Thursday, 12 November 2015

CLARIFICATION ON FDI POLICY OF FACILITY SHARING ARRANGEMENTS

Introduction

The Department of Industrial Policy and Promotion (“DIPP”) has vide its circular dated September 15, 2015 (“Circular”), clarified that ‘facility sharing’ agreements between group companies through leasing/sub-leasing arrangements will not be treated as ‘real estate’ business for FDI policy subject to certain conditions mentioned therein.

‘Real Estate Business’ is one of the eight sectors in which FDI is prohibited. The term ‘real estate business’ is defined in the FDI policy as:
dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.
The term ‘dealing’ used in the definition of the ‘real estate business’ includes not only buying and selling of the real property but also includes practices of earning profit/income by leasing or sub leasing.  

Office Sharing Arrangements

As a common practice, the companies in same group share the office infrastructure including the office space and the staff with each other. The holding company, subsidiary / associate company by and large carry out their operations from same office. The said office is usually taken on lease by one group company and is used by other group companies by way of facility sharing arrangements between such group companies.
As it was not possible to enter into sub leasing arrangements amongst the group companies because of the obvious reasons that the same may not only be deemed to be in violation of FDI policy but it may also be difficult or in some cases even impossible to mark down the area being sublet, the companies had no choice but to enter into office sharing arrangements.
The Circular clarifies that such office arrangements will not be deemed to be in violation of the FDI policy subject to (a) the arrangement being at arm’s length price in accordance with the relevant provisions of the Income Tax Act; and (b) annual lease rent earned by the lessor company does not exceed 5% of its total revenue.

Implications

The Circular comes as a relief to companies which have foreign investment and have unutilised space. The Circular will help such group companies to expand their business and obtain maximum use of the office space.

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