Offshore Fund Structure
A structure used when there is no intent to pool capital in India: the pooling vehicle is domiciled abroad, such as in Mauritius or Singapore, takes offshore investors' money and invests directly into Indian companies.
In plain language
Foreign investors who want exposure to Indian companies do not have to join an Indian fund. They can pool their money in a fund set up outside India, which then invests into India. That is the offshore fund structure.
The workbook defines it by intent: it is used when there is no intent to pool capital at the domestic (India) level. A pooling vehicle — the offshore fund — is domiciled in an offshore jurisdiction such as Mauritius or Singapore. Offshore investors commit capital to it, and it invests into Indian investee companies as opportunities arise. The offshore investment manager may take domestic investment advice for those investments.
Why go offshore at all? Because a suitable fund jurisdiction should above all offer tax neutrality — investors should not pay more tax than if they had invested directly — and India taxes capital gains at source.
How it works
Why offshore (4.1.1)
- India follows source-based taxation on capital gains, so offshore structures help offshore investors avoid double taxation on the same income.
- Offshore funds are formed in countries with Bilateral Investment Promotion and Protection Agreements (BIPA) with India, giving reliefs such as fair and equitable treatment, protection against expropriation, capital repatriation and efficient dispute resolution.
- Investments made by offshore funds in India are regulated by SEBI.
Documents at the offshore level (4.2.8)
| Document | Purpose |
|---|---|
| Subscription Agreement | Terms on which an investor subscribes to the offshore fund; capital commitment; investor representations such as being "fit and proper" |
| Advisory Agreement | If advisory work is delegated to an onshore entity, the terms on which it advises; the onshore advisor helps with deal sourcing, assessment, execution and post-investment management |
| Wrapper | A supplement to the domestic PPM used offshore in a unified structure, for private placement compliance abroad |
Tax comparisons the workbook draws (Chapter 9)
- GST: an offshore Category III AIF pooling foreign capital to invest in India does not pay GST on management fees — treated as export of services. An India-domiciled AIF pooling overseas money does pay it, which is why foreign investors may prefer offshore.
- DTAAs: investors need a Tax Residency Certificate (with Form 10F information if missing). India–Mauritius (protocol of 10 May 2016) taxes capital gains on shares acquired from 1 April 2017, but interest withholding is 7.5%, against 15% under the Singapore DTAA and 10% under the Netherlands DTAA.
- MLI principal purpose test: treaty benefits can be denied if obtaining a tax benefit was a principal purpose of the arrangement.
A worked example
Illustrative figures. Coral Reef India Fund, domiciled in Mauritius, raises the equivalent of Rs 400 crore from 30 foreign investors and invests directly in Indian companies. An Indian firm advises it under an Investment Advisory Agreement.
Management fee and GST. Fee at 1.5%:
1.5% × Rs 400 crore = Rs 6 crore
Offshore fund → export of services → no GST
If the same pool sat in an India-domiciled AIF: 18% × Rs 6 crore = Rs 1.08 crore of GST
Interest withholding. Coral Reef earns Rs 10 crore of interest from Indian debentures. Using the treaty rates the workbook quotes:
| Fund jurisdiction | Rate | Tax withheld |
|---|---|---|
| Mauritius | 7.5% | Rs 75 lakh |
| Netherlands | 10% | Rs 1 crore |
| Singapore | 15% | Rs 1.5 crore |
Mauritius saves Rs 1.5 crore − Rs 75 lakh = Rs 75 lakh against Singapore
To claim the Mauritius rate the fund needs a Tax Residency Certificate. And if tax saving were found to be a principal purpose of the set-up, the MLI principal purpose test could deny the treaty benefit.
Why NISM asks about it
Chapter 4 (Category III AIF: Fund Structures and Service Providers) introduces offshore and onshore funds at 4.1.1, then builds unified, master-feeder and parallel structures on top of them, and lists offshore-level documentation at 4.2.8. Chapter 9 (Taxation) explains the GST and DTAA reasons offshore structures exist. Chapter 2 gives the history — before 2012 no hedge funds were domiciled in India and foreign money came through offshore funds. Expect a question matching "no intent to pool capital in India" to this structure.
Common exam traps
- Offshore structure = no intent to pool capital in India. Pooling in India, even with foreign money, is an onshore or unified structure.
