Foreign portfolio investors (FPIs) are seeking clarity over the tax implications of the recently proposed variable capital company (VCC) structures in financial centres such as Gujarat International Finance Tec-City (GIFT City).
Among other benefits, the VCC structure allows funds some concession from short-term and long-term capital gains tax on returns on equities. The onus of paying tax, as per the standard VCC structure, falls on the investors in these entities.
A committee set up by the International Financial Services Centre (IFSC) of the GIFT City, in a recent report, recommended the adaptation of a “VCC-like” legal structure within various financial centres.
After the committee’s recommendation, many investors have been reaching out to their advisers for clarity on tax issues.
“In many countries, VCCs are given a tax passthrough status and even the investors are not taxed in the country where the VCC is set up. If India provides tax exemption to the VCC and its investors, it could significantly further boost movement of India-focused funds from offshore jurisdictions to the GIFT City as well as new funds in the GIFT City,” said Rajesh H Gandhi, partner, Deloitte India.
Globally, VCC structures are tax-free and only the end investors are taxed in their home country.
So, a UK investor investing in a Singapore VCC through Luxembourg will be taxed in the UK.
Many FPIs and large funds that operate from Singapore under VCC structures will explore options of moving to the GIFT City if this is allowed, said people in the know. Currently, only alternative investment fund (AIF) structures are allowed within the financial centres.
While tax is a major attraction, industry trackers said even otherwise the VCC may just be a better option for several investors.
Advantages of the VCC structures include flexibility to create umbrella structures, single investor structures, ringfencing of each sub-fund and incorporated body, and meeting of conditions at the umbrella level.
“Indian laws today do not recognise umbrella structures and any introduction of VCC-type structures would necessitate changes to the corporate, taxation and trust laws to make VCC a reality in India,” said Yashesh Ashar, a partner at Bhuta Shah & Co, a tax advisory firm.
A VCC can also provide several other advantages as compared to an AIF. “A VCC allows an ability to structure the fund vehicle as a corporate, have a self-managed fund, ability to pay dividends out of capital, segregated sub-funds with ringfencing of assets and liabilities, etc. One will have to wait and see to what extent the global regulations around VCC are incorporated in the Indian context,” said Gandhi of Deloitte.
The full report of the committee is still not in public domain and there is no clarity on the tax aspect.
Many investors, FPIs and their advisers have also reached out to the GIFT City officials on this, said people in the know.
Currently, a fund set up in the GIFT City is allowed to invest only in certain securities, but can invest in debt.
AIF-3 may be the most apt structure that could benefit the most given the current regulations, said experts.
The finance minister in the 2021-22 budget announced that tax incentives would be given to foreign funds for relocating to the IFSC, including the GIFT City.