REIT ASIAPAC
E D U C AT I O N
What is the typical structure of REITs in
India, such as are they internally or externally
managed, and what are the tax requirements?
also provide for a strong governance and reporting structure.
One of the hallmarks of a good REIT is having a strong “sponsor”
company that can continue to feed the REIT with a pipeline of
cashflow-generating properties in the years to come.
In India, since real estate assets are generally held in SPVs
(Special Purpose Vehicles), the REIT structure would be the trust
holding the SPV shares. Interest distributed by the SPVs to the
REITs and the REITs to investors is subject to 5% withholding tax
in the hands of foreign investors. Dividend is exempt from DDT
(dividend distribution tax). Current REIT regulations in India
provide for external management of REITs. REIT regulations
Indian REITs are also mandated to distribute not less than 90%
of its income; at least 80% of the value of REIT assets shall be
in completed and revenue generating properties. The threshold
is lower at 75% for Singapore-REITs (S-REITs), while a number
of S-REITs also voluntarily commit to distributing 100% of its
income.
“It will be more straightforward to structure an India REIT listing onshore
rather than offshore, as there is an additional layer of regulations to
negotiate for holding property in a foreign jurisdiction for tax efficiency. ”
What taxes do local and foreign investors into
Indian REITs need to be mindful of?
C
Income received by investors from REITs could be in the form of interest, dividends,
or gains on sale of REIT units. Interest and dividend income received from SPVs
by the REITs would be pass through, that is, such income would not be taxable in
the hands of REITs. The taxes on the different streams of income for domestic and
foreign investors are discussed below:
A
INTEREST INCOME
Distribution of interest by
REIT to its investors should be
subject to withholding tax at the
rate of 5% (plus surcharge and
cess) for foreign investors and
at the rate of 10% for domestic
investors. While there is no
further taxation of such interest
income for foreign investors,
domestic investors should be
required to pay additional tax on
such interest income at the tax
rate applicable to them. Credit
for such taxes withheld should be
available for both domestic and
foreign investors.
B
DIVIDEND INCOME
Dividend paid by SPV/ Holding
Company (in a two-tier
structure) is not subject to DDT
when paid to a REIT. However,
dividend paid by SPV to Holding
Company should be subject to
DDT at the rate of 20.56% on the
dividend distributed. Further,
there should be no DDT on
distribution of dividends by a
REIT to its investors.
Dividend received by investors
from a REIT should be exempt on
pass through basis.
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CAPITAL GAINS
1. There should be no income-
tax implications on swap of
shares in SPV for units in the
REIT. At the time of eventual
sale of such REIT units,
period of holding and cost
of acquisition of shares in
SPV should be available for
computing capital gains on
sale of the REIT units
2. Gains arising on sale of REIT
units should be liable to tax
as under:
• Long-term capital gains
exceeding INR 100,000
(US$1,431) on sale of
units held for more than
36 months – 10% (subject
to payment of securities
transaction tax)
• Short-term capital gains
on sale of units held for
up to 36 months – 15%
(subject to payment of
securities transaction tax)
Mumbai skyline
The route for a foreign investor to invest into
India isn’t so straightforward. For example,
I can trade most ASEAN markets and Hong
Kong, Japan, Australia, China, and the U.S.
through a general brokerage in Singapore,
but not India. Are you able to share the
most straightforward method for a foreign
investor to trade India REITs and InvITs?
there are currency risks since income is generated in India and
distributed by a Trust in that country’s currency. Indian listing
also gives an opportunity for local retail investors to participate.
Being an emerging market, office real estate in India has witnessed
growth considerably higher than the mature / developed REIT
markets. Unlike the other developed REIT markets including
Singapore, REIT returns in India have a significant contribution
from growth. Internationally, REIT’s distribution yields have been
100-200 basis points over the treasury yields with little growth.
In India, however, Total Shareholder Return shall be a healthy
combination of distribution yield and growth. Also, under-renting
of many assets provides these portfolios with higher growth
potential. Hence, on a Total Return Basis, Indian REITs offer a
robust return equal to or higher than the global REIT issuances.
Further, there are no India-focused REITs in Singapore as all are
structured as business trusts: Religare Health Trust (RHT) and
Ascendas India Trust. Although most business trusts listed here
have opted to voluntarily introduce thresholds, business trusts
are not subjected to any limit on development activities.
All Foreign Portfolio Investors (FPIs) need to be registered and
traded through registered brokers in India.
Aside from India, there have been offshore listings
of Indian assets such as Singapore’s Ascendas
India Trust. How do you view the relative pros
and cons of a listing in India and offshore listing -
including cost of capital, tax structuring, etcetera?
It will be more straightforward to structure an India REIT listing
onshore rather than offshore, as there is an additional layer
of regulations to negotiate for holding property in a foreign
jurisdiction for tax efficiency. For example, tax is paid in India
prior to repatriation to Singapore for distribution. Further,
On governance also, REIT regulations in India provide for a
strong governance framework on lines similar to International
REIT regulations. REIT regulations in India mirror Singapore REIT
Regulations.
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