Corpus Distribution from Offshore Discretionary Trusts Taxable

 Ahmedabad Tribunal Special Bench has ruled that corpus distributed on dissolution of an offshore discretionary trust to resident Indian beneficiaries constitutes taxable income under the gift tax provisions.

The Taxpayers were resident individuals and sole surviving beneficiaries of an offshore discretionary trust settled by a non-resident settlor and managed by non-resident trustees. On dissolution, the trustees distributed the accumulated corpus equally between the two Taxpayers. Notably, the trust income had never been distributed to the beneficiaries since its inception and undistributed income was instead added to the capital fund of the trust pursuant to its deed. The Taxpayers had no prior knowledge of the trust and no relationship with the settlor or trustees. The Indian tax authorities treated the receipt as taxable under gift tax provisions.

The Tribunal held the following, thereby confirming that the corpus distribution from an offshore trust is taxable under gift tax provisions:

·       Beneficiaries of a discretionary trust have no legal right to trust assets, only a hope that discretion will be exercised in their favour. Accordingly, amounts received on dissolution are not in consideration of any pre-existing right and are therefore received 'without consideration'

·       Since neither the settlor nor the trustees qualified as 'relatives' of the taxpayer under income-tax provisions, no exemption was available

·       The distinction between capital and revenue receipts is irrelevant for the purposes of gift tax provisions, as it taxes all sums of money received without consideration, regardless of their character.

The Tribunal also distinguished this from domestic trusts (where income is taxed at maximum marginal rate in trustees' hands), noting that since the offshore trust was never liable to tax in India, the distribution to resident beneficiaries represents the first and only Indian taxable event.

This ruling has far-reaching implications for resident Indian individuals who are, or have been, beneficiaries of offshore discretionary trusts. In the absence of a qualifying “relative” relationship with the settlor, the statutory exemption would not be available. Accordingly, it is imperative for resident beneficiaries of foreign trusts to carefully evaluate their tax positions and assess potential exposure in light of the above ruling.