For foreign nationals looking to invest in the Indian real estate market, setting up a Special Purpose Vehicle (SPV) is a logical solution. In this article, we'll delve into the SPV route and explain the key concepts and regulations involved, including the Foreign Exchange Management Act (FEMA) and Foreign Direct Investment (FDI) policy.
Understanding FEMA and FDI
FEMA is a law that regulates foreign exchange transactions in India. It governs cross-border transactions, including investments, borrowings, and repatriation of funds.
The FDI policy, on the other hand, sets out the rules and conditions for foreign investment in various sectors of the Indian economy, including real estate.
Setting up an SPV
An SPV is a legal entity created for a specific purpose, such as investing in real estate. Foreign investors can set up an Indian company (SPV) to invest in real estate, subject to certain conditions and regulations.
The SPV must be registered in India and comply with all applicable laws, including FEMA and the FDI policy.
FDI in Real Estate
India allows 100% FDI in the construction and development sector, which includes housing, built-up infrastructure, and real estate broking services. The minimum capitalization requirement for wholly-owned subsidiaries (WOS) is $5 million, while for joint ventures (JV) with Indian partners, it is $10 million.
These funds must be brought into India within six months of the commencement of the project.
SPV for Small Property Ownership
Foreign investors can set up an SPV to own a small property in India, such as a flat or a house with a carpet area of not more than 60 square meters. In such cases, the minimum capitalization requirements may not apply, as it falls under the affordable housing category.
However, the SPV must still comply with other conditions and regulations, such as FEMA and state-specific laws.
Conditions for SPV
Apart from the minimum capitalization requirements, the SPV must comply with other conditions, such as the lock-in period of three years for repatriation of funds, restrictions on purchasing agricultural land, and compliance with state-specific laws and regulations.
Taxation and Compliance
SPVs owned by foreign investors are subject to Indian taxation laws, including corporate income tax, minimum alternate tax (MAT), and withholding taxes on repatriation of profits.
The SPV must also comply with reporting requirements, such as filing annual reports and maintaining proper books of accounts.
Advantages of the SPV Route
Setting up an SPV allows foreign nationals to invest in Indian real estate, even if they cannot directly own property. It provides a legal structure to hold the investment and enables the repatriation of funds, subject to certain conditions.
Moreover, an SPV can be used to pool investments from multiple foreign investors, making it easier to meet the minimum capitalization requirements.
Conclusion
Setting up an SPV is a viable solution for foreign nationals to invest in the Indian real estate market, including small properties with a carpet area of not more than 60 square meters. However, it's essential to understand the regulations governed by FEMA and the FDI policy, as well as the conditions and compliance requirements associated with SPVs.
Seeking professional legal and financial advice is crucial to navigate the complexities and make an informed decision based on your specific investment goals.
