The Compliance Layer Most Funds Discover Too Late
Many first-time fund managers structure their PPM, tax positioning, and FEMA compliance carefully — and then discover FATCA/CRS obligations only after admitting their first foreign investor, treating it as an afterthought rather than a core part of investor onboarding. That's a mistake this guide is meant to prevent.
FATCA: The US-Specific Framework
The Foreign Account Tax Compliance Act requires foreign financial institutions — a category that includes many investment funds, including AIFs — to identify and report US-connected account holders. India's intergovernmental agreement with the US implements this reporting obligation through domestic Indian law, meaning it's not optional or US-jurisdiction-only in its practical application to an Indian fund.
CRS: The Broader Multilateral Framework
The Common Reporting Standard extends this logic globally — rather than focusing specifically on US persons, CRS requires identifying and reporting investors tax-resident in any of the many participating jurisdictions worldwide. An Indian AIF with investors from the UK, Singapore, UAE, or dozens of other CRS-participating jurisdictions needs to screen for and report on all of them, not just US connections.
Step 1: Determine Your Fund's Classification
The first question is whether your specific AIF structure is classified as a "Reporting Financial Institution" under the applicable rules. Many investment funds are classified this way given their nature as collective investment vehicles, but this should be confirmed for your specific fund structure rather than assumed.
Step 2: Build Due Diligence Into Onboarding, Not After
Every investor — not just obviously foreign ones — should complete FATCA/CRS self-certification as part of mandatory subscription documentation. This determines tax residency status (and specifically US person status for FATCA purposes) at the point of entry, rather than requiring a retroactive scramble to collect this information later.
Step 3: Watch for Investors Who Don't Fit the Obvious Category
FATCA/CRS reportability isn't limited to obviously "foreign" investors. A resident Indian investor who also holds US citizenship, or tax residency in another reportable jurisdiction, falls within scope too — screening purely by nationality or physical residence misses this category entirely.
Step 4: Report Annually Through the Prescribed Mechanism
Reporting flows to Indian tax authorities, who in turn exchange the information with relevant foreign tax authorities under the applicable intergovernmental agreements. This is an annual obligation with specific prescribed formats and timelines that should be built into your fund's standing compliance calendar.
Step 5: Refresh, Don't "Set and Forget"
Investor circumstances change — a change in tax residency, citizenship, or other connecting factors can affect previously self-certified status. Reporting Financial Institutions are generally expected to maintain processes to identify and capture such changes, not treat FATCA/CRS due diligence as a one-time onboarding exercise.
What Happens If You Get This Wrong
Non-compliance can attract penalties under applicable Indian tax provisions implementing FATCA/CRS, on top of real reputational and relationship damage with foreign investors and their own home tax authorities — consequences that compound the longer a compliance gap goes unaddressed.
Building FATCA/CRS Compliance Into Fund Operations From Day One
We help fund managers integrate FATCA/CRS due diligence directly into subscription documentation and build annual reporting into standing compliance processes, rather than treating it as a bolt-on exercise.
This article is for general informational purposes and does not constitute tax advice. Please consult us for guidance on your fund's specific FATCA/CRS classification and reporting obligations.