The US remains a popular destination for investing in various assets such as securities, real estate, ETFs etc. This is largely attributable to liquidity, stability and diversity of products in the market.

However, while investing, the international investors are not aware of the estate tax that may be levied on them. The estate tax (i.e, the inheritance tax) of USA operates differently for citizens, non-domiciled citizens and non-domiciled non-citizens. In case of a non-domiciled non-citizen, if the inheritance is of more than $60,000, the same is subject to slab wise tax which may go up to 40 per cent of the inheritance.

The above tax regime is relaxed if a person is domiciled in one of the 15 countries that USA currently has bi-lateral treaties with. India, at present, is not one of the countries in the list. The question thus arises how to legally circumvent such tax and enjoy full inheritance of investments in USA. The catch in this situation is that the estate tax is only applicable in case the investment is in a “USA situs asset”, i.e., the asset is located in USA.

Amongst other assets, assets such as cash in deposit accounts, treasury bonds and corporate bonds are exempted from the purview of USA situs. However, assets such as US Stocks and US pooled investment vehicles are considered to be part of USA situs assets. Just because the US stocks are held in account outside US doesn’t make them outside of USA and thus, they will still be subjected to USA estate tax.

Pooled assets

To still continue to invest in US stocks and other US traded securities, without being subjected to US estate tax one solution is to invest in non-US pooled vehicle such as mutual funds or similar pooled vehicle which would then invest in US Stocks. This way it is not the individual who holds the US Stocks and it is the share in mutual funds/pooled vehicle that is inherited. The offshore fund/pooled investment vehicle would not be taxed for inheritance.

The only drawback in this is that one cannot then hold a particular US stock or a particular type of investment that one wishes to invest in, as the underlying asset changes, unless such pooled investment vehicle is a single family office fund.

However, for those who do not wish to hold a particular type of stock but wish to invest in a US focussed pooled vehicle, this seems like a way out of the estate tax. It is essentially ring fencing your assets from taxation by structuring the investment through corporate or trust based non-US pooled investment vehicle.

GIFT City

India’s maiden International Financial Services Centre (“IFSC”) at Gujarat International Finance Tec-City (“GIFT City”) i.e, GIFT-IFSC allows multiple pooled investment structures (commonly known as funds). While typically these structures provide various regulatory and tax benefits which could attract high net-worth individuals (“HNIs”) to use these structures to invest in USA based assets, one of the roadblock is often the way these structures are taxed in contrast to the mutual funds.

While mutual funds may be taxed at investor level (i.e., investor pays tax on the income received), the private fund structures are often taxed at the fund level (i.e., fund pays tax on income and such income, when distributed, is then not subject to tax in the hands of the investor). Besides, taxing at the fund level reduces the asset value, making it less lucrative for long term investors.

However, this is less of an issue in GIFT IFSC at the moment given the 10 year tax holiday availed by funds in GIFT IFSC. Thus, resulting in a win-win situation for investors and funds in GIFT IFSC.

Mehta and Savani are Partners and Motwani is Associate with Cyril Amarchand Mangaldas.

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