Tuesday, September 26, 2023
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Investors from 21 nations get angel tax exemption

The Central Board of Direct Taxes said that certain classes of persons and foreign entities had been exempted from the angel tax provision.

With the exemption from the angel tax, the move will attract foreign portfolio investors from 21 countries to engage in startups. According to a notification, the list of 21 nations includes Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Korea, New Zealand, Norway, Russia, Spain, Sweden, United Kingdom, and the United States.

Analysts pointed out that Singapore, the Netherlands, and Luxembourg were not included in the list, although substantial investments were channelled through these nations into India. 

“A limited relief has been granted to certain categories of investors such as category 1 foreign portfolio investors, pension funds, and broad-based investment funds. Even such investors may need to take a re-look at setting up SPVs for investment in India vis-a-vis investing directly to avail of angel-tax exemption. Not including Singapore, the Netherlands, and Luxembourg is surprising, considering a large number of investments are routed to India through these jurisdictions, which are important financial centres,” said Gouri Puri, partner, Shardul Amarchand Mangaldas & Co.

She added that even such investors might want to reconsider using special-purpose vehicles rather than investing directly in India to be eligible for the angel tax exemption.

The class of persons covered under the exemption includes: 

  • Government and government-related investors like central banks, sovereign wealth funds, and international or multilateral organizations. 
  • Agencies, including entities controlled by the government or where direct or indirect ownership of the government is at or over 75%. 
  • Banks or entities involved in the insurance business where such entity is subject to applicable regulations in its country where it is established, incorporated, or is a resident. 
  • Any of the following entities from 21 nations who follow the regulations of their country of origin and are: 
  1. SEBI registered Category I FPIs. 
  2. Endowment funds associated with a university, hospitals, or charities. 
  3. Pension funds created or established under the law of the foreign country or specified territory. 
  4. Broad-based pooled investment vehicle or fund where the number of investors is more than 50, and such fund is not a hedge fund or a fund that employs diverse or complex trading strategies.

Punit Shah, a partner at Dhruva Advisors LLP, said the notification was a positive start. Still, it did not apply to some significant private equity funds that invest in India through jurisdictions like Singapore and Mauritius.

“Broad-based funds are defined as having more than 50 investors,” he said. “Hence, it would be interesting to see whether this benefit is extended to such pooling vehicles making investments in India through specific SPVs located in non-specified jurisdictions.”

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