Denial of tax treaty benefits: Blueprinting defence strategies for PE funds – A tax litigation perspective
June 8, 2022

Relevant Research

  • Revenue has issued reassessment orders to several global PE/VC funds denying tax treaty benefits to grandfathered investments alleging treaty shopping through Mauritius and Singapore between AY 2013-14 and 2015-16
  • Substantial tax, interest, and penalty has been levied invoking judicial anti-avoidance principles based on a supposed lack of commercial substance in these jurisdictions
  • Funds confronted with reassessment orders may be forced to dip into reserves, rely on tax indemnity insurance, or invoke investor givebacks
  • Strong reliance on binding judicial precedent, departmental instructions, and textual interpretation of treaty language will be crucial in challenging reassessment orders
  • Funds will be expected to demonstrate ownership and control over funds, actual decision making by directors, and satisfy materiality thresholds to claim treaty benefits going forward
  • Future exits from grandfathered investments will witness greater Revenue scrutiny including reliance 

We are delighted to share our most recent and comprehensive research paper discussing at length the legal, tax, regulatory, commercial and strategic issues concerning the setting up of India focussed funds.

 

Over the past few years, the investment funds industry has been the subject of a series of legislative and regulatory interventions designed variously to protect investor interests as well as to enlarge the scope of investment activity. From an Indian fund formation perspective, this is evidenced from the introduction of codes of conduct for various stakeholders, the enhanced exposure limits for domestic institutional LPs and the much-anticipated roll out of the concept of accredited investors. Similarly, the Government of India has announced a slew of measures to incentivise sponsors to set up funds in GIFT City with a view to developing GIFT City as a reputable international financial services centre.

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We regularly write on Fund Formation, PE, PIPE and M&A, Structured Finance, Fund Litigation, Governance and Stewardship. Stay tuned.