How NRIs setting up private trusts in India for investment, estate planning can take care of FEMA issues – The Economic Times

Clipped from: https://economictimes.indiatimes.com/wealth/plan/how-nris-setting-up-private-trusts-in-india-for-investment-estate-planning-can-take-care-of-fema-issues/articleshow/82851201.cms

Synopsis–Setting up of a trust in India for NRIs is a mixed bag with a lot of challenges under Indian exchange control laws since foreign investment in private trusts is not generally permissible. Further, the trust laws in India which govern the formation, registration as well as rights and responsibilities of each of the stakeholders – settlor, trustee, beneficiaries etc., also require consideration.

Many NRIs are looking at India for investments as well as estate planning with the possibility of returning to their homeland in the future. The current crisis has also made a sizeable section of the NRIs re-think estate planning avenues for themselves and their families with a focus on India in the post pandemic world.

All of the above have led to increasing enquiries from NRIs for setting up a private family trust in India for the purpose of making investments – in start-ups and other avenues – in India.

Under the trust structure, the assets and the businesses of the family could be settled under a private trust and held in the name of as well as managed by the trustees for the benefit of the beneficiaries. The trustees of the trusts could be certain identified family members or family friends or professionals. The settlor of the trust could make instructions to the trustees as regards the management of the assets of the trusts as well as income from those assets and direct the ownership of income, enjoyment, management rights of various assets / business be allocated amongst the various family members subject to such conditions as he desires. The conditions could be such as to ensure a particular conduct from the beneficiaries towards the family or its assets. The trustees could also be guided by the protectors under a recommendatory role.

Private trust structures also provide the required mitigation from the implications of the potential estate tax as well as insolvency laws.

However, setting up of a trust in India for NRIs is a mixed bag with a lot of challenges under Indian exchange control laws (‘FEMA‘) since foreign investment in private trusts is not generally permissible. Further, the trust laws in India which govern the formation, registration as well as rights and responsibilities of each of the stakeholders – settlor, trustee, beneficiaries etc., also require consideration.

These include questions such as: Is a trust recognized as a person under the FEMA? Can NRIs settle a trust in India? Can NRIs become trustees or co-trustees as well as beneficiaries of the trust settled in India? What investments would be permissible for the trust? Whether the trust will be able to repatriate monies to beneficiaries outside India?

1. FEMA does not recognize trusts (except for certain specified categories which are registered) as a separate person as trust is not a legal entity but a legal arrangement under law. Thus, each of the stakeholders – viz. settlor, trustee and the beneficiary should independently and in their individual capacity (vis-à-vis the trust) be compliant with FEMA.

2. Since foreign investment in private trust is not directly permissible, settlement of trusts by NRIs can be explored on a non-repatriation basis either using monies lying in their non-resident ordinary rupee (NRO) account or sourcing it directly from outside India. Alternatively, settlement of the trust can be achieved by resident relatives of NRIs settling the trust upon receipt of cash gifts from the NRIs.

3. Though, under the trust laws, NRIs can become trustees subject to certain conditions, NRIs being the sole trustee(s) of the trust may not be permissible. Further, since trustees are treated as legal owners of the trust property, it may not be permissible for trustees, being NRIs, to hold properties / investments not permissible under FDI route on behalf of the trust. However, considering that foreign investment by NRIs on non-repatriable basis is treated at par with domestic investments under the FDI Policy, the body of trustees – including resident and NRIs trustees – can hold FDI investments on non-repatriation basis.

4. NRIs can become beneficiaries to the trust with FDI investments. However, in case of trust holding non-FDI investments, the real test would be to determine the extent of control or rights enjoyed by the NRI beneficiaries.

5. Remittance of capital and returns from the trust to the beneficiaries will be subject to FEMA. It should be permissible for the trust to directly remit monies to the NRI beneficiaries up to USD 1 million per financial year or deposit the same in the beneficiaries NRO account, which would allow them to repatriate USD 1 million per financial year.

To conclude, the ‘mixed bag’ of trust and FEMA is not completely covered in the above paragraphs and one has to apply FEMA basis the factual pattern and the objectives sought to be achieved by the settlor / family concerned. Needless to say, tax aspects in relation to the trust must also be considered while undertaking this exercise.

(The author is chartered accountant and Partner, Bhuta Shah & Co LLP.)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of http://www.economictimes.com.)

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