Skip to main content
KCM Consultants LLC
Cross-Border

DIFC Variable Capital Company for Investing Into India

A VCC is one company divided into cells, each of which can be taken by a different investor. For investment into India it can solve the cost of treaty substance. It does not solve the question of purpose.

By Suril Mehta, CA, Partner, K C Mehta & Co LLP | KCM Consultants LLC, Dubai

Published 11 November 20267 min

Key Takeaways

  • The DIFC enacted its Variable Capital Company Regulations on 9 February 2026. A VCC can hold proprietary money through cells without a fund licence, provided it carries on no regulated financial services.
  • Under the India-UAE tax treaty, gains on debentures and bonds are taxable only in the seller’s country of residence. Gains on shares can still be taxed in India.
  • A UAE company gets treaty residence only if it is incorporated in the UAE and managed and controlled wholly in the UAE. A VCC lets cells share that substance and its cost.
  • Shared residence cuts both ways: decisions for one cell taken outside the UAE can put the whole VCC’s residence in question.
  • After the Supreme Court’s Tiger Global ruling (15 January 2026), a tax residency certificate is necessary but not enough. A VCC cell with no reason other than the treaty saving is unlikely to hold.

What a DIFC VCC is

A VCC works like a co-working space. It is one company, divided into cells, and each cell can be taken by a different investor. Each cell has its own assets and liabilities, so creditors of one cell cannot reach another. Money goes in and out at net asset value, like a mutual fund, without buyback formalities. The board and the service provider sit at the VCC level, so their cost is shared across cells.

Singapore (2020) and Mauritius (2022) have had VCCs for years, but as regulated funds. The DIFC regime, enacted on 9 February 2026, allows a VCC to hold proprietary investments. The final regulations removed the earlier “qualifying purpose” list. Unless the VCC is an exempt VCC (for example, one controlled by a DIFC registered person, an authorised firm, a government entity or a listed company), it must appoint a corporate service provider.

The India angle: debentures under the treaty

India tax without treaty relief India-UAE treaty
Gains on unlisted debentures Treated as short-term capital gains whatever the holding period; for a foreign portfolio investor, 30% plus surcharge and cess Taxable only in the seller’s country of residence (Article 13(5))
Gains on shares of an Indian company Taxable in India May be taxed in India (Article 13(4))
Interest on debentures Taxable in India India may tax it, at up to the treaty rate (Article 11)

So the treaty helps on gains from debentures and bonds, not on gains from shares, and not on interest.

Worked example

An investor based outside the UAE and India buys unlisted debentures of an Indian company for INR 50 crore and sells them three years later for INR 65 crore. The gain is INR 15 crore.

  • Held directly as a foreign portfolio investor: short-term gain taxed at 30% plus surcharge and cess. At an illustrative combined 32.76% for a company (30% x 1.05 x 1.04), Indian tax is about INR 4.91 crore.
  • Held through a UAE-resident company or VCC cell that qualifies for the treaty: India does not tax the gain under Article 13(5). The UAE position must then be checked: unless an exemption applies, the gain is within UAE corporate tax at 9% above the AED 375,000 band.

The difference is real, which is exactly why it is tested.

The “wholly” test, and why the VCC helps

Article 4(1)(b) of the India-UAE treaty treats a company as a UAE resident only if it is incorporated in the UAE and “managed and controlled wholly in UAE”. That calls for directors who genuinely live in the UAE, board meetings held there, and decisions actually taken there. For a single investor, building that alone is costly.

In a VCC, the investor takes a cell instead of forming a company. Tax residence is tested at the VCC level where the cells are segregated cells, which are compartments of one company. Incorporated cells are separate companies and must stand on their own.

The catch is that residence is shared. If investment calls for even one cell are really taken outside the UAE, the “wholly” condition can be questioned for the whole VCC, not just that cell. Governance across all cells must be run from the UAE, every time.

After Tiger Global: purpose matters

In January 2026 the Supreme Court held that Tiger Global’s Mauritius entities could not rely on the India-Mauritius treaty for their Flipkart exit. The Court found that the real intention behind setting up the entities and obtaining TRCs was to obtain treaty benefits, applied India’s general anti-avoidance rules (GAAR) and held the gains on transfers after 1 April 2017 taxable in India.

For a VCC the lesson is direct. India’s GAAR and the treaty’s anti-abuse provisions ask why the arrangement exists. If the tax saving is one of the main purposes of the cell, the benefit can be denied, VCC or not.

In short: a VCC solves the cost problem. It does not solve the purpose problem. Where there is a genuine non-tax reason for the cell, such as pooling family money or separating family branches, the treaty position is far easier to defend.

VCC compared

DIFC VCC Singapore VCC Mauritius VCC
Introduced 2026 2020 2022
Proprietary use without a fund licence Yes, if no regulated activity No, used as a regulated fund No, used as a regulated fund
India treaty treatment of debenture gains Residence state only (Article 13(5)) Depends on the India-Singapore treaty Depends on the India-Mauritius treaty
Treaty residence test for companies Managed and controlled wholly in the UAE Treaty and LOB tests Treaty, LOB and post-2017 rules

What to do

  • Start with the commercial reason for the structure, and write it down. That is what GAAR and the treaty anti-abuse tests will examine.
  • Run every cell’s decisions from the UAE, with UAE-resident directors, minutes and records.
  • Check FEMA, the SEBI route (FPI or other), Indian withholding on interest, and UAE corporate tax on the cell’s income before investing.
  • Keep the TRC current, but do not treat it as the answer. See UAE Tax Residency Certificate.

FAQ

Does a DIFC VCC need a DFSA licence?
Not for holding its own proprietary investments, as long as it does not carry on regulated financial services. A VCC that acts as a fund or provides regulated services needs the relevant authorisation.

Is each cell a separate taxpayer?
A segregated cell is part of the VCC, so residence is tested at the VCC level. An incorporated cell is a separate company and must meet the residence tests itself.

Does the treaty exempt gains on Indian shares held by a VCC?
No. Under Article 13(4) India may tax gains on shares of an Indian company. The residence-only rule in Article 13(5) covers other property, such as debentures and bonds.

Is a TRC enough after Tiger Global?
No. A TRC is necessary evidence of residence, but India can still deny treaty benefits under GAAR or the treaty’s anti-abuse provisions if obtaining the benefit is a main purpose of the arrangement.

Talk to KCM about structuring investment into India from the UAE: contact us.

This is not structuring advice. Actual structuring will have to consider FEMA, SEBI registration, GAAR and treaty eligibility.

Sources and last checked: 9 November 2026

This is not to be construed as legal advice. The actual advice will depend upon the facts and will have to take into consideration the case-specific facts and the anti-abuse regulations.

← Back to Knowledge Hub