Government walks the talk; Abu Dhabi’s Sovereign Wealth Fund becomes the first fund to get tax exemption for infra investments, additional conditions prescribed!

MIC Redwood 1 RSC Limited, Abu Dhabi, United Arab Emirates (Fund) was recently conferred the tax exemption intended for a sovereign wealth fund (SWF) under the Income-tax Act, 1961 (Tax Act).

What is the tax exemption?

Dividends, interest and long-term capital gains earned by SWFs and Pension Funds from investments in specified “infrastructure business” are sought to be completely exempt.

The exemption seeks to incentivise investment in diverse sectors. “Infrastructure business” for the purposes of the exemption would include sectors like transport, energy, water, sanitation, telecommunication, and “social and commercial infrastructure”. “Social and commercial infrastructure” in turn includes hospitals, tourism, education institutions, affordable housing, and the likes. For a comprehensive list, please click here.

What are the key statutory conditions to qualify for the exemption?

Is the exemption automatic?

No, the exemption would only be available on a specific approval from the Central Government and is not automatic even if the stipulated conditions are met.

The Central Government has the power to prescribe additional conditions, in addition to the statutory conditions, at the time of the grant of approval that could be case specific.

Additional conditions prescribed for the Fund - would they set a precedent?

Given the nature of additional conditions which seek to ensure the money being invested is indeed self-generated income of the foreign government, such conditions are likely to be placed on subsequent grants as well.

Concluding thoughts

The impact of restrictions on having controlling rights or ability to appoint executive directors in the investee company may need to be analysed more closely. Such restrictions certainly raise the question of whether they could be a deterrent to attracting investments directly in private entities. Such aspects should be kept in mind by other SWFs seeking the exemption and whether the conditions could be relaxed to ensure control in cases of majority shareholding.

Having said that, the Fund’s application for exemption seems to have been processed and approved expeditiously ie, in less than 2 months as per media reports. The efficacious handling of the process will only encourage more applicants.

-         Indruj Rai (Partner) and Jugal Mundra (Associate)

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