Last updated: September 26th, 2024 3:05 PM

Tax Residency Certificate

In today's globalized world, many individuals and businesses generate income in more than one country. With the rise in cross-border transactions and overseas investments, managing tax liabilities has become increasingly complex. One key tool for addressing this complexity is the Tax Residency Certificate (TRC). This document plays a crucial role in preventing the same income from being taxed twice through the provisions of Double Taxation Avoidance Agreements (DTAAs). This article aims to offer a comprehensive guide to understanding the Tax Residency Certificate (TRC), its importance, and how individuals and businesses in India can apply for and benefit from it. File Your Income Tax Return Easily with IndiaFilings! Get expert assistance to file your ITR and claim benefits under DTAA. [shortcode_102]

What is Tax Residency Certificate (TRC)?

A Tax Residency Certificate (TRC) is an official document issued by the tax authorities of a country to certify that an individual or a business is a tax resident of that country for a specific financial year. This certificate is crucial in claiming tax relief under DTAAs between two countries to avoid double taxation. For instance, consider an Indian resident who earns income in a foreign country. The foreign country (known as the source country) taxes the income earned there, and the Indian government (known as the resident country) may also tax the same income. This is where a TRC comes into play. By furnishing this certificate, the taxpayer can prove their residency status and claim tax relief under the DTAA between the two countries.

Who Can Obtain a Tax Residency Certificate?

To be eligible for a TRC, you must qualify as a tax resident of India, as per the Income Tax Act, 1961. This certificate is available to:

• Individuals– Those classified as Resident and Ordinarily Resident (ROR) under Section 6 of the Income Tax Act.
• Non-Resident Indians (NRIs)– NRIs need TRCs from their country of residence to claim DTAA benefits on income earned in India.
• Businesses and Entities– Companies, partnerships, and trusts with cross-border income must obtain a TRC from their country of residence to avoid double taxation on foreign income.

Tax Residency Certificate for NRI

Non-resident taxpayers can also avail the advantages of the Double Taxation Avoidance Agreement (DTAA) by providing a Tax Residency Certificate (TRC) from their country of residence. This certificate allows non-residents to claim tax relief on various types of income earned abroad, which include:

• Income generated from assets located in foreign countries.
• Earnings from services rendered overseas.
• Salary income earned in foreign countries.
• Interest income from foreign savings accounts and fixed deposits.
• Income from dividends on shares and mutual funds earned abroad.
• Revenue from the sale of agricultural products in other countries.
• Capital gains from the sale or transfer of property in foreign countries.

By furnishing a TRC, non-residents can ensure that their foreign income is taxed appropriately under the DTAA provisions, avoiding double taxation.

Importance of a TRC for Individuals and Businesses

The primary purpose of a TRC is to certify tax residency and claim benefits under DTAA, ensuring that individuals and businesses do not suffer double taxation. Other important aspects of a TRC include:

• Proof of Residency: A TRC is an official document proving your residency in a specific country. For many countries, residency is the basis for taxation. This certificate helps establish that you are liable to pay taxes in your country of residence rather than the country where your income is earned.
• DTAA Benefits: Many countries have entered into DTAA agreements to provide relief from double taxation. A TRC enables taxpayers to claim reduced rates of tax on income like dividends, royalties, interest, and capital gains earned in foreign countries.
• Essential for NRIs and Foreign Companies: Non-resident Indians (NRIs) and foreign businesses earning income in India or abroad must provide a TRC to prove their residency status for tax purposes. Without it, they may be subject to full tax liability in both countries.

