While the economy has seen several ups and downs since the COVID-19 pandemic, there has also been exponential growth in global wealth. It is estimated that in 2021, India’s population of Ultra High Net-worth Individuals (“UHNIs”) (i.e., individuals owning assets worth more than USD 30 million/ INR 226 crore) grew by 11 per cent. This number is expected to increase by a further 39per cent by 2026. Globally, similar trends can be seen. It is estimated that global UHNI population will grow by a further 28 per cent by 2026.
Recent trends have also shown an uptick in the number of UHNIs exploring family office structures to manage their wealth. In this regard, Singapore has emerged as one of the topmost destinations for global UHNIs (including Indians, East-Asians, Europeans and Americans) to set up their international family offices. The favored jurisdiction has seen a sevenfold increase in the number of family offices since 2017.
One of the reasons why Singapore is a preferred destination is the fiscal incentives that the government offers to family offices. Further, the government has shown an inclination to positively regulate such structures to enhance the quality of family offices in the country. The Singapore government has also introduced fiscal measures for incentivising targeted investments by such family offices (such as supporting local start-ups/ philanthropic initiatives), which simultaneously boost Singapore’s economy and provide impetus to family offices.
In contrast, while quite a few Indian UHNIs have an Indian family office, such structures have not attracted much foreign investment. In our experience, and as per several reports, even Indian UHNIs have increasingly been opting to set up family offices abroad, in more tax-efficient jurisdictions such as Singapore and the UAE. In India, the effective tax rate on income earned by UHNIs may go up to approximately 42.7 per cent. In Singapore, the maximum personal income tax rate is merely 24 per cent and the UAE does not have personal income tax at all. Similarly, corporate tax rate in India can go up to 34.94 per cent (for domestic companies), while in Singapore it is only 17 per cent. In the UAE, a 9 per cent corporate tax will only be introduced this year. Further, Singapore and the UAE generally do not tax capital gains, and dividend income is also tax-free in the hands of the recipient in these jurisdictions, unlike in India.
Additionally, these jurisdictions have targeted regulatory and fiscal schemes in place to promote the growth of family offices. For instance, Singapore-based family offices can benefit from the Onshore Fund Tax Incentive Scheme and the Enhanced Tier Tax Incentive Scheme (Section 13U and Section 13O exemptions). Under the said scheme, tax exemptions are provided to specified investment income on satisfaction of prescribed conditions. Further, for families intending to relocate, Singapore also awards permanent resident status under its Global Investor Programme, which includes an option that is specifically designed for family offices. Similarly, in the UAE, numerous fiscal incentives are provided to family offices set up in financial free trade zones (i.e., the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM)). Both the DIFC and ADGM provide a 40-year guarantee of zero taxes on corporate income and profits.
India, until recently, had not notified any specified regime for the regulation/ promotion of family office structures. In April 2022, recognising the need for having a formal structure for managing and preserving the wealth of UHNIs and their families, a framework was released, facilitating the setting up of family offices in GIFT City, India’s global financial services hub. These regulations allow family offices to be set up as an authorised fund management entity. Further, the extant tax laws also extend the benefit of certain tax holidays and other beneficial provisions to such entities set-up in the GIFT City, along the lines of their counterparts in favourable jurisdictions such as Singapore or the UAE.
While this initiative is laudable and expected to attract global UHNIs to India, there remain a few creases that need to be ironed out before GIFT City can truly compete with global jurisdictions. For instance, while a tax holiday may be available to family offices set up in GIFT City, the language of the extant tax laws does not provide sufficient clarity on whether such tax holiday would be limited to the business income of the family office or whether the same would also extend to their investment incomes (such as dividend on stocks held as investment or interest on loans/ debt securities). Moreover, presently, the tax holiday is only available for a period of ten years. Further, even if the tax holiday is applicable, such entities will still be required to incur a tax cost in the form of Minimum Alternate Tax/ Alternate Minimum Tax.
These persisting tax issues may make the regime less attractive when compared to favourable jurisdictions (such as Singapore and the UAE), which provide more holistic fiscal incentives. There lies a huge opportunity for India to promote the recently notified family office regime in GIFT City, especially considering the fact that the cost of setting up a family office in the country is comparatively less than other developed nations. Therefore, all eyes would be on the upcoming Budget to rationalise the extant tax laws, in order to bring the tax treatment of family offices set up in GIFT City at par with these favourable jurisdictions.
Views are personal. Savani is Partner, Cyril Amarchand Mangaldas; Jhingan is Principal Associate at Cyril Amarchand Mangaldas; Gupta is Associate at Cyril Amarchand Mangaldas.
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