What is a Tax Residency Certificate (TRC) and How to Get It?

A TRC, or Tax Residency Certificate, is an important document issued by the taxpayer's resident country's Income Tax Department. This certificate is needed to claim relief under the DTAA, Double Taxation Avoidance Agreement, tax treaty provisions.

Why is a Tax Residency Certificate Important?

The primary purpose of their certification is to verify tax residency and enable individuals or entities to claim all income tax benefits under the DTAA provisions. However, other important aspects include:

• Residency Proof: Residency is the basis of taxation for many countries; therefore, a tax residency certificate serves as a legal document to prove the NRI's residency in a specific country. This certificate confirms that the NRI is obligated to pay taxes only in their country of residence, not in the country where the income is earned.
• DTAA Benefits: This certificate allows for an income tax at a reduced rate on income generated from sources such as royalties, capital gains, dividends, interest, and other types of income in foreign countries.
• Foreign companies and NRIs: Businesses and entities operating across borders with income from multiple countries, as well as NRIs, are subject to full tax liability in both countries without a TRC.

An Example to Understand What the TRC, Tax Residency Certificate?

Let's say there is a software company named TechZee.Inc., which is based in India and provides services to clients in the United States. Now, without a DTAA, the income generated by providing the services to US clients will be taxable in both countries, India and the US.

However, suppose TechZee obtains a TRC certificate from the Indian Income Tax Department. In that case, it can claim relief from the U.S. withholding income tax, and vice versa, if it has a tax residency certificate in the USA. The primary action that TRC took was to prevent TechZee from being taxed twice on the same income source.

The Income Tax authorities govern the application and issuance of a TRC certificate under Sections 90 and 90A of the Indian Income Tax Act, 1961.

What are the types of Residents in Income Tax?

An individual's tax obligations are determined by their residential status. According to the Income Tax law, an individual's status can be one of the following types:

Resident or Ordinarily Resident (ROR)

Individuals must meet the following criteria to be considered a resident as per the Income Tax Law, Section 6(1)

• 182 or more days of stay in India within an FY
• 730 or more days of stay in India within seven years before the current FY
• In a case where an individual has stayed in India for more than 365 days in the last 4 years.

Under Income Tax Laws Section (6)6, to be seen as a resident and an ordinarily resident, an individual has to:

• Stay in India for at least 2 years in the last 10 FYs before the current year.
• Before the current FY, if the individual has stayed for more than 730 days in the last seven years.

An individual who is a Resident and Ordinary Resident ROR is taxed on their global income; now, this means both foreign and Indian income is taxable in India.

Resident but Not Ordinarily Resident (RNOR)

For individuals to be seen as resident but not ordinarily resident, they need to:

• Stay in India for 729 days or fewer during the preceding 7 years.
• As an individual, you have been a non-resident for nine out of the previous ten years.

The income earned or accrued by RNORs in India is only taxed.

Non Resident (NR)

• Stayed in India for less than 182 days in one financial year

Just as the RNORs, NRIs are liable to pay taxes only on the income earned in India.

Eligibility Criteria: To Get a Tax Residency Certificate

Not everyone can obtain a Tax residency certificate; you must meet specific eligibility criteria to qualify.

• Tax Residents: Businesses or individuals must be deemed as tax residents of the country issuing the TRC.
• Physical Business Space: If applying for TRC as a business entity, the taxpayer must have a physical place of business in the foreign country.
• Residency Proof: If an individual is applying for TRC, they must provide proof of residency in the foreign country, such as a domicile certificate.

Process to Get a Tax Residency Certificate in India?

NRIs with an income source in India are liable to provide a Tax residency certificate from their country of residence to avail of the benefits of the DTAA or Double Taxation Avoidance Agreement. Now, to get a TRC, here's what you need to do:

Apply for a TRC With the Tax Authority

A non-resident in India must apply for a tax residency certificate with the tax officials of their country of residence, where they are a tax resident. Now, every country has its unique procedures; however, they are usually completed by submitting an online application in Form 10FA or in person to the tax authorities.

Submit the Documents

Now, to file for the TRC, the taxpayer needs to provide all the required documents, which include

• Proof of income tax returns filed in the foreign country of residence
• To verify the identity, a copy of a passport
• Proof of residency that includes utility bills, residency card, and more

Submit Form 10F

This form needs to be filled out by the taxpayer to claim the benefits of DTAA, and this form serves as the identification proof to confirm that the taxpayer pays income taxes in the country of residence.