Benefits of a Tax Residency Certificate

A TRC is beneficial for both individuals and businesses in various ways, particularly for those engaged in cross-border transactions or investments. Here are some key advantages of obtaining a TRC:

• Avoiding Double Taxation: The primary purpose of a TRC is to avoid double taxation. By providing a TRC, you can claim tax benefits under the DTAA between the two countries where income is earned and taxed.
• Lower Withholding Taxes: TRCs allow individuals and businesses to benefit from reduced withholding taxes on income such as:
  • Dividends: Some countries have DTAA provisions that lower the tax rate on dividend income.
  • Royalties and Interest: With a valid TRC, you may qualify for reduced tax rates on royalties or interest earned abroad.
• Proof for Financial Transactions: A TRC acts as a valid proof of residency for conducting certain financial transactions, such as international trade or opening bank accounts abroad. Many countries and financial institutions require a TRC to verify your residency status.
• Compliance with Tax Laws: For businesses and individuals, especially NRIs, a TRC helps comply with international tax laws. It provides a basis for filing tax returns in both resident and source countries without facing the burden of double taxation.

Validity of Tax Residency Certificate (TRC)

A Tax Residency Certificate (TRC) is valid until the end of the financial year from the date it is issued. Therefore, taxpayers need to reapply for a new certificate every year to continue benefiting from the Double Taxation Avoidance Agreement (DTAA).

Key Details Included in a Tax Residency Certificate

The format of a TRC may differ across countries, but it typically contains the following information:

• Name of the taxpayer
• Taxpayer’s identification number (TIN or PAN)
• Nationality (for individuals) or country of incorporation (for companies)
• Residential address
• Period for which the certificate is applicable
• Tax authority issuing the certificate

If the certificate is in a local language, it is advisable to have it translated into English for use in India.

Tax Residency Certificate Format

While the format of a TRC may differ slightly across countries, it generally includes certain standard details. Below is a typical format for a Tax Residency Certificate (TRC) issued in India: [pdf-embedder url="https://www.indiafilings.com/learn/wp-content/uploads/2024/09/Tax-Residency-Certificate-Format-1.pdf" title="Tax Residency Certificate Format"]

Residential Status Under the Indian Income Tax Act

Before diving into how to obtain a TRC, it’s essential to understand the classification of residential status under the Indian tax system. An individual’s residential status determines their tax obligations.

Resident and Ordinarily Resident (ROR)

An individual qualifies as a Resident and Ordinarily Resident (ROR) if:

• They are in India for 182 days or more during the financial year or
• They have been in India for 730 days or more in the preceding seven years.

An ROR is taxed on their global income, which means both Indian and foreign income are taxable in India.

Resident but Not Ordinarily Resident (RNOR)

An individual is classified as RNOR if they have been a non-resident for 9 out of 10 previous years or have stayed in India for 729 days or less during the preceding seven years. RNORs are taxed only on income earned or accrued in India.

Non-Resident (NR)

A person qualifies as a Non-Resident (NR) if they have been in India for less than 182 days in a financial year. Non-residents are liable to pay taxes only on the income earned or accrued in India. Click here to learn more about Income Tax Return for NRI

Eligibility Criteria for Obtaining a Tax Residency Certificate (TRC)

To qualify for a Tax Residency Certificate (TRC), applicants must meet specific eligibility criteria. These requirements are as follows:

• Tax Residency Status: Individuals or businesses must be recognized as tax residents of the country issuing the TRC.
• Business Establishment: Applicants must have a fixed place of business in a foreign country if applying as a business entity.
• Residency Proof: In cases where individuals are applying, they need to provide proof of residency in the foreign country, such as a domicile certificate.

How to Apply for Tax Residency Certificate in India?

Now that we’ve discussed the importance of a TRC let’s understand how to get tax residency certificate in india. The process for obtaining a Tax Residency Certificate involves the following steps:

Step 1: Determine Eligibility

To be eligible to apply for a TRC, you must be a resident of India or qualify under the provisions of Section 6 of the Income Tax Act.

