Singh, partner, Khaitan & Co.

It is easier to establish presence and substance at GIFT to mitigate any POEM (place of effective management) or permanent establishment risks associated with offshore set ups. This flexibility coupled with tax holidays and GST exemptions make it a compelling alternative for global HNIs looking at having a presence in India, said experts.

“GIFT IFSC is attracting interest from high net worth NRI families with roots in India. The trust structure regime allowed for the family office structures makes way for ease of succession planning. The requirement for such trusts to be determinate trusts aligns favourably with tax regimes in foreign countries. Single-family offices can take leverage in foreign denominated currency to improve efficiency in implementing investment strategies,” said Yashesh Ashar, partner, Bhuta Shah & Co.

Not a single family office is currently registered at GIFT IFSC. Indians have historically gravitated to jurisdictions such as Singapore and Dubai to set up family offices.

The single-family office regime in GIFT IFSC compares favourably with the jurisdictions like Singapore and Dubai, in terms of regulatory and investment flexibility, taxes and cost of set-up and administration, according to experts. The cost of set-up and maintenance at GIFT IFSC, for instance, could be one-fourth that of Singapore and Dubai.

Jain believes that setting up investment holding companies or special purpose vehicles in Singapore and Dubai may be challenging for family offices, depending on the facts of the case. “The new overseas investment norms allow investments only into regulated funds, which may make it difficult for family offices to invest into funds set up in Dubai or Singapore, which may or may not be regulated. Further, these jurisdictions may also have an additional requirement to set up fund managers which may add to the cost of operations,” she said.

Singapore offers a complete tax holiday for investment income; the UAE also offers a similar advantage. “One will need to evaluate whether tax holidays will be available for family offices once corporate tax is introduced in the UAE. GIFT offers tax holidays on business income but it remains to be seen if the same benefit will be extended for capital gain, dividend and interest income. Also, a fund manager gets a residency permit by setting up a vehicle in Singapore and the UAE. GIFT is yet to offer such a benefit,” said Sonali Pradhan, head of wealth planning at Julius Baer India. Ashar feels that there is a need to make the family office regime at GIFT IFSC attractive to Indian (resident) businessmen by making relaxations to the corpus requirements for Indian families, permitting them to settle trust in GIFT IFSC and making it flexible to repatriate and settle larger corpus to trusts set up in GIFT IFSC for resident Indians. Resident Indians are currently not allowed to settle a trust outside India under FEMA regulations.