FBR Proposes Tax Exemptions for Sale of Shares Under Special Purpose Vehicles

The Federal Board of Revenue (FBR) has proposed tax exemption for the sale of shares of Special Purpose Vehicles (SPVs) by any person to a Real Estate Investment Trust (REIT) scheme.

The FBR proposed in the Finance Supplementary Bill 2021 to amend the rate of the dividend tax levied pursuant to Section 5 of the Income Tax Ordinance, which is henceforth levied at zero percent in a situation where the REIT scheme receives a dividend from an SPV, and 35 percent in case of the dividend recipient not being a REIT. This amendment has been proposed by virtue of a new clause (c) in Division II of Part 1 of the First Schedule to the ITO.

Advanced Tax on Dividends

As a corresponding amendment to the abovementioned, the Bill also contains a proposal for the same treatment for Advanced Tax on dividends received by a REIT (0 percent) and others (35 percent) from SPVs.

The Finance Bill also proposes the inclusion of SPVs for exemption from the total income as provided in Clause (99) of Part 1 of the Second Schedule to the ITO, subject to the conditions prescribed therein being fulfilled.

The Bill has sought to amend Clause (99A) of Part 1 of the Second Schedule to the ITO. Through this amendment, it has been proposed that the sale of the shares of the SPVs by any person to a REIT scheme is exempt from income tax.

Sections 150, 151, 233 and Division VII of Part I of the First Schedule to the ITO proposed not to be applicable: The Bill proposes to add SPVs in clause (47B) of Part IV of the Second Schedule to the ITO by ‘including’ them in REIT schemes in this clause.

Definition of SPVs

The aforestated amendments contained explanations that SPVs will have the same meaning as defined under the REIT Regulations 2015. An SPV has been defined as “a limited liability company that a Non-PPP REIT Scheme may invest in or set up in accordance with and subject to the limitations set forth in these Regulations”.

The Tola Associates commented, “Considering the withdrawals of exemptions and zero-rating from the STA, we believe that providing, on the one hand, the aforementioned incentives to REIT Schemes and SPVs, and withdrawing exemptions and zero-rating from the STA, on the other hand, is an inconsistent treatment for taxpayers at large. Hence, we believe these amendments related to REITs and SPVs must be reviewed in the interest of equitable taxation”.