International fund-of-funds structures present unique challenges for foreign tax credit (FTC) compliance under the Direct Tax Code (DTC) 2025. When a fund-of-funds invests in underlying funds that pay foreign taxes, the question arises: can the foreign tax credit pass through to the ultimate investors? This guide analyses the FTC pass-through rules and their application to international fund-of-funds structures.
The Foreign Tax Credit Framework
Rule 76(1) — Eligibility
Rule 76(1) provides that "An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the tax year in which the income corresponding to such tax has been offered to tax or assessed to tax in India."
Rule 76(2) — Proportionate Credit
"In a case, where income on which foreign tax has been paid or deducted, is offered to tax in more than one tax year, credit of foreign tax shall be allowed across those tax years in the same proportion in which the income is offered to tax or assessed to tax in India."
Rule 76(7) — Credit Calculation
The credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country, and shall be given effect to in the following manner:
- The credit shall be the lower of the tax payable under the DTC on such income and the foreign tax paid on such income
- Where the foreign tax paid exceeds the amount of tax payable in accordance with the provisions of the agreement, such excess shall be ignored
Application to Fund-of-Funds Structures
What is a Fund-of-Funds?
A fund-of-funds is an investment vehicle that invests in other funds rather than directly in securities or assets. In an international context, a fund-of-funds may invest in:
- Offshore funds investing in Indian securities
- Indian funds investing in foreign securities
- Funds in multiple jurisdictions
Tax Characteristics
- Category I and II AIFs: Pass-through taxation — income is taxed in the hands of investors
- Category III AIFs: Taxed at the fund level
- Mutual Funds: Taxed at the fund level (unless pass-through benefits apply)
FTC Pass-Through
For pass-through funds (Category I and II AIFs), the foreign tax credit may pass through to the investors if:
- The foreign tax was paid on income that is passed through to the investors
- The investors are residents of India
- The income is offered to tax in India by the investors
- The documentation requirements are satisfied
Pass-Through Mechanism
Step 1: Fund Pays Foreign Tax
The underlying fund pays foreign tax on income earned in a foreign jurisdiction.
Step 2: Income Passes Through
The income (net of foreign tax) passes through to the fund-of-funds (or directly to investors).
Step 3: Fund-of-Funds Passes Through
The fund-of-funds passes through the income (and the foreign tax) to its investors.
Step 4: Investors Claim FTC
The investors claim the foreign tax credit in their Indian tax returns, subject to:
- The investors being residents of India
- The income being offered to tax in India
- The documentation requirements being satisfied
Documentation Requirements
Rule 76(10) — Documents
Credit of any foreign tax shall be allowed on furnishing:
- Form No. 44: A statement of income from the country outside India offered for tax for the tax year and of foreign tax deducted or paid on such income
- Certificate or Statement: Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee
Key Documentation for Fund-of-Funds Investors
- Details of the foreign tax paid by the underlying funds
- Details of the income passed through
- Certificates from the fund-of-funds and underlying funds
- Proof of tax payment
Rule 76(16) — Verification by Accountant
Form No. 44 shall be verified by an accountant defined in section 515(3)(b):
- Where the assessee is a company
- In all other cases, where the amount of foreign tax paid outside India for a tax year equals or exceeds ₹1,00,000
Practical Compliance
1. Identify Foreign Taxes Paid
- Identify foreign taxes paid by underlying funds
- Determine the amount of foreign tax attributable to each investor
2. Pass Through Information
- The fund-of-funds must pass through information to investors
- Provide details of foreign taxes paid
- Provide details of income passed through
3. Claim FTC in Investor Returns
- Investors must claim FTC in their Indian tax returns
- Furnish Form No. 44 and supporting documents
- Ensure timely filing
4. Maintain Records
- Maintain records of foreign taxes paid
- Maintain records of income passed through
- Retain documents for the prescribed period
Consequences of Non-Compliance
Disallowance of Credit
If the documentation is not provided or the conditions are not fulfilled:
- The foreign tax credit may be disallowed
- Income may be recomputed
- Interest and penalty may be levied
Penalty
Non-compliance may result in penalty under Section 439 for under-reporting of income.
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on foreign tax credit pass-through for international fund-of-funds structures. Our international tax experts help fund managers and investors understand the FTC framework, complete Form No. 44, and navigate the regulatory framework. We assist in documentation preparation, return filing, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on foreign tax credit or any other international tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex foreign tax credit pass-through framework for international fund-of-funds structures requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive international tax advisory services, including:
- FTC Assessment: Evaluation of foreign tax credit eligibility
- Documentation: Assistance with Form No. 44 and supporting documents
- Return Filing: Assistance with claiming FTC in returns
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your foreign tax credit matters.