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Mumbai: France is fast emerging as the gateway for foreign investors to route their trades — mainly equity derivative – into the country following the renegotiation of tax treaties with Mauritius almost three years ago.
Almost a quarter of the outstanding positions in India’s futures and options contracts and a growing chunk of the bets on India through Offshore Derivative Instruments like participatory notes (p-notes) and swaps are being executed through French banks or subsidiaries of some global firms based in Paris, said five people familiar with the matter.
Under the tax treaty between India and France, the right to tax capital gains on investments here lies with Paris.
Till April 1, 2017, Mauritius was the most preferred route for foreigners to bring money into India because of zero taxes on investments done through the island nation.
But, after the government changed the tax agreements on share transactions, Mauritius is losing its relevance among offshore funds and investors.
Though equity derivative trades in India done through Mauritius and Singapore still enjoy the tax benefits, many funds and trading desks of big banks are increasingly doing such transactions via France to ensure that all the investments are carried out from a single jurisdiction.
They worry that share and derivatives trades done through two separate taxfriendly countries could invoke General Anti-Avoidance Rules (GAAR) by the Indian tax authorities.
GAAR, implemented in 2017, requires foreign investors to prove that they are in a jurisdiction not just to take advantage of the tax treaty.
According to unofficial estimates, trades done through Société Générale, BNP Paribas and the French units of Morgan Stanley and Bank of America ML make up for 20-25 per cent of the open interest or outstanding positions in the country’s derivatives market.
Some of these banks, which had offices in Mauritius and Singapore for benefitting from the tax treaty, have moved them to France, said one of the people quoted above.
Email queries to Société Générale, BNP Paribas, Morgan Stanley and BofA ML went unanswered till the time of going to print.
Under GAAR, an arrangement by an entity is considered genuine only if it has “material substance” in that particular jurisdiction.
Having an office with sufficient staff and business operations are some of the ways through which tax men determine if a business arrangement is genuine or not.
To satisfy the conditions under GAAR, several funds have shifted even their derivative books to France.
“To build more substance in France as a safeguard against GAAR provisions, some of them even moved their proprietary trading to France,” said a leading tax consultant, who advises at least two of these banks.
“F-O volumes from France are showing an increase." Before 2017, majority of the derivative volumes came through Mauritius.
Tax consultants said participatory notes (p-notes) — offshore derivative instruments issued by brokers to foreign investors not registered in the country, which were earlier issued from Mauritius, are now being dealt in France, said a lawyer who represents leading FPIs.
This is mainly for p-notes bought against a derivative trade in India.
As per regulations, pnotes against Indian derivatives contracts can only be issued for hedging, which means clients need to own the shares if they wish to buy the instrument.
“Since shares purchased only through France are eligible for tax treaties, it does not make sense to do p-notes against derivatives in a different jurisdiction,” said a senior official with a foreign bank.
Lawyers said trading volumes from France will increase after Brexit later in January as European funds headquartered in London are looking for a new base.
Post Brexit, UK-based funds will find it difficult to do pooling money from clients across the continent.
European laws allow passporting of funds, which means a portfolio manager based in Luxembourg can pool money from investors across Europe.
Stock Market
France turns new gateway for Indian derivatives play
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