HNI Investors in Offshore ‘Blank Cheque’ Cos Receive I-T Notices

Well-heeled Indians betting on ‘blank cheque’ firms -the Wall Street term for special purpose acquisition companies or SPACs-have started receiving notices from the tax department.

(I-T) department has served notices to at least four people in the last 10 days, sources told ET. SPACs are formed solely to raise capital by inviting investors in a pre-listing offering with the aim to acquire a stake in an existing, primarily unlisted, opera ting company. Later, the target company can merge with the

publicly traded SPAC and become a listed entity on large bourse like the New York Stock Exchange. SPACS, which became popular in 2019-20, caught the attention of several Indian HNIs searching for new investment avenues.

LRS Rules offer More Clarity

 “But many Indian resident investors who bought SPAC units or shares had not reported these off shore investments in the FA (foreign assets) schedule of the I-T return. This is a violation. Probably, they chose not to disclose because it was unclear whether the Liberalised Remittance Scheme (LRS) can be used to buy stake in an entity that at the point of in- vestment did not have any bona fide business… SPACs acquire a business or get merged only after raising money and getting listed. Now the department has the data with territories like Bermuda sharing details,” said Rajesh Shah, partner, CA firm Jayanti- lal Thakkar and Company.

LRS, monitored by the Reserve Bank of India (RBI), permits a resident individual to remit up to $250,000 a year to open overseas bank accounts, buy securities and immovable properties among other things. Bermuda is a signatory to the common reporting standard a global framework for automatic sharing of information between countries.

Tax havens such as Bermuda and Cayman often serve as centres for pooling funds by unregulated or loosely regulated vehicles like SPAC.

Since August 2022 when new dos and don’ts were added to the LRS regulations, there has been an ex- plicit restriction on investment in unlisted entities like SPACs. However, many practitioners of tax and foreign exchange laws believe investment in SPACs thro- ugh LRS was best avoidable even before the regulations were tightened.

Moin Ladha, senior partner at law firm Khaitan & Co, said, “The key condition for investments under the overseas direct investment route is to ensure that the entity abroad is engaged in a bona fide business. While corporate entities are allowed to invest through a special purpose vehicle such an option is not available to individual resident investors. This has been the position even before August 2022.

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