New KYC requirements of FPI – Implications for FATCA / CRS reporting

April 13,2018
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Bahroze Kamdin (Partner, Deloitte Haskins and Sells LLP)

Section 285BA of the Income-tax Act, 1961 read with Rules 114F to 114H of the Income tax Rules provides for due diligence to be followed for identification and reporting of non-resident account holders for US’ Foreign Account Tax Compliance Act (FATCA) and the Common Report Standard (CRS) of the OECD.  

In case a financial account is held by an entity which is passive non-financial entity, the controlling persons of the entity have to be identified; and if tax resident of the country outside India, the account held by the entity is to be reported. 

Controlling person as per the Income-tax Rules, means a natural person who exercises control over an entity and includes beneficial owner as determined under sub-rule(3) of Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules 2005. As per the Explanation to the Rule, in determining the beneficial owner, the procedure specified in the circular as amended from time to time shall be applied inter alia circular No. CIR/MIRSD/2/2013, issued on the 24th January, 2013 by the Securities and Exchange Board of India (SEBI). 

SEBI, vide  its 2013 circular, issued guidelines for identification of beneficial ownership (BO) for different types of entities - (A) persons other than individuals and Trusts – companies, partnership, AOP, BOI etc; and (B) Trusts. The guidelines also specified that for the purpose of identification of BO of foreign investors’ viz., foreign institutional investors, sub-accounts and qualified foreign investors, clarifications issued vide circular no. CIR/MIRSD/ 11 /2012 dated 5 September 2012 (2012 circular) should be considered. 

The SEBI 2012 circular was further relaxed vide circular No. CIR/ MIRSD/ 07/2013 dated 12 September 2013 (2013 circular).  

Also, as per the SEBI circular of 12 September 2013, details of ultimate beneficial owner (UBO) of an FPI category I was not required, while for Category II it was required only if UBO was over 25%; for Category III, the details of UBO was required.   SEBI has now issued a circular No. CIR/IMD/FPIC/CIR/P/2018/64 dated 10 April 2018 (2018 circular) amending the earlier 2012 circular and 2013 circular. 

SEBI’s 2018 circular has made major changes in identification and verification of beneficial owners of FPI as under:

• In case of companies and Trust FPIs, BO is to be identified on controlling ownership interest (also termed as ownership or entitlement) and control basis. [E.g., management shareholder and participation shareholder to be looked into for BO of companies. For Trust, the settlor, Trustee, beneficiary, etc., to be considered.]  

• The BO in case of partnership firm and unincorporated association of individuals should be identified on ownership or entitlement basis. 

• The materiality threshold for identification of BO of FPIs on controlling ownership interest (or ownership/ entitlement) basis shall be the same as prescribed in PMLA Rules, i.e. 25% in case of company and 15% in case of partnership firm, Trust and unincorporated association of persons. 

• In respect of FPIs coming from “high risk jurisdictions” as referred in SEBI’s Master circular No. CIR/ISD/AML/2010 dated December 31, 2010, lower materiality threshold of 10% for identification of BO should be applied and also to ensure KYC documentation, as applicable for category III FPIs. [As per circular no. CIR/ISD/AML/3/2010 dated 31 December 2010,  clients in high risk countries include countries where existence / effectiveness of money laundering controls is suspect, where there is unusual banking secrecy, countries active in narcotics production, countries where corruption (as per Transparency International Corruption Perception Index) is highly prevalent, countries against which government sanctions are applied, countries reputed to be any of the following – Havens/ sponsors of international terrorism, offshore financial centers, tax havens, countries where fraud is highly prevalent. While dealing with clients in high risk countries where the existence/effectiveness of money laundering control is suspect, intermediaries apart from being guided by the Financial Action Task Force (FATF) statements that identify countries that do not or insufficiently apply the FATF recommendations, published by the FATF on its website (www.fatf- gafi.org), shall also independently access and consider other publicly available information. 

There are no countries which have been named in the circular as high risk jurisdiction and so whether countries named in the FATF recommendation like Iran, and North Korea should be considered or other countries named by OECD, EU, etc.] 

• In case the material shareholder or owner is an entity, then look-through principle shall be applied to identify the BO of the material shareholder/ owner entity. 

• Where no material shareholder/owner entity is identified in the FPI for controlling ownership interest basis and also on control basis (for companies and trusts), BO shall be the senior managing official of the FPI. 

• In case of companies/ Trusts represented by service providers like lawyers/ accountants, FPIs should provide information of the real owners/ effective controllers of those companies / Trusts. 

• If the BO exercises controls through means such as voting rights, agreements, arrangement etc that should also be specified. It is clarified that BO should not be a nominee of another person. 

• BO should not be a person mentioned in United Nations Security Council’s Sanctions List notified from time to time; 

• BO should not be from jurisdiction identified in the public statement of Financial Action Task Force (FATF) as: 

a) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or 

b) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies. 

• NRI/ resident Indian cannot be BO of FPI

FPI Category II and III are required to maintain a list of BO and report the BO to SEBI. 

Generally FPI should be reporting financial institutions and so this change may not be relevant from the FATCA / CRS perspective. However where FPIs are passive entities, the reporting financial institutions under section 285BA of the Act should take note of these guidelines and reporting, in their process of identification of reportable accounts wherever applicable under FATCA and CRS.

Whether such disclosure of beneficial ownership by FPIs will have any impact on the taxation of income earned by the FPI in India where Treaty benefits are claimed, remains to be seen. 

The expert column is also co-authored by Alifya Hakim (Senior Manager) and Lovina Mathias (Manager).

 

Comments

  • Anil - Emkay Global Financial Services Limited on April 17 2018

    Dear Madam, A really good & helpful analysis of SEBI circular, it will be great help if you will kindly elaborate implication of following clause of the relevant circular on KYC requirement of FPI in relation to "(C) Indians as BO of FPI". (c) Indians as BO of FPIs In reply to FAQ 91, it has been clarified that “NRI/PIO is not eligible to make investments as an FPI. Accordingly, a company which is majority owned by one or more NRI/PIOs shall not be allowed to make investments as an FPI. However, if such company is appropriately regulated it may be given registration as Category II FPI for the purpose of acting as investment manager for other FPIs. This position is the same as in FII regime where companies promoted by NRIs were registered as non-investing FIIs.” In order to bring further clarity, it is informed that Non Resident Indians (NRIs) / Overseas Citizen of India (OCI) cannot be BO of FPIs. However, if an FPI is Category II Investment manager of other FPIs & is non- investing entity, it may be promoted by NRIs/ OCIs. It is also clarified that Resident Indian cannot be a BO of FPI. Regards, Team Compliance, Emkay Global Financial Services Limited.

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