Why US Persons should consider investing in a PMS, instead of a MF or AIF (due to PFIC taxation)?

Taxation of global investments for US Persons can be complicated, especially in the case of pooled investment vehicles (such as Mutual Funds or Alternative Investment Funds – AIF’s). In this blog post, we share the US Tax Complications related to pooled Indian investment options and why we believe that US persons should consider investing via a non-pooled investment option (such as PMS – Portfolio Management Services instead). 

Indian MF & AIF Investments likely to be considered investments in PFIC's

Unit-based pooled investment vehicles (such as an Indian Mutual Fund or Alternative Investment Fund), are likely to be considered investments in PFIC’s (Passive Foreign Investment Company) from a US taxation perspective. 


PMS Investments will not qualify as PFIC

PMS (Portfolio Management Services) in India are NOT a pooled investment vehicle, since investments in equity/debt securities held in a PMS are held directly in the investors name and the PMS essentially acts as a Power of Attorney to execute trades on behalf of the investor. 

Since an investment in a PMS is not an investment in a pooled investment vehicle, it would not be considered as a PFIC from a US Taxation perspective (Disclaimer: Please do consult with your US Tax advisors for up-to-date tax advice and on the tax treatments that investments in PMS’s will be subject to). 

Since a PMS investment will be considered similar to an investor having directly purchased the securities in their own demat account, the taxation of gains from these investments will be subject to the form of income (interest, dividend or capital gains). Most of these are likely to be taxed at lower tax-rates than the highest marginal tax-rate applicable to investments in PFIC’s. 

Our Recommendation: US Persons should consider PMS's over MF's or AIF's for their Indian Equity Investments

Given the substantial tax-complexities arising out of investments in PFIC’s (such as Indian Mutual Funds or Indian AIF’s), we recommend that US persons consider investing in Indian equities via the PMS route instead. 

We anyway typically prefer PMS investments over MF investments, on the back of the longer-term outperformance that we have witnessed in the case of the more differentiated PMS strategies. 

Important Disclaimer

IME Capital is not a tax-consultant or a tax-advisor, and specifically is not an expert with regards to US taxation. This blog post has been prepared on the basis of our analysis of various US Tax codes & analysis that we have studied, and may not be up-to-date, factually correct or reflect some of the finer nuances of the applicability of US tax codes on overseas investments by US persons. Please consult your US tax-advisors before making any investments based on the advice of this post.