Special Taxation Regime for offshore funds: Modification of certain conditions [Section 9A] :

Effective from: A.Y. 2017-18

(i) Under section 9A, a special regime has been provided in respect of offshore funds.

(ii) In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund.

(iii) Further, an eligible investment fund shall not be said to be resident in India merely because the eligible fund manager undertaking fund management activities on its behalf is located in India.

(iv) The benefit under section 9A is available subject to satisfaction of the conditions provided in, inter-alia, section 9A(3), for the eligibility of the fund. These conditions relate to residence of fund, corpus size, investor base, investment diversification and payment of remuneration to fund manager at arm’s length.

(v) However, there are instances where a fund may not qualify as a tax resident of a country on account of domestic tax laws or legal framework of the country. The legal and regulatory framework of the country of incorporation of funds forms the basis for their global structure and the same cannot be modified in respect of any investment made in a specific country. For example, large pension funds or mutual funds from USA or SICAVs (open ended collective investment schemes) from Luxembourg. India would still be able to collect information regarding fund under the applicable DTAA or TIEA as under the agreements with many of the countries, information can be exchanged in respect of persons who may not be resident of the country. Further, the conditions relating to restriction on fund carrying on business or controlling fund managing business in India or from India restricts the flexibility of operation for funds and focus should be on nature of activities undertaken in India.

Accordingly, the following amendments have been made in section 9A by the Finance Act, 2016:

	Condition	Existing Provision	Amendment by the Finance Act, 2016
(1)	Residence Clause (b) of section 9A(3)]	The Eligible Investment Fund has to be resident of a country or specified territory with which India has entered into a Double Taxation Avoidance Agreement (DTAA) or Tax Information Exchange Agreement (TIEA).	The Eligible Investment Fund shall also mean a fund established or incorporated or registered outside India in a country or a specified territory notified by the Central Government in this behalf.
(2)	Activities [Clause (k) of section 9A(3)]	The fund shall not carry on or control and manage, directly or indirectly, any business in India or from India. Note – Further, the Fund shall neither engage in any activity which constitutes a business connection inIndia nor have any person acting on its behalf whose activities constitute a business connection in India other than the activities undertaken by the eligible fund manager on its behalf. This is provided in clause (l) of section 9A(3).	The condition of fund not controlling and managing any business in India or from India shall be restricted only in the context of activities in India and will not apply in respect of activities from India.Accordingly, clause (k) of section 9A(3) has been amended to provide that the fund shall not carry on or control and manage, directly or indirectly, any business in India.