Additionally, a tax residency certificate does not contain all the crucial details required by Indian tax authorities, such as the TIN (tax identification number), address, nationality, or other relevant information. Hence, when filing with the tax authorities of India, an individual must submit Form 10F along with their TRC, as this form supplements the missing information in the TRC.

Issuance of Form 10FB

Once the assessing officer has reviewed your application and has verified all the documents, they will issue the TRC in Form 10FB. This form will contain all the necessary information, including the individual's Tax residency status and more.

Using the TRC

Once you have the tax residency certificate, it can be used when filing the income tax return in both India and the foreign country, ensuring that you pay taxes only once, either in the country of residency or at a reduced rate in the source country.

Information Needed for a Tax Residency Certificate:

NRIs need to give all the below-mentioned details to the tax authorities while applying for a TRC:

• Name of the taxpayer, be it an individual or an entity
• Status of the taxpayer, whether it is a firm, company, or individual
• Permanent Account Number (PAN) or an Aadhaar Number (if applicable)
• Cony of Incorporation for the business or the nationals for the Indians.
• TIN is the tax identification number of the taxpayer.
• Under sections 90(4) or 90A(4) of the Income Tax Act, NRIs are also required to provide the period of their residential status.
• Address of the foreign account

Validity of a Tax Residency Certificate (TRC)

The validity of a tax residency certificate is for one financial year. Therefore, to reap the benefits of the double taxation avoidance agreement, taxpayers have to apply for a new certificate annually.

What Are the Details of a Tax Residency Certificate?

The tax residency certificate format varies from country to country; however, every certificate has the following details:

• Taxpayer's name
• Taxpayer's identification number (either PAN or TIN)
• Country of incorporation for business or entities, or nationality for the individuals.
• Validity Period.
• The tax authority that is liable to issue the certificate.

If the TRC is in a foreign country's local language, it is advisable to have it translated into English for use in India.

Complexities in Getting a TRC

Yes, TRC comes with a lot of benefits, but so do the complexities it has while getting one:

• Verification of the documents: Every document submitted by the taxpayer is subjected to detailed scrutiny by the Income Tax Department. Any discrepancy in any of the documents can lead directly to the rejection of the application.
• Processing Time: Taxpayers are advised to apply for a tax residency certificate well in advance, as the processing time is lengthy.
• Foreign Taxation and Laws: NRIs must be aware of and comply with the taxation laws of both their country of residence and India. This process can be complex and requires a thorough understanding of the law to proceed.

Misconception About a TRC

1. Lifetime certificate: One of the most common misconceptions about a tax residency certificate is that it remains valid for a lifetime once issued. No, this isn't the case. You need to get a new TRC issued every financial year.
2. TRC is only for NRIs: Many taxpayers think that TRC is issued only for NRIs; however, this is not the case. A tax residency certificate is also valid for indian residents who have income from abroad. They also need a TRC to claim benefits under DTAA.
3. TRC is exempt from all taxes: A tax residency certificate helps reduce tax rates or avoid double taxation on the same source of income. It does not exempt a taxpayer from paying taxes; you must comply with the taxation laws of both countries.

Out of the various benefits of having a Tax residency certificate, some of them are as follows:

Help claim DTAA benefits

A tax residency certificate helps the taxpayers claim the benefit of DTAA because this certificate validates the taxpayer's residency status, which ensures they are not taxed twice on the same income source.

TRC acts as proof of residence

Tax residency certificates also serve as a basis for residence documents, which condition financial transactions such as international trade, opening bank accounts, making investments, and other similar activities.

Serves as a document for tax compliance

The TRC serves as an essential document for adhering to international tax regulations. They help establish the assessee's tax residency status, which is essential when dealing with tax authorities, financial institutions, or when filing tax returns.

Transparency in International Transactions

Now that we understand that a tax residency certificate helps establish tax residency status for both companies and individuals, it increases credibility and transparency in international transactions, facilitating seamless financial transactions.

Filing taxes feels like a breeze with Savetaxs.

In a world where individuals and businesses generate income from various countries across the globe, having a tax residency certificate can help a taxpayer avoid paying taxes twice. No matter if you are an NRI earning income in India or an Indian resident earning income abroad, a TRC saves you from being taxed unfairly on the same source of income in different countries.

It can feel overwhelming when you earn income from multiple countries and manage the taxes for each. Well, let Savetaxs help you release your stress. We ensure that all your taxes are filed correctly and that you're eligible for all the benefits under a double taxation avoidance agreement.

With over two decades of experience in filing taxes for NRIs and foreign nationals, we ensure our clients don't have to worry about unnecessary tax burdens. Let us do the math while you focus on expanding your horizons, because we're standing right beside you to manage all your finances like a pro.