This article is written by Roshini Bansal, pursuing Certificate course in Real Estate Laws from LawSikho. Here she discusses the tax implications of owning property abroad.

Introduction

With the present slowdown in the Indian real estate market affecting the development of projects, it is a common trend for Indian residents to invest in property overseas. The trend can be linked to the fact that there is a consensus amongst experts and laymen alike today that there is a limited scope of investing in real estate in India with the spiraling prices of the property and lack of confidence in the real estate developers, owing to the lack of transparency, absence of implantation of regulations, corruption, poor quality of construction, and delays in completion of projects. There has also been an economic slowdown in various parts of Europe, which has made real estate investment affordable. Moreover, over the years Indians find their families scattered across the globe, which has made these investments more common these days. There are a number of routes through which Indian residents can invest and purchase property abroad. Each route brings with it differing legal conditions, and also has differing tax implications. These investments need to be structured appropriately so as to ensure these legal and tax consideration. This structuring helps in mitigating with the risks associated with investments in property abroad.

With this advent in investment of properties abroad, the government policies on the matter have been steadily becoming liberalizing, permitting more Indians and Indian owned companies to transfer money abroad to purchase property. However, despite these liberalizations, there are still a number of legal implications that need to be fulfilled. It is pertinent to understand legal and tax related implications while making such real estate investments.

Procedure

The procedure to buy real estate abroad broadly depends on the region one intends to purchase property in. For instance, Singapore allows foreigners to purchase condominiums (or apartments) but not land; whereas in Dubai, apartments are sold as leasehold properties and not even NRIs are allowed to own units, let alone land; and in Thailand, the leasehold title to the land is renewable. In Australia, a person of foreign origin can purchase a new property but requires prior permission of the Foreign Investment Review Board. One can also buy vacant land as long as the construction commences within 12 (twelve) months of purchase. For each country, one needs to conduct proper due diligence both in terms of legal as well as tax implications.

Legal regulations for Purchasing property abroad

Foreign Exchange Management Act, 1999 (“FEMA”) and the Reserve Bank of India (“RBI”) notifications and directions govern the purchase of foreign property by Indian residents. According to section 6(4) of the FEMA, a person resident in India can hold, own, transfer or invest in any immovable property situated outside India if such property was acquired, held or owned by him/ her when he/ she was resident outside India or inherited from a person resident outside India. These regulations state that such a purchase has to be backed by a general/special permission from the RBI.

Immovable property can be acquired outside India:

1. Under section 6(4) of FEMA.
2. By way of an inheritance or a gift from a person as (a) referred to in sec 6(4) of FEMA; or (ii) who has acquired it before July 8, 1947 (iii) who has acquired such property in accordance with the foreign exchange provisions which were in force at the time of such acquisition.
3. Purchased with the balance amount in the Resident Foreign Currency (RFC) account of the resident.
4. As a gift from individuals as described in (b) & (c) above, provided he/she is a relative of such individual.
5. Purchased with transmittals made under the Liberalised Remittance Scheme.
6. With a relative provided there is no outflow of funds from India.
7. By an Indian company having overseas offices, or for the purpose of housing for its employees/ staff.

Purchase by legal entities ( Indian Companies/LLPs/Registered partnership.

There is no RBI permission required for an Indian company to acquire property abroad for business and staff residences, up to a certain percentage of their market turnover/net worth. There are ways of indirect purchase through which Indian entities can invest equity or set up foreign companies, who can in turn invest in real estate abroad. These sort of investments are allowed without RBI’s approval, subject to the limit of USD 1 billion per year or 400% of their net worth, whichever is lower. There are certain conditions that need to be met with while investing indirectly in such foreign entities.  The foreign company in which the Indian entity intends to invest in should be an operational entity engaged in bona fide business, and it should not be in real estate business or that of banking business. Indian entities can also make foreign real estate investment through Special Purpose Vehicles. There are also restriction associated with repatriation of funds to India within a certain number of years of disinvestment in these foreign entities for real estate purposes.

There are additional conditions regarding the method of remittance of funds abroad, the manner of disinvestment as well. For larger investment, the approval of RBI is required.

Tax Implications

Tax compliance while purchasing property overseas, is complex. Taxation related implications have a huge impact on such investments regarding real estate abroad. The sale of an Indian property to finance the purchase of such investments in foreign property can create tax implications. Furthermore, the lease, sale, or transfer of foreign property, post purchase also creates a tax liability, both in India and the foreign country where the investment is made. Such tax liability needs to be property dealt with so as to avoid double taxation and that most tax efficient way is adopted.

Under the FEMA Regulations, the limit for permissible remittance outside India by resident individual is USD 250000 per financial year per person. Since the aforesaid limit is individual basis, each member of a family can remit the said amount per financial year for the purpose of acquisition of real estate thereof.

In case of a resident individual who has invested in immoveable assets overseas, also earns a rental income from such immovable property, then such an individual will be subject to tax liabilities both in India as well as in the country where such immoveable property is situated. India has entered into a number of tax treaties with a number of countries, most of which allow imposition of taxation rights to both India, as well as the country in which such immoveable property is located.

Further, as the local tax laws require, all residents, and generally resident Indians are required as per the mandate of law to declare the details of immovable property held by them overseas during the last financial year while filing their income tax returns. This declaration requires a number of details to be disclosed which includes the country in which such investment is being made, the details and the address of the specific property being invested in, the date of acquisition of the property (date of execution and registration of the title agreement), the details of the investment itself, and the type of income derived from such property. Moreover, with the abolition of the wealth tax of 1957 from 01.04.2016 vide the Finance Act of 2015, the wealth tax implication of owning a property in India by a resident Indian who invests in property overseas individually has been done away with. Such wealth tax was charged at the rate of 1% of the specified asset based on the net worth of such an individual. With the abolition of wealth tax, an Individual can buy house properties without any wealth tax implication.

Irrespective of property type, size and location, and whether it is earning any income or not, you need to disclose the ownership and other related transaction details while filing tax returns in India. With the introduction of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it is mandatory for a resident to disclose foreign assets, failing which a penalty of as high as 10 lakh may be levied by the income tax department.

Income from property investments abroad, generally invites tax in India, as well as in the country in which the property is situated. Apart from the tax implications, it is also pertinent to consider the stamp duty as well as estate duty implications, and other prevalent property taxes and permissions under the laws of the particular country where the property is being purchased. These costs are to be evaluated, and the manner in which they have to be funded from India are important considerations.

Conclusion

It has been 25 (twenty five) years since the liberalization of the economy, and there has been an up flow of foreign investments in India and at the same time, there are more and more Indians seeking to expand their investment horizons and make real estate purchases abroad. There are numerous avenues to make such investments. RBI has been progressively making this easier, and this gives Indian residents and companies alike to diversify their investments and make property purchases overseas.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.