FEMA Compliance for Private Trusts: Key Considerations

SUCCESSION PLANNING – PRIVATE TRUST –A STUDY UNDER FEMA, 1999

If a private trust having foreign assets and one or more beneficiary/s resident in India or private trust having Indian assets and having one or more beneficiary/s resident outside India will attract provisions of Foreign Exchange Management Act, 1999.

In this series of Succession/Estate Planning- Introduction, importance and taxation for all form of Estate planning including FEMA matters relating to such planning, this is Part-III of this series. For other parts, please contact the best Chartered Accountant Firm In India.

For FEMA applicability on Private trusts, the following points must be considered:

• Jurisdiction of Private Trust (Foreign or Indian Trust)
• Residential status of Testator both present and past;
• Location of assets of testator;
• Residential status of beneficiaries both present and past;
• Intention of the beneficiaries regarding change in residential status;
• Individual status of person-NRI or non-NRI and OCI cardholder;
• Whether the person is always resident or was non-resident earlier and now become resident (Returning Indian).

FEMA – Relevant Provisions for Private (Family) Trusts

Though there is no provision under FEMA which directly relevant for the Private (Family) Trusts. However, it is extremely difficult in current Global economic atmosphere where almost every person who plan private trust as an instruments of succession/Estate Planning. Therefore, we need to find out FEMA provisions which may be indirectly applicable to the subject matter of our discussion.

Based on the study of relevant provision of FEMA which may apply in case of Private (Foreign) Trust, following basis principles can be derived:

• Private (Family) Trust is not defined under FEMA Law, hence, it is not a person under FEMA and therefore for all transactions we need to consider the status of trust based on the personal/residential status of beneficiary/s, trustee/s and settlor.
• Where jurisdiction of trust, location of assets and residential status of beneficiary/s, trustee/s and settlor is in India or outside India, the trust will come out of ambit of FEMA.
• For a person resident in India, current Account personal transactions are generally allowed up to limit under LRS which currently $ 250,000 (Specific Approval of RBI is required above this limit) in each year unless specifically denied. [Section-5 of FEMA, 1999 read with FEM (Current Account Transactions) Rules, 2000]
• For a person resident in India, permissible capital account personal transactions are generally allowed up to a overall limit under LRS which currently $ 250,000 (Specific Approval of RBI is required above this limit) in each year while permission is required for all other capital account transactions. [Section-6(2) and (2A) of FEMA, 1999 read with FEM (Permissible Capital Account Transactions) Regulations, 2000 and FEM (Non-debt Instruments) Rules, 2019]
• No person can deal in foreign currency transactions otherwise through the authorised dealers who are specifically allowed by RBI to deal in foreign currency transactions. (Section-3 of FEMA, 1999)
• No person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India without general or specific permission under rules and regulations of FEMA. (Section-4 of FEMA, 1999)
• A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. (Section-6(4) of FEMA, 1999)
• A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. (Section-6(5) of FEMA, 1999)
• A person resident in India shall take all reasonable steps to realise and repatriate to India any amount foreign exchange which is due or has accrued to him within such period and in such manner as specified in FEM (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000. (Section-8 of FEMA, 1999)
• In view of absence of any specific provision in relation to private trust, we need to follow the philosophy behind the FEMA law accordingly should not do something indirectly which is otherwise not allowed directly and look into all the transactions in its entirety and the ultimate impact of such transaction under FEMA.

In view of the above principles, let us now test the following situations which may have an impact on any arrangement under private trust:

Situation-A:

Indian Trust. Indian Settlor, Indian Assets, Indian Trustee/s with NRI or OCI beneficiary/s. What if beneficiary is Non-resident of non-Indian origin.

FEMA Impact:

At the time of settlement, distribution of income and assets of the trust (Considering specific private trust):

• Any interest of non-resident in the trust shall be considered as gift. IT may be of money, Indian security, Immovable property or other movable property which is generally allowed in case of NRI/OCI card holder under RBI rules and regulations subject to certain conditions. However, Gift of property to person other than NRI/OCI do require specific permission of the authorities.
• Even in case of NRI/OCI card holders, compliance of conditions cannot be followed in letter and spirit therefore, specific approval is always better.
• A small window is open to transact through general permission if trust is testamentary trust and beneficiaries are NRI/OCI card holder getting the assets by way of inheritance. (Section-6(5) of FEMA, 1999)
• Income from the trust due or accrued to the non-resident beneficiaries can be repatriated under LRS up to one million US dollar in every year subject to payment of Indian tax.
• Similarly any distribution of assets at the time of dissolution of trust or otherwise can be repatriated by Non-resident under LRS subject to the fact that all the FEMA compliance are being undertaking at the time of settlement of the assets in trust.
• The situation may change in case of discretionary trust.

Situation-B:

• Foreign Trust, Indian Settlor out of LRS remittance, Foreign Assets, Indian Trustee/s with resident beneficiary/s.
• Foreign Trust, Indian Settlor out of income earned as non-resident, Foreign Assets, Indian Trustee/s with resident beneficiary/s.

FEMA Impact:

At the time of settlement, distribution of income and assets of the trust (Considering specific private trust):

• Person resident in India can remit overseas up to $250,000 each year and keep this money in bank account, purchase foreign securities and immovable properties outside India Except impermissible transactions.
• When he create a foreign trust for the resident beneficiary/s is tantamount to gift of foreign currency, foreign securities or immovable property outside India to a person resident in India. Any transactions of gift involving foreign currency, foreign securities or immovable property outside India by a person resident in India to a person resident in India is not permitted, therefore such trust should also not be permitted.
• However, a testamentary trust can be settled by an Indian settlor out of the assets created through LRS or income earned as a non-resident.
• The situation may change in case of discretionary trust.

Situation-C:

Foreign Trust, Non-resident Settlor, Foreign Assets, with resident beneficiary/s.

FEMA Impact:

At the time of settlement, distribution of income and assets of the trust (Considering specific private trust):

• No person resident in India shall acquire, hold, own, possess, or transfer any foreign exchange, foreign security, or any immovable property situated outside India without general or specific permission under the rules and regulations of FEMA. (Section-4 of FEMA, 1999), therefore settlement of any such assets in a trust for his benefit can be done only through specific permission
• Any income due or accrued to him from the trust needs to be repatriated back to India as early as possible. (Section-8 of FEMA, 1999)
• In case of a discretionary trust, there are many other complications therefore permission is the safest route for better compliance.

Most importantly, FEMA is not a law that can be taken lightly as of late there are so many cases of confiscation of assets by ED, high pitch penalty and compounding orders, and even initiation of prosecution proceedings in some cases.  Therefore, it is always better to go to the RBI or Central Government for specific approval where there is any doubt in any arrangement or transaction. (Section-13 of FEMA, 1999)

Disclaimer: This blog is for private circulation, the views are the personal views of the author, and would not be responsible for any action taken based on this, without any consultation.

Authored By: CA Sanjay Kumar Agrawal 

Email: sanjay@dsrvindia.com 

M: +91 9810116321