INDIA Law and Practice Contributed by: Rishabh Shroff, Kunal Savani and Chirag Shah, Cyril Amarchand Mangaldas
3.4 Exercising Control Over Irrevocable Planning Vehicles As per the ITA, a transfer (including settlement or con - tributions to a trust) shall be deemed to be “revocable” if it: • contains any provision for re-transfer, directly or indirectly, of the whole or any part of the income or assets to the transferor (settlor or contributor, in the case of a trust); or • gives the transferor a right to re-assume power, directly or indirectly, over the whole or any part of the income or assets. Thus, if the settlor retains any powers over a trust, even if the terms of the trust deed consider such trust to be an irrevocable trust, it shall be considered a rev - ocable trust under the ITA. For instance, even if the settlor does not directly retain any unfettered powers over the trust property but has the right to exercise such powers subject to meeting certain contingencies (such as by obtaining consent of any named person), then such trust would be deemed to be a revocable trust. Accordingly, it is critical to ensure that no such powers are directly or indirectly retained by the settlor. Further, the ITA provides that all income arising to any person by virtue of a revocable transfer shall be chargeable to tax as the income of the transferor. On the other hand, in the case of an irrevocable trust, since the settlor no longer maintains any control over the trust property, such settlor is not taxed on the income of the trust property. Despite this, revocable trusts remain a popular structuring choice amongst families in India for succession planning. This is because such a trust allows settlors to retain a certain amount of control and oversight over their assets in order to ensure that interests of their family members are protected. Settlors will often retain the power to add or remove beneficiaries and decide in what pro - portion distributions are made.
trustees and beneficiaries of a private trust. Private trusts are a popularly chosen vehicle of succession and are established for holding joint family assets such as immovable property, shares of a family busi - ness, family jewels and so on. Members of the family are made beneficiaries of such family trusts in order to ensure a seamless inheritance of family-owned prop - erty and avoid the hassle of obtaining a probate. From a tax perspective, India has included provisions incorporating the GAAR under the ITA, with effect from 1 April 2017. As per the GAAR provisions, an arrangement is classified as an impermissible avoid - ance arrangement, if its main purpose is to obtain a tax benefit and the arrangement satisfies one of the following four conditions: • creates rights or obligations not ordinarily created between persons dealing at arm’s length; • results, directly or indirectly, in the misuse or abuse of the provisions of the ITA; • lacks commercial substance or is deemed to lack commercial substance in whole or in part; or • is entered into, or carried out, by means, or in a manner, not ordinarily employed for bona fide purposes. Thus, if a trust has been set up for the purpose of avoiding taxes, then such a structure could attract the GAAR provisions and it may be disregarded to determine the ultimate tax effect. The statutes governing public trusts are set out in 10.1 Charitable Giving . 3.3 Tax Considerations: Fiduciary or Beneficiary Designation When an Indian resident is a beneficiary in a foreign trust then that person is required to furnish details of their foreign assets in Schedule FA in their Income Tax Return (ITR). Schedule FA pertains to the disclosure of scheduled foreign assets of Indian residents to avoid tax evasion. Further, such beneficiary being an Indian resident will be taxed on their global income which will include the income they receive from such trust as a part of their share as a beneficiary.
4. Family Business Planning 4.1 Asset Protection
Trust structures are undisputedly the most popular method for asset protection and offer beneficial gov -
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