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.
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:
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.
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.
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.
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.
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.
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.
