UAE Sovereign Wealth Funds Investments in India - Tax Aspects

Abu Dhabi Investment Authority Invests in India - Diving into Sovereign Wealth Fund

What are Sovereign Wealth Funds (SWFs)?

Sovereign Wealth Funds (SWFs) are government-owned investment funds typically established from a country's surplus reserves. They are government investment vehicles. These reserves can originate from various sources, including commodity exports (like oil), trade surpluses, bank reserves, or other government funds. Kuwait was the first country to form its SWF. They invest globally in various assets, including stocks, bonds, real estate, and private equity.

UAE-Based SWFs and their Investments in India

With its oil-rich economy, the UAE has established several prominent SWFs that have actively invested in India. These include the Abu Dhabi Investment Authority (ADIA), Mubadala Investment Company, and ADQ (formerly Abu Dhabi Developmental Holding Company), Seventy Second Investment Company LLC, MIC Redwood 1 RSC Ltd. These SWFs have participated in significant deals across various sectors in India, including infrastructure, technology, healthcare, and real estate.

Notably, ADIA has partnered with other Indian financial institutions to establish ADIA has partnered with other Indian financial institutions to establish the National Investment and Infrastructure Fund (NIIF). The Government of India established NIIF which is the first sovereign wealth fund of India.

Taxation: Favorable Environment for UAE SWFs in India

India follows source-based taxation, meaning it taxes foreign investors on income arising from India. This encompasses income that accrues, arises, is deemed to accrue or arise, is received, or is deemed to be received in India.

Previously, Indian domestic tax law (Income-tax Act'1961) did not have provisions exempting foreign governments, government-owned entities, or SWFs from tax. However, a recent exemption, Section 10(23FE) of the Income-tax Act, 1961, now allows notified SWFs to be exempt from taxes on interest, dividends, and capital gains from qualifying investments.

Exemption Conditions:

• The investment must be in debt, share capital, or units between April 1, 2020, and March 31, 2024.
• The investment must be held for at least three years; and
• The investment should be in specific infrastructure businesses or other notified businesses, such as Indian Infrastructure Investment Trusts (InvITs), companies involved in specified infrastructure sectors, or Category I or Category II Alternative Investment Funds (AIFs) investing wholly in Indian companies involved in such sectors.

Additional Conditions for Exemption:

• The SWF must be wholly owned and controlled by a foreign government.
• The SWF must be set up and regulated under the laws of that foreign country.
• Earnings should be credited to the foreign government's account or another designated account.
• Assets should vest in the foreign government upon dissolution.
• The SWF shouldn't engage in commercial activity.
• The SWF must be notified by The Central Government of India.

The India-UAE tax treaty provides tax exemptions for income derived by the UAE government and its entities, including SWFs, from their investments in India. The exemption covers both:

• Passive income: such as dividends, interest, and capital gains from investments in securities
• Active income: derived from commercial activities

This exemption, extending beyond passive income, makes the Indian tax environment particularly attractive for UAE investors. It eliminates double taxation concerns and provides greater certainty for SWFs when making investment decisions in India.

India-UAE Tax Treaty Benefit

Most tax treaties define the term "person" broadly to encompass individuals, companies, partnerships, and other entities. This inclusive definition usually covers SWFs as they are typically established as legal entities, such as corporations or trusts, under the laws of the UAE.

The specific wording of the treaty plays a significant role in interpreting SWFs as "persons." Some treaties explicitly mention "government," "state," or "political subdivision" in their definitions. India-UAE tax treaty categorically also recognizes the ADIA as a resident of the United Arab Emirates.

Beyond the tax treaty benefits, India has a specific tax exemption for notified SWFs, including ADIA. This exemption applies to income earned from qualifying investments made in specific sectors, primarily infrastructure. To qualify for this exemption, the SWF must meet certain conditions, including holding the investment for a minimum period and not engaging in commercial activities in India.

Overall, the combination of a favorable tax treaty, specific tax exemptions for notified SWFs, and a growing economy makes India an attractive destination for UAE-based SWFs.