Offshore Discretionary Trusts: SC Clarifies Taxation Rules

The Supreme Court of India in a recent ruling (Commissioner of Wealth Tax, Rajkot v. Estate of Late HMM Vikramsinhji of Gondal (Civil Appeal No. 2312 of 2007) has held that the Indian resident beneficiaries of an offshore discretionary trust shall not be subject to tax on the trust’s income until the trustees or ‘discretion exercisers’ exercise the discretion and make a distribution of income to the beneficiaries. Discretionary trust in India signifies a trust wherein the beneficiaries’ shares in the income/assets of the trust are unknown. Discretion is given to the trustees to make income distributions to the beneficiaries in furtherance to the terms of the trust. Specific trusts on the other hand state the share of each beneficiary. This report by Khaitan & Co. analyses this important ruling on trust taxation in India.