India – Taxation Reforms Under Finance Bill 2016 For REITs And InvTs.

7 March, 2016

 

The Finance Act, 2015 also provided exemption to Sponsors from minimum alternate tax (MAT) in respect to gains arising on transfer of a capital asset, being share of a special purpose vehicle to a Business Trust in exchange of units allotted by that Business Trust.

 

However, one of the areas which required clarity is regarding applicability of dividend distribution tax (DDT) on the distribution of dividends by SPVs.

 

BUDGET 2016

 

The Budget 2016 was presented by the Union Finance Minister on February 29, 2016 wherein the Finance Bill, 2016 ("Finance Bill") was tabled in the Parliament and inter-alia certain changes were proposed in the taxation regime applicable to InvITs and REITs.

 

1. Section 115 – O of the Act was amended to include a new subsection – Sub-section (7) to Section 115 – O of the Act.

 

The recent Finance Bill inter-alia, enumerates the following further much needed exemptions in relation to Business Trusts:

 

1. The Finance Bill amended the relevant provisions1 of the Income Tax Act, 1961 (the "Act") to provide that no tax shall be chargeable in respect of any dividend declared, distributed or paid by ‘specified domestic company’ by way of dividends (whether interim or otherwise) to the Business Trusts out of its current income on or after the specified date. However, this shall only apply in respect of any dividends declared, distributed or paid by such ‘specified domestic company’ (whether interim or otherwise) out of its accumulated profits and current profits after the specified date. ‘Specified domestic companies’ have been defined to mean domestic companies in which a Business Trust holds the whole of nominal value of the equity share capital of such company (cases where some portion of the equity share capital are required to be mandatorily held by any other person 

 

INTRODUCTION

 

BACKGROUND

 

As per the existing taxation regime applicable to these InvITs and REITs (collectively, the "Business Trusts"), the following tax incentives inter-alia are already provided to Business Trusts:

 

1. Capital gains in the hands of the Sponsor can be deferred when the Sponsor exchanges the shares of the special purpose vehicles (SPVs), which holds the assets, with the units of the Business Trust. Such gains by Sponsor will only be taxed at the time of any actual sale of units by Sponsor at the later stage.

 

2. Unit holders were exempt from long term capital gains in relation to the sale of units on recognised stock exchange subject to the payment of securities transaction tax on sale of such units and the short term capital gains will be taxed @15% in addition to applicable surcharge/ cess. Interest income is exempt for a Business Trust, but is taxable in the hands of unit holders.

in accordance with laws, or direction of the Government have been exempted from this). Specified date is the date of acquisition by the Business Trust of such holding as set out hereinabove.

 

A snapshot of the key exemptions provided in this Finance Bill is set out below:

 

(a)  exemption from levy of DDT in respect of distributions made by SPV to the Business Trust;

(b)  such dividend received by the business trust and its investor shall not be taxable in the hands of trust or investors;

(c)  the exemption from levy of DDT would only be in the cases where the Business Trust either holds 100% of the share capital of the SPV or holds all of the share capital other than that which is required to be held by any other entity as part of any direction of any Government or specific requirement of any law to this effect or which is held by Government or Government bodies; and
(d) the exemption from the levy of DDT would only be in respect of dividends paid out of current income after the date when the Business Trust acquires the shareholding referred in (c) above in the SPV. The dividends paid out of accumulated and current profits upto this date shall be liable for levy of DDT as and when any dividend out of these profits is distributed by the company either to the Business Trust or any other shareholders.

 

While a ‘special purpose vehicle’ is defined under relevant SEBI Regulations3 to inter-alia mean an company or LLP in which the REIT or InvIT holds or proposes to hold controlling interest and not less than fifty percent (50%) of the equity share capital or interest, however, to claim any exemption under the Finance Bill for DDT has been provided only to SPVs in which the Business Trust holds the entire nominal value of equity share capital. This may restrict the exemption granted to only those SPVs where the entire shareholding is held by the Business Trust as opposed to SPVs as per the definition in the aforesaid relevant SEBI Regulations.

 

Clauses 23FC and 23FD of Section 10 of the Act; Section 115UA of the Act.

Regulation 2(zy) of the SEBI (InvIT) Regulations, 2014 and Regulation 2(zs) of the SEBI (REIT) Regulations, 2014.