Significance of the Tax Residency Certificate in India

The Tax Residency Certificate is a proof of residency, and can ensure that income is not doubly taxed—that is, once in the source country and again in the resident country. The document’s importance also lies in the fact that it provides further credibility in the international transactions of the certificate-holder.

The Indian government has established various double taxation avoidance agreements (DTAAs) with different countries, and these treaty provisions are applicable exclusively to residents of countries that are parties to such agreements. Therefore, it is crucial to ascertain the individual’s tax residency. One significant document for establishing tax residency and supporting a claim for DTAA relief is a Tax Residency Certificate (TRC).

What is a tax residency certificate?

A Tax Residency Certificate is an official document granted by a country’s tax authorities, confirming the residency status of the applicant, whether an individual or a company, for a specific tax year. This certificate serves as evidence that the applicant qualifies for the benefits outlined in the tax treaty framework of that particular country.

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Permanent Establishment in International Taxation and Indian Tax Law

For example, an Indian resident is obligated to pay taxes on their worldwide income in India. If they earn income from a foreign country, they might also face tax deductions in those countries. To potentially lower the foreign tax rate, they can leverage the advantages provided by a tax treaty established between the Government of India and other nations. To avail the benefits of the DTAA in a foreign country, the Indian taxpayer needs to acquire a TRC from the Indian Government.

In the case of a non-resident earning income from India, obtaining a TRC is necessary from their local government.

The TRC serves as proof of residency, ensuring that income is not taxed twice—once in the source country and again in the resident country. TRCs grant access to the benefits outlined in tax treaties, including lower withholding tax rates on specific types of income. Beyond treaty advantages, TRCs serve as essential documentation for tax compliance, aiding in establishing residency status when dealing with tax authorities or financial institutions. For businesses engaged in cross-border activities, holding a TRC streamlines administrative procedures, minimizing the risk of disputes with tax authorities in different countries. Additionally, TRCs are often required for various financial transactions, contributing to credibility and transparency in international dealings. – Lalitha Rao, Manager, Corporate Accounting Services

Categories of income on which TRC is applicable

The categories of income covered by a TRC includes:

• Income generated from services rendered in a foreign country or India;
• Salary remunerated in a foreign country or India;
• Earnings from assets located in a foreign country or India;
• Capital gains realized from the transfer of property situated in a foreign country or India;
• Interest accrued on fixed deposits in India;
• Interest earned on savings bank accounts in India;
• Income from agriculture or the sale of agricultural produce in a foreign country or India; and
• Dividends received from shares and other funds in India.

Obtaining the Tax Residency Certificate in India

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A resident of India, who is an assessee, may submit an application for a Tax Residency Certificate in Form No. 10FA to the Assessing Officer, as per rule 21AB. Upon receiving the application and being satisfied with the provided particulars, the Assessing Officer will issue a certificate of residency in Form No. 10FB to the assessee.

A non-resident taxpayer in India has the option to acquire a Tax Residency Certificate from the government of the country or specified territory where they hold residency. The TRC should encompass the following essential details:

• Taxpayer’s name;
• Taxpayer’s status (e.g., individual, company, firm, etc.);
• Nationality in the case of an individual or the country/specified territory of incorporation or registration for a company, LLP, firm, or other entities;
• Tax identification number or Unique number assigned to the taxpayer as per the country or specified territory of residence, based on which the individual is recognized as a resident by the respective government;
• Taxpayer’s residential status;
• Validity period of the certificate; and
• Taxpayer’s address for the applicable period covered by the certificate.

The non-resident taxpayer is required to furnish the above information along with the key person details, their address proof, father’s name, their tax identification number, email ID, and contact number. Form 10F should be filed electronically with the Income Tax Department along with the TRC, Certificate of Incorporation, and address proof of the non-resident tax payer in India. – Lalitha Rao 

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