CBDT notifies guidelines for onshore management of offshore funds

In order to encourage fund management from India, the Finance Act, 2015 had introduced a new section 9A in the Income-tax Act, 1961 (the Act) to provide a safe harbour rule for onshore management of offshore funds. The said section provides that the fund management activity carried-out through an eligible fund manager in India by an eligible investment fund shall not constitute business connection in India of the fund and shall not lead to the residence of the fund in India. However, this safe harbour is subject to the fund and the fund manager satisfying various conditions.

Pursuant to this, the Central Board of Direct Taxes (CBDT) has engaged in significant industry consultation and based on recommendations received from the various stakeholders, issued a notification on 15 March 2016 to provide guidance on the application of the safe harbour rules provided in section 9A of the Act. While the guidelines provide clarity on some of the onerous conditions of section 9A of the Act, aspects such as the investment diversification condition, investment in associated entity and not including asset managers of mutual funds as eligible fund managers may continue to pose challenges for fund managers to consider relocating their fund management activity to India.