PART 2: The Non-personal Entity.
Shivajirao Gaekwar shares a note by Vishal Agarwal of BMR Advisors, Mumbai, about tax implications of buying property in London
London: The tax implications discussed in ‘Part 1: The Private Individual’, apply equally for residential property owned by an Indian company for investment purposes and not in the course of its business.
If a resident individual were to acquire overseas property through an overseas company (‘Overseas Holding Company’) established by the individual, the associated tax implications will be different from those summarized in the previous post.
On the basis that the Overseas Holding Company is controlled and managed outside India, it ought not to be regarded as being resident for Indian tax purposes. Rental income, if the property is let, would accrue to the Overseas Holding Company. Such income should not be liable to tax in India since it would accrue to the Overseas Holding Company and not to the resident individual. Similarly, if the property is sold by the Overseas Holding Company, any capital gain realized from the sale would also accrue to the Overseas Holding Company and should consequently not be liable to tax in India. Income distributed by the Overseas Holding Company as dividends will be taxable as ordinary income in India. If the owner of the Overseas Holding Company is an Indian company, such dividend is taxable at 15 percent (plus applicable surcharge and cess); if the owner is an individual, tax would apply at the ordinary rates applicable to the individual.
If shares in the Overseas Holding Company are sold by the resident holder, any resulting capital gains would be liable to tax in India. Shares held for more than twelve months (and not thirty-six months as is the case for property) are treated as long-term capital assets. If held for twelve months or less, they would be treated as short-term capital assets. Such gains would be liable to tax at the rates discussed earlier. Any loss resulting from the sale of shares of the Overseas Holding Company can be offset against taxable gains in the same manner as discussed earlier.
Wealth tax provisions on ownership through a company
Where the property is acquired through an Overseas Holding Company, the asset that the resident individual will hold is shares in the Overseas Holding Company. Shares are presently not chargeable to wealth tax.
Reporting obligations
An individual who owns property outside India is required to report the details of such property in his / her annual tax return.
Direct Taxes Code Bill, 2010 (‘DTC’)
The current Indian tax law is proposed to be replaced with the DTC with effective from April 1, 2013. Key areas of difference in tax analysis under the DTC are (i) the concept of “annual value” referred to above has been dropped. Instead, only actual rent received or receivable on letting out of property is charged to tax; certain prescribed tax deductions continue to be available; (ii) the concept of Controlled Foreign Corporations (‘CFC’) has been introduced bringing to tax in India profits accumulated in an overseas holding company even if not distributed; (iii) the property will be treated as long-term if held for a more than one year from the end of the year in which it was acquired; and (iii) wealth tax is also leviable on shares held in a foreign company that qualifies as a CFC.