CBDT Circular Clarifies Taxability Of Non-Residents’ Income From Off-shore AIF Investments

The CBDT has vide Circular No. 14/2019 dated 3rd July 2019 provided important clarification regarding the taxability of income earned by non-resident
investors from off-shore investments routed through an Alternate Investment Fund.

Circular No. 14/2019
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North-Block, New Delhi, dated the 3rd of July, 2019

Subject: Clarification regarding taxability of income earned by a non-resident
investor from off-shore investments routed through an Alternate Investment Fund reg.

In the context of Alternate Investment Funds (AlFs), references have been made to the
Central Board of Direct Taxes (the Board) seeking clarity regarding taxability of income from
investments made by the non-resident investor through these AIFs, outside India (off-shore
investment).

2. The incidence of tax arising from off-shore investment made by a non-resident investor
through the AlFs would depend on determination of status of income of non-resident investor as
per provisions of section 5(2) of the Income-tax Act, 1961 (Act). As per section 5(2) of the Act,
the income of a person who is non-resident, is liable to be taxed in Ind ia if it is received or is
deemed to be received in India in such year by or on behalf of such person; or accrues or
arises or is deemed to accrue or arise to him in India.

3. Chapter XII-FB contains special provisions relating to tax on income of investment funds and
income received from such funds. Under Chapter XII-FB, section 115UB of the Act ( ‘Tax on income
of investment fund and its unit holders) is the applicable provision to determine the income and
tax-liability of investment funds & their investors. In this context, “investment fund”is defined in
Explanation 1 of Chapter XII-FB to mean any fund established or incorporated in India in the form
of a trust or a company or a limited liability partnership or a body corporate which has been
granted a certificate of registration as a Category I or Category II Alternative Investment Fund
and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund)
Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of
1992). Thus, provisions of section 115UB apply only to Category I or Category II AIFs, as defined
in SEBIs regulations.

4. By an overriding effect over other provisions of the Act, sub-section (1) of section 115UB of
the Act provides that any income accruing or arising to, or received by, a person, being a unit
holder of an investment fund, out of investments made in the investment fund, shall be
chargeable to income-tax in the same manner as If it were the income accruing or arising to. or
received by. such person had the investments made by the investment fund been made directly
by him and not through the AIF.

5. The matter has been considered by the Board. As section 115UB( l) of the Act provides that
the investments made by Category I or Category II AIFs are deemed to have been made by the
investor directly, it is hereby clarified that any income in the hands of the non-resident investor
from off-shore investments routed through the Category I or Category II AIF, being a deemed
direct investment outside India by the non-resident investor, is not taxable in India under section
5(2) of the Act,

6. It is further clarified that loss arising from the off-shore investment relating to non-resident
investor, being an exempt loss, shall not be allowed to be set-off or carried-forward and set off
against the income of the Category I or Category II AIF.

7. The contents of this Circular may be circulated widely for information of all stakeholders and
departmental officers.

8. Hindi version to follow,
(Rajarajeswari R.)
Under Secretary (ITA.II), CBDT
(F.No. 225/79/2019-ITA.II)