Step 2: Fill Form 10FA

The next step is to submit Form 10FA to the Income Tax Department. This form serves as an application for requesting the issuance of a TRC. Form 10FA requires details like:

• Full name
• Address
• Permanent Account Number (PAN)
• Details of the country for which TRC is required
• The financial year for which TRC is being requested

Step 3: Submit Supporting Documents

The applicant must submit supporting documents along with Form 10FA. These documents may include:

• Proof of residence
• Tax returns filed in India for the relevant financial year
• Passport copy (for NRIs)
• Aadhaar card and PAN card

Step 4: Issuance of Form 10FB

Once the application is reviewed and verified by the Assessing Officer, the TRC is issued in Form 10FB. This form contains the details of your tax residency status for the specific financial year and allows you to claim the benefits under DTAA.

Step 5: Using the TRC

Once you have obtained the TRC, you can use it when filing tax returns in both India and the source country. This ensures that you pay taxes only in your country of residence or at a reduced rate in the source country.

How to Obtain a Tax Residency Certificate (TRC) in India for NRIs

Non-Resident Indians (NRIs) who earn income in India must provide a Tax Residency Certificate (TRC) from their country of residence to claim the benefits of the Double Taxation Avoidance Agreement (DTAA). The process of obtaining a TRC for NRIs involves the following steps:

Apply with the Tax Authorities in Your Resident Country

NRIs must apply for a TRC with the tax authorities of the foreign country where they are tax residents. Each country has its own procedure, but typically, this involves submitting an application form either online or in person.

Submit Supporting Documents

Applicants need to provide various documents to establish their tax residency status in the foreign country. These documents often include:

• Tax returns filed in the foreign country.
• A copy of the applicant’s passport to verify identity.
• Proof of residency, such as a residency card or utility bills, confirming that the individual resides in that country.

Furnish Form 10F to Indian Authorities

If the foreign TRC does not contain certain essential details required by Indian tax authorities—such as nationality, Tax Identification Number (TIN), or address—NRIs must furnish Form 10F along with the TRC when filing with Indian tax authorities. This form supplements the missing information and ensures compliance with the DTAA regulations.

Important Information Required for a TRC

When applying for a TRC, NRIs need to provide the following details:

• Name of the taxpayer (individual or entity).
• Status of the taxpayer (individual, firm, company, etc.).
• Aadhaar Number or Permanent Account Number (PAN) (if applicable).
• Nationality (for individuals) or Country of Incorporation (for businesses).
• Tax Identification Number (TIN) of the taxpayer.
• Period of Residential Status, as per Section 90(4) or 90A(4) of the Income Tax Act.
• Residential Address in a foreign country.

Also read: Income Tax Return for NRI

Challenges in Obtaining a TRC

Obtaining a TRC may seem straightforward, but it comes with certain challenges:

• Document Verification: The Income Tax Department scrutinizes applications carefully. Any discrepancy in documents may lead to rejection or delays.
• Processing Time: It may take several weeks for the TRC to be issued, so applicants must apply well in advance.
• Compliance with Foreign Tax Laws: NRIs must comply with the tax laws of both India and their resident country, which can be complex and require careful planning.

Common Misconceptions about Tax Residency Certificate

• TRC is not a one-time certificate: Many taxpayers mistakenly believe that once issued, a TRC is valid for a lifetime. In reality, it is only valid for a specific financial year, and taxpayers need to apply for a new TRC every year.
• TRC applies to both residents and NRIs: Some people believe TRCs are only for NRIs. However, Indian residents who earn income abroad also need a TRC to claim DTAA benefits.
• TRC does not exempt you from all taxes: A TRC helps reduce tax rates or avoid double taxation, but it does not exempt you from paying taxes altogether. You still need to comply with the tax laws of both countries.

Conclusion

In today’s world of global business and international transactions, a Tax Residency Certificate (TRC) is an essential document for individuals and businesses to avoid double taxation. Whether you are an Indian resident earning income abroad or an NRI with income in India, a TRC ensures that you are not unfairly taxed on the same income in multiple countries. By understanding the process and eligibility requirements for obtaining a TRC, you can streamline your tax obligations and benefit from DTAAs. 

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