Special Purpose Vehicle

A Real Estate Investment Trust can own a building in two ways.

It can hold the property directly. Or it can hold a company that holds the property.

That company is a Special Purpose Vehicle, or SPV. The workbook describes it as a separate entity, which can be a company, floated to hold and develop real estate properties.

The trust keeps a controlling interest in the SPV. So the trust controls the asset without owning it in its own name.

That matters for tax. Money reaching the trust from an SPV is treated differently from money the trust earns any other way. An SPV is not just a legal wrapper; it changes who pays the tax.

Where the SPV sits. A sponsor, generally a real estate developer, sets up the REIT to collect money from the public and invest on their behalf in income-generating real estate. That investment is made either by the REIT directly or through a Special Purpose Vehicle in which it holds the controlling interest. An InvIT is structured very similarly for infrastructure projects.

Why it matters for tax. A REIT is a hybrid pass-through entity. Of its five income categories, only three pass through: rental income, dividend received from SPV, and interest received from SPV. So two of the three pass-through categories are defined by the SPV.

Interest from an SPV.

Dividend from an SPV, and the one twist worth memorising.

TDS under Section 194LBA on distribution by the trust:

No tax is deducted where the dividend is received from an SPV that has not opted for Section 115BAA. Where a DTAA is more beneficial, tax is deducted at the DTAA rate.

Two capital gains rules that follow the SPV shares. Where units of a business trust are allotted in consideration of a transfer of shares of an SPV:

• the period of holding of the units includes the period for which the SPV shares were held; and
• the cost of acquisition of the units is the cost of acquisition of the SPV shares.

Illustrative figures, built on the workbook's rules.

A REIT holds an office park through Bharat Office SPV Pvt Ltd, in which it has a controlling interest. In one year the REIT receives from the SPV Rs 6,00,00,000 of interest and Rs 2,00,00,000 of dividend, and distributes both to unit-holders. Mrs Nair holds 1% of the units, so she receives Rs 6,00,000 of interest and Rs 2,00,000 of dividend.

Case A — the SPV has opted for Section 115BAA.

Case B — the SPV has not opted for Section 115BAA. The interest is unchanged. The dividend changes completely.

One decision taken inside the SPV, about its own corporate tax regime, decides whether Mrs Nair pays tax on her Rs 2,00,000.

Now the holding-period rule. Mr Bhatia held 10,000 shares of the same SPV, acquired for Rs 40,00,000 in April 2021. In May 2024 those shares were transferred to the business trust and he received units in exchange. He sells the units in August 2024.

Had the clock restarted in May 2024, the sale three months later would have been short-term. Because the SPV holding period carries over, it is not.

Chapter 12 (Taxation of Other Products), section 12.4, defines the SPV inside the structure of REITs; section 12.4.1 sets out the exemption of SPV interest and dividend under Section 10(23FC) and the Section 115BAA twist; section 12.4.4 gives the Section 194LBA TDS table; and section 12.5 confirms the same treatment for InvITs. Chapter 8 supplies the period-of-holding and cost-of-acquisition rules for units received for SPV shares. Expect the Section 115BAA dividend question, the 10% versus 5% interest TDS split for residents and non-residents, and a holding-period question on units received for SPV shares.

• Only interest and dividend FROM AN SPV get the pass-through treatment. Interest or dividend the trust earns from anything else is taxable at the trust and exempt in the unit-holder hands under Section 10(23FD).
• Section 115BAA decides the unit-holder position on SPV dividend. SPV inside 115BAA means the unit-holder is taxed. SPV outside it means the unit-holder is exempt and no TDS is deducted.
• Non-residents face 5% TDS on SPV interest but 10% on SPV dividend. The interest rate is the lower one, which is the reverse of what most candidates guess.
• Rental income passes through for a REIT but not for an InvIT. For an InvIT rental income is taxable in its own hands. That is the only difference the workbook draws between the two.
• Capital gains on the trust own property sales do not pass through. They are taxed at the trust, not the unit-holder.
• The holding period and cost of the SPV shares carry into the units. Nothing restarts on the exchange.
• This is not a special purpose acquisition vehicle. The special purpose acquisition vehicle of a leveraged buy-out is a private company incorporated to acquire control of a target company. This SPV holds and develops real estate or infrastructure for a trust.