Tax-savvy American NRIs use family trusts to insulate Indian assets

BY  SACHIN DAVE ET

Trust Indians to come up with jugaad, even when they no longer live in the country. Faced with a tax on the sale of assets in India, some non-resident Indians in the US are disposing of their property and other holdings after transferring them to family trusts. 

The issue stems from an agreement between the US and India in 2015 to implement the US Foreign Account Tax Compliance Act (FATCA), a law aimed at ensuring that tax is paid on income generated from wealth parked overseas. Under the agreement, the two countries will share information about citizens with assets in each other's countries. 

In the past few years, some Indian families have sent at least one of their heirs to either the US or Europe with the objective of saving tax in India. However, both Europe (through inheritance tax) and the US (FATCA) have started raising tax queries on the wealth of such families. In addition, Indian tax authorities, equipped with data from Switzerland and the Panama leaks on money stashed abroad, are going after such family structures across the globe. According to government sources, about 4,000 people in the past two years have given up Indian citizenship, fearing that the tax department will go after their unaccounted wealth in India. 

By transferring assets to trusts before selling them, NRIs in the US won’t be liable to pay tax on such transactions. “In the past one year, we have seen many parents of NRIs settled in the US are creating  and transferring their assets to family trusts due to implementation of FATCA. Tax cannot be levied on beneficiaries if appropriate structuring is done, so understandably, there has been an increased interest in family trusts,” said Girish Venkataraman, CEO at IIFL Investment Adviser & Trustee Services Ltd. 

Starting last year, data of US citizens with investments in India is being shared with US tax authorities. NRIs fear this would trigger an additional tax liability in the US on share dividend and property sale in India, among other things. 

“India has started sharing even mutual fund and stock market data of green-card holder NRIs with the US. So even while there is no long-term capital gains tax in India on STT-paid securities, the US can levy tax on such gains unless they are ring-fenced in a family trust,” said Jeenendra Bhandari, a partner at MGB & Co. 

While scrutiny was limited to real estate initially, in the past year US tax authorities have started questioning returns from mutual funds and stocks. If such assets are transferred to trusts, the taxman cannot directly slap a tax when a sale happens. Even NRIs with a net worth of about $1million (Rs 6.5 crore) are forming family trusts to continue investing in India without attracting tax in the US. 

With the introduction of FATCA, what is now gaining momentum is the creation of discretionary trusts, which protect the interests of the beneficiaries and maintain confidentiality,” said Zulfiquar Memon, managing partner of MZM Legal, a law firm. “Forming such discretionary trusts solves more than one problem – the whole issue around succession planning is also sorted out due to such trusts without attracting adverse tax.” 

There are also cases of Indian businessmen who tried to work around Indian tax laws facing some problems, experts said. In the past few years, some Indian families have sent at least one of their heirs to either the US or Europe with the objective of saving tax in India. 

However, both Europe (through inheritance tax) and the US (FATCA) have started raising tax queries on the wealth of such families. In addition, Indian tax authorities, equipped with data from Switzerland and the Panama leaks on money stashed abroad, are going after such family structures across the globe. According to government sources, about 4,000 people in the past two years have given up Indian citizenship, fearing that the tax department will go after their unaccounted wealth in India.