INDIA Law and Practice Contributed by: Vivek Chandy, Archana Tewary, Kumarmanglam Vijay and Brijita Prakash, JSA
Typically, foreign investors prefer private limited com - panies, while domestic investors prefer partnerships and LLPs for smaller holdings. LLPs are also increas - ingly preferred for smaller ownership of holiday/luxu - ry rental real estate on a time-share basis or similar arrangements. Companies are generally subject to corporate income tax at 22%, 25% or 30% (subject to applicable sur - charge and cess), as may be applicable. LLPs are sub - ject to income tax at the rate of 30% (plus applicable surcharge and cess). REITs are granted limited pass-through status by a special income tax regime, due to which certain income is taxed directly in the hands of the inves - tors. Interest and dividend income received from spe - cial purpose vehicles (SPVs) as well as rental income received from immovable property held directly by the REIT are subject to tax in the hands of the investors of the REITs, subject to conditions prescribed. Any income which has not been accorded a pass-through status would be subject to tax in the hands of the REIT and be exempt in the hands of the investors. 5.3 REITs REITs can invest in land and any permanent improve - ments, leasehold or freehold, including any other assets incidental to the ownership of real estate. However, there have been a limited number of REITs since introduction of the SEBI (REIT) Regulations in 2014. REITs in India are only permitted to be publicly owned, ie, units of the REIT must be listed on stock exchanges. REITs can raise funds through an initial offer to the public and not private placements and subsequently through follow-on offers, rights issues and qualified institutional placements. REITs are man - dated to distribute at least 90% of the net distribut - able cash flows to investors on a half-yearly basis and conduct a full-fledged valuation of all REIT assets on a yearly basis through a registered valuer. The SEBI (REIT) Regulations do not prohibit investment in units by domestic or foreign investors. Investment in REIT units is exempted from the ambit of restrictions for FDI as well as foreign portfolio investment entities. The benefits of using a REIT include:
• unlocking invested capital for developers, espe - cially in the commercial space; • net worth and deposit requirements prescribed for the sponsor and managers ensure that these plat - forms have sound and stable financial health; • being regulated, these platforms provide more confidence to investors; • limitations on the number of investors and creation of SPVs applicable to private limited companies are not applicable to REITs; and • mandatory listing of units provides for exit opportu - nity for investors. Please see 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity regarding tax implications for REITs. 5.4 Minimum Capital Requirement There are no minimum capital requirements for com - panies, LLPs or partnerships. REITs are required to comply with regulations relating to asset size and minimum offer. 5.5 Applicable Governance Requirements Private limited companies need to have at least two directors on their board, while public limited compa - nies need at least three directors. Public companies also have additional compliances, such as having independent directors on their board. Companies with paid-up capital over a prescribed threshold are also required to appoint a company secretary. One-person companies can be incorporated by Indian citizens resident in India. It has been proposed that non-resident Indians should be allowed to incorporate one-person companies. LLPs and partnerships are required to have at least two designated partners. There has been increased attention to compliance with environmental, social and governance norms in India; thus, although not legally mandated, investors may require companies to undertake certain compli - ances in this regard. Directors of companies now need to pay heed to environmental issues, and some deci - sions of courts in recent years throw light on such obligations.
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