International tax update for India, Germany and the Channel Islands

At a glance

India: legislation of 2023 Finance Act impacting securities transactions tax and short-term capital gains from sale of debt mutual funds

Germany: long-awaited case law on dividend withholding tax (WHT) for US “S corporation” published on 10 March 2023

Channel Islands: tax compliance changes for Guernsey and Jersey resident partnerships for assessment year 2022

A closer look

India: Finance Act 2023

On 31 March 2023, the 2023 Finance Bill received the President’s assent to become the 2023 Finance Act. The following changes impacting the asset management industry have applied since 1 April 2023:

1. Increase of 25% of securities transaction tax (STT) levied on the sale of options or futures contracts in securities

The following STT rates now apply:

2. Gains from selling debt mutual funds are deemed short-term capital gains (similar treatment to market-linked debentures)

Previously, long-term capital gains arising from redeeming/transferring debt mutual funds were taxable at 10% (without indexation for Foreign Portfolio Investors, or FPIs).

The 2023 Finance Act considers gains from the transfer, redemption or maturity of a unit of a debt mutual fund (i.e., a mutual fund where <35% of total proceeds are invested in the equity shares of domestic companies) acquired on or after 1 April 2023 as short-term capital gains. This ends these funds’ tax advantage over traditional lending products or bank fixed deposits, as their transfer/redemption gains are now taxable at the same rates as ordinary income (where base tax rates can go up to 30%).

Also, gold funds, pure international funds, funds of funds or any other product that holds <35% in equity shares of domestic companies has been similarly taxed since 1 April 2023.

3. Surcharge capped to 25% on interest income for funds registered as an association of persons (AOP) or a body of individuals (BOI):

The maximum surcharge for interest income earned by FPIs registered as AOP/BOI in India has been reduced from 37% to 25%. This effective tax rate chart summarizes the differences in interest income received pre- and post-31 March 2023 as well as from 1 July 2023, when the 5% concessional rate will be lifted.

Germany: case law on dividend withholding tax (WHT)

On 10 March 2023, Cologne’s lower fiscal court published a long-awaited decision dated 16 November 2022. It ruled that a US “S corporation”, a transparent entity for US federal income tax purposes, was entitled to a 0% WHT rate under the German-US double tax treaty (DTT).

The court also ruled that the S corporation’s shareholders were required to file for the dividend WHT refund instead of the S corporation itself, and that this provision is procedural and does not govern whether a particular treaty provision applies to determine the dividend WHT rate.

The case is not only relevant for US S corporations receiving dividends from German subsidiaries, but also for US LLCs treated as partnerships or disregarded entities for US federal income tax purposes that receive dividends from their German subsidiaries. Asset managers should also consider the potential challenge of DTT relief via other intermediate foreign vehicles considered opaque for German tax purposes.

It is expected that the tax authorities will appeal the lower tax court’s decision and that the federal tax court will ultimately rule on the case.

Read more here.

Channel Islands: tax compliance changes for 2022 assessment year

The key tax compliance changes for Guernsey or Jersey resident partnerships for the 2022 assessment year are summarized below.

Jersey

On 16 December 2022, the Jersey 2023 Budget (Finance Law 202) was adopted, to which Revenue Jersey published draft guidance for partnerships.

The Finance Law imposes various changes to partnership tax filings in Jersey. In particular, for the 2022 assessment year onwards, all “relevant” partnerships will need to file an annual tax return (a “combined notification”) by 30 November following the assessment year. This will include income tax and economic substance information.

Read more here.

Guernsey

Similar changes apply to Guernsey regarding the 2022 assessment year, especially:

• Economic substance rules were previously extended to include Guernsey partnerships, which are now required to file a tax return and accounts for the first time in Guernsey.
• Any partnerships required to file that are not already registered with the Guernsey Revenue Service must do so by 14 July 2023. Failure to register will result in penalties.

Read more here.