The Mumbai Income Tax Appellate Tribunal (ITAT) has recently
determined the following issue in the affirmative in the case of
Manoj Dhupelia: Should the income of an offshore discretionary
trust be subject to tax in India, if no distributions have been
made to beneficiaries in India?
The question arose from appeals filed by individual
beneficiaries in relation to a Lichtenstein-based trust, the
Ambrunova Trust and Merlyn Management SA (the Trust) with the ITAT.
It is important to note that the individuals in this case were
amongst those first identified by the Government of India (GOI) as
holding undeclared bank accounts in Lichtenstein.
The ITAT ruling raises the following issues:
Taxation of Trust Corpus: ITAT
classified the corpus of the trust as "undisclosed
income" and declared it taxable in the hands of the
Taxation of Undistributed Income:
ITAT refused to draw a distinction between the corpus and
undistributed income from the trust and declared it taxable in the
hands of the beneficiaries.
Prevention of Money Laundering
Prosecution: The ITAT ruling will likely pave the way for further
prosecution of the individuals, the trust companies, banks and
other facilitators in relation to anti-money laundering legislation
It is likely that other cases of a similar hue are in various
stages of litigation with tax authorities in India. In particular,
the following risk assessment and mitigation measures in this
regard should be considered:
Ascertaining whether tax evasion
petitions of the variety filed by the GOI in the Manoj Dhupelia
case with the jurisdictional governments impact any beneficiaries
of offshore trusts who at any time were subject to Indian tax or
exchange control laws.
Outlining the distinction between the
original corpus of the trust and subsequent undistributed income
through robust documentation.
Early regulatory action to quash
proceedings that do not follow precedents set by the Supreme Court
of India in determining similar issues, since there is a high
likelihood that as a pure point of law, the Supreme Court may
follow its past precedents and rule that undistributed income from
an offshore discretionary will not be taxable in India.
If you have any questions about the topics discussed in
this Alert, please contact Saionton Basu in Duane
Morris' London office, any of the attorneys in our India
Practice Group or the attorney in the firm with whom you are
regularly in contact.
Disclaimer:This Alert has been
prepared and published for informational purposes only and is not
offered, nor should be construed, as legal advice. For more
information, please see the firm's
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