Investors From 21 Nations Get Angel Tax Exemption

The Central Board of Direct Taxes said on Wednesday that certain classes of persons and foreign entities had been exempted from the angel tax provision.

The move would encourage foreign portfolio investors from 21 nations to invest in startups with an exemption from angel tax.

The list of 21 countries include Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Israel, Italy, Japan, Korea, New Zealand, Norway, Russia, Spain, Sweden, United Kingdom and the United States, according to a notification.

However, analysts highlighted that Singapore, the Netherlands and Luxembourg were not part of the list, despite a large number of investments being routed into India through these jurisdictions.

Limited relief has been granted to certain categories of investors, such as category one FPIs, pension funds and broad-based investment funds, according to Gouri Puri, partner at Shardul Amarchand Mangaldas and Co.

Even such investors may need to have a re-look at the practice of setting up special purpose vehicles for investment into India vis-à-vis investing directly to avail the angel tax exemption, she said.

The class of persons covered under the exemption include:

• Government and government-related investors like central banks, sovereign wealth funds, international or multilateral organisations.

• Agencies, including entities controlled by the government or where direct or indirect ownership of the government is at or over 75%.

• Banks or entities involved in the insurance business where such entity is subject to applicable regulations in its country where it is established, incorporated or is a resident.

• Any of the following entities from 21 nations who follow the regulations of their country of origin and are:

1. SEBI registered Category I FPIs.

2. Endowment funds associated with a university, hospitals or charities.

3. Pension funds created or established under the law of the foreign country or specified territory.

4. Broad-based pooled investment vehicle or fund where the number of investors is more than 50, and such fund is not a hedge fund or a fund that employs diverse or complex trading strategies.

Punit Shah, partner at Dhruva Advisors LLP, said the notification was a welcome step, but the move was not all-inclusive of some large private equity funds who invest in India through jurisdictions like Mauritius and Singapore.

"Broad-based funds are defined as having more than 50 investors," he said. "Hence, it would be interesting to see whether this benefit is extended to such pooling vehicles making investments in India through specific SPVs located in non-specified jurisdictions."