Why Indian UHNI Founders Are Setting Up Offshore Family Offices

Lately, we have seen India emerge as the provider of the world’s third-largest ecosystem for startups. In fact, according to an Invest India report, there has been a 15X increase in the total amount of funding received by Indian startups, a 9X increase in investors in such startups, and a 7X increase in the number of startup incubators. Effectively, this translates into a significant 66% YoY growth in the number of Indian-origin unicorns. 

This unique circumstance brings to the forefront one distinct consideration for successful founders of such startups: wealth creation and conservation, coupled with requirements for legacy/succession planning. 

Two Targets With A Single Arrow: A Possibility? 

In today’s day and age, successful founders and entrepreneurs seek solutions that would enable them to augment their wealth and, at the same time, solve their concerns in relation to succession planning. While the first aspect deals with the desired structures for offshore wealth creation, the other aspect stems from concerns about ensuring a smooth transition of such wealth to the rightful legal heirs and successors.

It is here that the establishment of a family office is worthy of consideration for any Ultra High Networth Individuals (UHNIs) and families who share similar objectives and are searching for tools that provide investment control, risk-adjusted returns, a global portfolio, diversification, and offshore wealth generation. Thereafter, the UHNIs may consider setting up an appropriate structure, such as a family trust or foundation, along with or sans a will, as necessary, so that their inheritance-related concerns and objectives are adequately addressed.

HSBC has acknowledged in one of its reports that the pandemic has been a catalyst for more UHNIs to establish their family offices offshore in order to enhance and protect their wealth while combining this with solutions that enable the creation of a long-term legacy. Accordingly, a significant number of wealthy Indians (and non-Indians) are setting up family offices in jurisdictions such as Singapore and Dubai. It is an established fact that this supports their respective endeavours and de-risks their portfolio from both currency and geographical risks. 

Typically, a family office brings with it the following distinct advantages:

• Personal: It is a bespoke solution that meets the concerned UHNI’s/family’s financial objectives.
• Privacy: It enables the housing of all personal data in a single secure place while limiting access to such information to a limited number of people only.
• Prosperity: Investments can be spread across different jurisdictions globally and are expected to cater to varied needs and requirements. A family office can assist in creating a balance between wealth creation objectives and the financial needs of a family.
• Perpetuity: A family office allows for the alignment of the family wealth to specific purposes. This, in turn, facilitates the creation of a legacy across generations.
• Professionalism: Typically, a family office is managed by a team of talented investment and other professionals who focus particularly on implementing a family’s financial vision. By default, this brings about discipline and effective management of the affairs of a family office.

Of course, there are different structures that could be considered to achieve the above, and the specific objectives of a UHNI or his/her family must be studied as no one size fits all. A private limited company is an option, as is a limited liability partnership. However, depending on their stated objectives, they must procure the requisite licences, approvals, or permissions in accordance with applicable laws. 

Some Facts And Possibilities

India is estimated to have approximately 300 family offices with an average AUM of $100 Mn each. Successful promoters, public figures and entrepreneurs have already formed their family offices. 

Singapore, a popular jurisdiction for family offices, saw 700 family offices set up in 2021 alone. But why Singapore? 

• Singapore is an international financial hub with a strong regulatory and legal framework, stable pro-business policies and government, ease of doing business, and well-developed infrastructure.
• The country has an attractive tax regime where the corporate tax rate is 17% while in contrast, India levies a 30% corporate tax with a reduced tax rate of 25% for companies with a turnover of up to INR 400 Cr. 
• Singapore has a quasi-territorial tax system that allows exemptions from select foreign-sourced income like branch profits, service income, and dividends. It does not levy a capital gains tax on its tax residents.   
• The country also has double tax avoidance agreements (also known as DTAAs) with over 100 countries, including India. This enables effective tax planning, structuring, and predictability. It also provides special protections for investments made in/with countries with whom Singapore has entered into investment protection treaties. 

Igniting The Ambition

Recent trends suggest that the next generation of entrepreneurs and founders is now exposed to both private asset classes and global investment opportunities. In the past few years, family office structures have undergone significant changes in response to changes in the regulatory and tax environments. This especially holds true in today’s fast-changing business landscape, which requires improved risk management and wealth preservation systems.

Establishing a family office is, in many ways, like starting a new business. The pertinent question here would be, “Do I need a family office? If yes, then should I consider setting it up outside India?”

The answer to the first question is straightforward. If a founder/entrepreneur/UHNI resonates with the advantages mentioned earlier, they should consider setting up a family office in their chosen jurisdiction, which needs to be chosen carefully based on several factors.

This brings us to the second part of the question, why outside India? Apart from the benefits mentioned previously, the primary consideration here should be the tax residency status of the founder/entrepreneur/UHNI and their respective beneficiaries. The local laws and regulations of the target jurisdiction and the originating jurisdiction should align with the goals of the family, which may include the setting up of a family office.  

For instance, individuals with tax residency in the United Kingdom or the United States may have to deal with inheritance tax implications in the future. This may not align with the wealth preservation goals that the family has in place. However, the impact of such taxes can also be mitigated through effective tax structuring and planning. 

Other considerations include the capability and credibility of the investment managers of a family office. They should definitely be focusing on three factors, namely, returns, risk, and liquidity while strategising toward an appropriate investment structure for a family office. 

Another important consideration is if the founder wishes to relocate to another jurisdiction. Therefore, it is imperative that a clear understanding of the process for setting up a family office, its impact on current assets and wealth, examination of applicable laws and regulations, approval processes, compliance considerations, the presence of tax treaties, or any other beneficial agreements between both countries, be procured by the promoter of the family office by engaging a reputed, regulated and fully equipped investment manager. 

It is pertinent to note that the transfer of wealth from one jurisdiction to another is an integral part of setting up a family office. One needs to bear in mind that every jurisdiction has its own capital controls, compliance, and regulatory frameworks that are unique, constantly evolving, and designed to protect itself. Thus, it is critical that all these factors are assessed in detail by UHNIs/founders/entrepreneurs who intend to establish their family office, and in doing so, they must engage capable and credible advisors such as regulated investment managers and multi-family offices who can perform an in-depth analysis of such structures and situations.  

In Summary

The growth of the startup ecosystem in India has led to successful founders and entrepreneurs mulling avenues for offshore wealth creation and conservation while contemplating legacy planning. Establishing a family office is a solution that provides investment control, risk-adjusted returns, global portfolio diversification, and offshore wealth generation. 

It is a bespoke solution that is managed by a team of qualified professionals who focus particularly on implementing a family’s financial vision. Jurisdictions like Singapore are attractive to family offices due to it being an international financial hub that has a strong regulatory framework, an attractive tax regime, and double tax avoidance agreements with over 100 countries. 

Family office structures have undergone significant changes in response to changes in the regulatory and tax environments. With the fast-changing business landscape, improved risk management, and wealth preservation systems, establishing a family office is indeed a favourable route for UHNIs looking to augment their wealth while adopting appropriate private trusts or other structures for solving their predicaments in succession planning.