- The offshore fund invests directly into Indian investee companies — unlike a unified structure, where the offshore fund invests into an onshore AIF and cannot invest directly.
- BIPA and DTAA are different agreements: BIPA protects investments (expropriation, repatriation, disputes); DTAA allocates taxing rights.
- Offshore funds' investments in India are still regulated by SEBI.
- GST: offshore management fees for foreign pools are export of services; an India-domiciled AIF with overseas investors pays GST.
- Mauritius interest withholding 7.5%, Netherlands 10%, Singapore 15% — and the Mauritius capital gains exemption was curtailed for shares acquired from 1 April 2017.
Check yourself
1.An Offshore Fund Structure is typically used when:
- a)there is no intent to pool capital at the domestic (India) level, so offshore investors commit capital to a fund domiciled in, say, Mauritius or Singapore, which invests in Indian investee companies
- b)commitments from domestic and offshore investors must be pooled in an onshore AIF
- c)offshore investors must invest through a feeder fund into a domestic master fund
- d)resident Indian investors wish to avoid the Liberalised Remittance Scheme
Show the answer
Answer: (a) there is no intent to pool capital at the domestic (India) level, so offshore investors commit capital to a fund domiciled in, say, Mauritius or Singapore, which invests in Indian investee companies
"An Offshore fund structure is used when there is no intent to pool capital at the domestic (i.e. India) level." The pooling vehicle is domiciled in an offshore jurisdiction, such as Mauritius or Singapore. Offshore investors commit capital to it, and it "will make investments into Indian Investee companies as and when investment opportunities arise". The Offshore Investment Manager can take domestic investment advice for these investments. Option (b) describes the Unified Structure. Option (c) describes the Master-Feeder Structure. Option (d) confuses the purpose: the LRS is the route through which resident Indians remit money abroad, so this structure is not a way around it.
Where this is taught
- Series XIX-B · Chapter 4: Category III AIF: Fund Structures and Service Providersintroduced here
- Series XIX-C · Chapter 8: Alternative Investment Fund Structuringintroduced here
- Series XIX-E · Chapter 6: Alternative Investment Fund Structuringintroduced here
- Series XIX-D · Chapter 5: Alternative Investment Fund Structuringintroduced here
Related terms
- Double Taxation Avoidance AgreementA treaty between two or more countries that prevents the same income being fully taxed twice, either by allocating the taxing right or by the residence country giving credit for tax paid at source.
- Tax Residency CertificateThe certificate a non-resident investor obtains from its home tax authority to claim benefits under a Double Taxation Avoidance Agreement — without it, Indian domestic rates apply.
- Parallel StructureA fund structure in which offshore investors invest through separate offshore funds that invest directly in Indian companies alongside a SEBI-registered domestic AIF.
- Unified StructureA fund structure in which commitments from domestic and offshore investors are pooled into one onshore Indian AIF, with the offshore fund investing into it rather than directly in companies.
- Master-Feeder StructureA fund structure in which offshore investors invest through a feeder fund in their jurisdiction, which invests in a domestic master fund that also accepts direct investors.
- Onshore FundA fund created by a domestic investment manager and domiciled in India, pooling capital from resident and foreign investors, registered under the SEBI (AIF) Regulations with its PPM filed through a merchant banker.
- WrapperA supplement attached to a domestic fund's Private Placement Memorandum when it is distributed offshore, so the offering complies with private placement rules in the jurisdictions where it is marketed.
- AIPACSEBI's Alternative Investment Policy Advisory Committee, headed by Shri Narayan Murthy — its recommendations shape AIF valuation guidelines and proposals on Category III tax and GST.
- Downstream InvestmentAn investment by an Indian investment vehicle in a domestic company. For a Category III AIF it is indirect foreign investment only if its sponsor or manager is not Indian owned and controlled.
- Tax NeutralityThe principle that pooling investor money through an AIF structure should not leave an investor worse off, tax-wise, than if they had invested directly — a key test when choosing where to domicile a fund.
- BIPAA treaty between India and another country used by offshore fund sponsors to choose a jurisdiction giving their investors fair treatment and capital repatriation protections in India.
- Pure Domestic AIFThe simplest AIF structuring template: one pool set up and registered in India under the AIF Regulations, with every investor, the manager and the sponsor all resident in India for FEMA and tax purposes.