Indian tax authorities are investigating wealthy individuals ( HNIs ) who invested in Special Purpose Acquisition Companies ( SPACs ), also known as “blank cheque” firms. Sources say at least four individuals have received notices in the past ten days.
SPACs raise capital through an initial public offering ( IPO ) with the intent to acquire an unidentified operating company. This allows the target company to go public quickly. SPACs became popular in 2019-2020, attracting Indian investors.
The issue is that many investors failed to disclose these offshore investments in their tax returns. There was confusion about using the Liberalised Remittance Scheme ( LRS ) for SPACs, which often lack a real business at the time of investment. This lack of clarity may have led to non-disclosure.
Bermuda, a popular jurisdiction for SPACs, now shares information with Indian tax authorities. Effective from 1 April 2020, tax is withheld at the rate of 20% (plus applicable surcharge and cess) on the gross amount declared, distributed, or paid to non-resident recipients by domestic companies in Bermuda.
The Liberalised Remittance Scheme, managed by the Reserve Bank of India ( RBI ), allows individuals to send up to $250,000 abroad for various purposes. Bermuda participates in automatic information sharing with other countries.
While LRS rules were tightened in August 2022 to explicitly restrict investment in unlisted entities, tax experts say it is always risky. Investments under the overseas direct investment route require the foreign entity to have a real business.
While companies can invest through special purpose vehicles, individual investors cannot.
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