Reits could get respite from dividend tax

Final regulation to widen the definition of SPV to include LLPs

The Securities and Exchange Board of India (Sebi) is likely to widen the definition of a Special Purpose Vehicle to include limited liability partnerships (LLPs).

The move will make the latest investment instrument more tax efficient, since it would help save on dividend distribution tax (DDT), said market players, who’ve been pressing this request for a while.

"If Reits (Real Estate and Infrastructure Investment Trusts) are allowed to invest in LLPs holding real estate, sponsors might contemplate setting up LLPs for Reits. This would provide slightly higher returns to investors, since dividend distribution tax is not applicable to profit distributions made by LLPs,” said Bhairav Dalal, associate director, PricewaterhouseCoopers.

Though the government had approved tax pass-through status to Reits in the recent Union Budget, those in the sector felt it wasn’t of much help.  The move to allow LLPs is likely to provide partial relief.

 

“Investment in properties through LLPs would help in avoiding DDT. A tax liability of nearly 16 per cent is not applicable on LLPs. More, a number of real estate assets are held by LLPs and this would give greater flexibility to Reits in acquisition of these,” said an expert.

The representation to Sebi was that LLPs were gaining popularity as preferred vehicles to own real estate assets. Allowing Reits to hold real estate assets through LLPs would provide the required flexibility, it was argued.

The soon-to-be-issued final regulations on Reit could provide more clarity on the issue, said observers.

It is expected that the final regulations will include detailed framework on a Reit follow-on offering and on delisting of the instrument from stock exchanges. In the draft regulations on Reits issued by Sebi last financial year, the regulator hadn’t touched upon either delisting or taxation.

Sebi, however, did extensive market consultation on Reits over the past year. It had got nearly 700 comments on the regulations it had proposed.