The Department of Industrial Policy & Promotion (DIPP), Government of India, on September 15, 2015, issued a clarification wherein it has allowed leasing/ sub-leasing arrangements between the group companies by taking out such activity from the ambit of ‘real estate businesses’ under Consolidated Foreign Direct Investment Policy Circular of 2015.

Real estate is among the sectors where Foreign Direct Investment (FDI) is not permitted. Real estate business, as per Foreign Exchange Management Act, means dealing in land and immovable property with a view to earning profit or earning income there from (excluding certain activities as specified). Accordingly, leasing/sub-letting of land or immovable property was considered as real estate business and barred for the companies having FDI in them.

The Department of Industrial Policy and Promotion (DIPP) received certain references on the issue as to whether entering into Facility-sharing agreements through leasing or sub-leasing arrangements within group companies for the larger purpose of business activities will be considered as real estate business.

In this regard, the Department clarified that the Facility-sharing agreements between group companies through leasing/sub-leasing arrangements for the larger interest of business will not be treated as ‘real estate business’ within the provisions of the consolidated FDI policy circular 2015.

This permission shall be subject to the following conditions:

a. Such arrangements are at arm’s length price in accordance with Income Tax Act 1961, and

b. The annual lease rent earned by the lessor company does not exceed 5% of its total revenue.

Accordingly, companies with foreign direct investment (FDI) in them are now free to lease out surplus real estate to other companies within the group, without violating the FDI policy on real estate.

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