FIXED-TRUSTS VCFs TO GET TAX EXEMPTIONS

Domestic Venture Capital Funds (VCFs) set up as Determinate Trusts and investing in unlisted firms overseas will enjoy a tax exemption on their income. A determinate trust is one where the beneficiaries are known and their shares are clearly spelt out. In such a structure, the trust will be exempt from paying tax. The tax will have to be paid by the beneficiary when the income is distributed by the trust. The tax exemption will be available to the funds if they comply with the norms laid out for trusts under the income tax law. Reserve Bank of India (RBI) recently allowed domestic VCFs to invest up to $ 500 million in equity and equity-linked instruments in unlisted firms overseas. This means a domestic fund set up in the form of a trust will not have to pay tax on any income – capital gains, interest or dividend-earned from investments made in unlisted offshore firms. The exemption will be available on investments made in any sector. “A pass-through status will be available to the trust on any income it earns from investments made in unlisted firms in India and abroad. The trusts will, however, have to ensure that they do not violate the conditions under Section 164 of the Income Tax Act.” Under this section, a trust gets a pass through status only if the share of each beneficiary is determinate. However, if the domestic venture fund is not set up in the form of a trust, it will have to pay tax on income earned from investment in unlisted firms overseas. A tax pass-through will not be available to such VCFs or venture capital companies.