There has been a change in the pecking order among regions that foreign portfolio investors (FPIs) invest from into India.

Luxembourg has dislodged Mauritius to become the region with the third-largest assets under custody. Its AUC grew 30 per cent last year to ₹4.85 lakh crore, with its equity assets now second only to the US.

Investments from Mauritius dipped nine per cent to ₹3.9 trillion during the year amid greater regulatory oversight on the island nation. The tax treaty between India and Mauritius was renegotiated a few years back post which capital gains on sale of shares was made fully taxable after April 1, 2019.

Since 2020, Luxembourg’s prominence has increased following virtual meetings between European and Indian leaders, resulting in three financial agreements to bolster trade relations, according to experts. Out of more than 3,000 FPI accounts from Europe (excluding the UK), approximately 1,400 originate from Luxembourg.

“With the evolving regulations for foreign investments in India, Luxembourg stands on a stronger footing as it is better-regulated compared to tax havens,” said Manoj Purohit, Partner & Leader, Financial Services Tax, BDO India.

According to Neha Malviya Kulkarni, Chief Growth Officer, SuperNAV, an international fund set-up advisory, Luxembourg has long been the top choice for European investors, hosting some of the world’s largest FPIs. The recent surge in AUM, however, can be linked to investors seeking new fund locations beyond the traditional ones that have come under a cloud given the greater scrutiny of tax-havens, she said.

“Luxembourg is well regarded for its capabilities in setting up market-centric structures, tax incentives and expertise. The Indo-Luxembourg interactions since 2020 have only increased, including the engagement with GIFT City,” said Viraj Kulkarni, founder and CEO, Pivot Management Consultancy (PMC).

Another notable gainer last year was France, which entered the top ten club after more than a year. The country’s AUC has grown over 74 per cent to ₹1.88 lakh crore.

“Changes in the geopolitical environment with events like Brexit and beneficial tax treatment on investments, especially for those investing under the FPI route, has been instrumental for the growth of such portfolio investors,” said Purohit.

According to the Double Taxation Avoidance Agreement (DTAA) between India and France, gains for the alienation of shares of a company forming part of a participation of at least ten per cent in a company which is a resident of India will be taxed in India and vice versa.

“For holdings less than ten per cent, capital gains might not occur in India upon such transfers. Investors may want to benefit from these favourable provisions in the DTAA,” said SuperNAV’s Kulkarni.

Ireland and Norway have both moved up one position, now ranking fifth and seventh, respectively, among the jurisdictions.

Ireland is popular because of its tax efficiencies and global reach. Irish’s regulated funds are exempt from Irish tax on income and gains derived from their investments.

Canada slipped one place even as its AUC grew 19 per cent year-on-year. It is unclear if the diplomatic row between India and Canada has, in any way, impacted investments.

“We see more inflows coming from France, Luxembourg and Cyprus going forward,” said PMC’s Kulkarni.