Trusts GFT
Trusts GFT
Trusts
Chapter 112 Nishith Desai Associates
Synopsis
Particulars Page
No.
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Trusts
Preliminary Issues
A distinction must be drawn between questions relating to
the settlement, will or other instrument which operates inter alia to
vest property in trustees and questions relating to the validity and
operation of the trust provisions contained therein. The Convention
does not apply to preliminary issues relating to the validity of wills
or of other acts by virtue of which assets are transferred to the
trustee.6
3 Article 3
4 Article 20
5 Article 22
6 Article 4
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International Taxation – A Compendium
Governing Law
Articles 6 & 7 of the Hague Convention contain two rules
as to the governing law of a trust. The primary rule7 is that a trust
is governed by the law chosen by the settlor, as long as that choice
is not opposed to public policy. The choice must be express or
be implied in the terms of the instrument creating or the writing
evidencing the trust interpreted, if necessary, in the light of the
circumstances of the case. A testator or settlor resident in India is
free to set up a trust governed by some foreign law. If the settlor
makes no choice of the governing law, or if he selects some law
which does not provide for trusts or the category of trust involved8,
the secondary rule applies, which is that the trust is governed by the
law with which it is most closely connected.9 The same rule appears
to apply at common law. It must be noted that the choice of law
would not be applicable to tax matters which would be governed by
the respective jurisdiction where the settlor, beneficiaries, property or
trustee, as applicable,
The ascertainment of the law with which the trust is most
closely connected involves making reference in particular to four
factors:
(a) the place of administration of the trust designated by the
settlor;
(b) the situs of the assets of the trust;
(c) the place of residence or business of the trustee; and
(d) the objects of the trust and the places where they are to be
fulfilled.10
There is among these factors “a certain implicit hierarchy,”
but also a considerable overlap for (a) and (c) will usually coincide.
Although not expressly stated in the Hague Convention, it is clear
from other provisions of the Convention11 that these factors are to
be considered as at the moment of creation of the trust. These will
include domicile of the settlor, especially if the trust is created by a
7 Article 6
8 Article 6(2)
9 Article 7(1)
10 Article 7(2)
11 Article 10
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Trusts
Recognition of trusts
Article 11 of the Convention provides that recognition
implies, as a minimum, that the trust property constitutes a separate
fund, that the trustee may sue and be sued in his capacity as trustee,
and that he may appear or act in this capacity before a notary or
any person acting in an official capacity. Further, in so far as the
law applicable to the trust requires or provides, recognition implies
12 Article 8(1)
13 Article 8(2)
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International Taxation – A Compendium
14 Article 11(2)(3)
15 Article 15(1)
16 Article 15(2)
17 Article 10
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Trusts
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International Taxation – A Compendium
9) Inter vivos Trust: A settlor who is living at the time the trust
is established creates an inter vivos trust. An inter vivos trust can be
created in any of the trust forms above.
10) Testamentary Trust: A trust created in an individual’s Will.
11) Irrevocable Trust: It is the one that will not come to an end
until the terms of the trust have been fulfilled.
12) Revocable Trust: A trust of this kind can be revoked (cancelled)
by its settlor at any time.
13) Purpose Trust: A trust which is created specifically for a
purpose. Such trust may or may not have any beneficiaries.
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Trusts
taxed on the receipt of distributions from the trust and the trustee
may not be subject to Indian tax and reporting obligations.
Apart from the beneficiaries test, an offshore trust could also
be considered to be a tax resident of India, if India is considered to
be the place of management and control for such trust, even if such
management and control is partly done from India. It may be noted
that in such a case, the trust may be treated as an association of
persons, which is a separate taxable entity under the ITA and subject
to tax in India on its worldwide income. Hence, if the trustee of
the offshore discretionary trust is situated in India or if any Indian
person is controlling and managing the trust from India, wholly or
partly, there is a possibility of the same being considered as a tax
resident of India.
The abovementioned would be applicable in a case where the
offshore trust has been set up as an irrevocable trust. For an offshore
trust which has been set up as a revocable trust by an Indian settlor,
the story would be somewhat different altogether.
A revocable trust tantamount to being a revocable transfer
under the Indian tax provisions if it contains any provision for
the re-transfer directly or indirectly of the whole or any part of
the income or assets to the transferor or it in any way gives the
transferor a right to re-assume power directly or indirectly over
the whole or any part of the income or assets. Thus, where a
settlement is made in a manner that the settlor is entitled to recover
his contributions over a specified period and is entitled to the
income from their contributions, the settlement of the trust will be
disregarded for the purposes of tax, and the income thereof taxed as
though it had directly arisen to the contributors.
Under the current laws, the Indian resident beneficiaries
are required to report their interest in an offshore trust in the
information return filed along with the income tax return.
Disclaimer
This article has only been provided for internal circulation
and should be treated as limited academic material on the subject
and should in no way be relied upon as legal advice by any person
referring to this material. Nishith Desai Associates shall not be
responsible or held liable for any information provided herewith,
should it be relied upon or acted upon by any person.
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