What is Tax Residence Certificate (TRC)?

Navigating the complexities of cross-border income can be daunting, especially when dealing with tax obligations in multiple countries. To simplify matters, nations have established double taxation avoidance agreements (DTAAs), enabling taxpayers to pay taxes in just one country. However, to benefit from these agreements, individuals and businesses must first establish their tax residency, often through a tax residence certificate (TRC).

In this article, we’ll uncover the ins and outs of a tax residence certificate. We’ll discuss its importance, different types, benefits, and walk you through the process of applying for TRC step by step.

What Is a Tax Residence Certificate?

A Tax Residence Certificate is like proof of where you live for tax purposes. In India, if you are regarded as a resident for tax purposes, you will have to pay taxes on income earned worldwide. To circumvent dual taxation in India and other countries, India has entered into double taxation avoidance agreements (DTAAs) with 88 other countries. The purpose behind this is to show that you are still an Indian resident and, therefore, should only be taxed in your home country.

People living outside India (non-residents) can also benefit from these arrangements by obtaining a TRC from their home jurisdiction. It includes various types of revenues such as income arising out of salary or wages, interest from foreign bank accounts, among others. Bear in mind, the TRC certificate remains valid until it is issued at the end of the financial year so that one needs to renew it yearly to continue enjoying the benefits under the treaty arrangement.

What Are The Types Of Tax Residence Certificates?

Now that you’re familiar with what is tax residence certificate, let’s explore the different types of TRC certificates:

• Resident and Ordinarily Resident (ROR)

This classification accommodates individuals who satisfy the requirements set out in Section 6(1) ITA. People are considered residents if they spend 182 days or more in India during a given year or have been staying in India for at least 730 days within any of 7 previous years. In addition, persons who have resided in India for 365 days or more in four years immediately preceding the previous year are classified as ordinary residents under Section 6(6).

• Resident but Not Ordinarily Resident (RNOR)

This category includes those individuals who spend substantial time in India but may not be treated as everyday residents. Persons to be categorised as RNOR must have stayed in India for 730 days or above during the last financial year or should have been present at least twice out of ten years immediately prior to this year.

• Non-Resident (NR)

Non-resident status applies to individuals who spend limited time in India. They are considered non-residents if they stay in India for less than 181 days in a financial year, or if they reside in India for fewer than 60 days in the fiscal year. Additionally, individuals who stay in India for more than 60 days but less than 365 days in the last 4 financial years are also classified as non-residents.

What Are The Benefits of a Tax Residence Certificate?

Here are the compelling reasons why obtaining a Tax Residence Certificate can be advantageous:

• Simplifying Financial Transactions

Tax residence certificate serves as more than just tax documents. It’s crucial for various financial activities, simplifying tasks like international trade, opening bank accounts, and making investments. TRC provides concrete proof of residence, ensuring smoother and more efficient financial transactions.

• Unlocking Tax Treaty Benefits

With TRC, individuals and businesses can access the advantages offered by Double Tax Avoidance Agreements (DTAA) treaties. These benefits include enjoying reduced withholding tax rates on certain types of income, such as royalties, dividends, and interest.

• Ensuring Smooth Tax Compliance

TRC certificate plays a vital role in simplifying compliance with international tax regulations. It establishes an individual or business’s tax residency status, making it easier to file taxes accurately and interact with financial institutions and tax authorities without encountering complications or misunderstandings.

• Streamlining Administrative Processes

For multinational businesses, the TRC certificate streamlines tax-related administrative procedures. By providing clear evidence of tax residency, TRCs reduce the risk of disputes with foreign tax authorities and ensure that businesses receive the correct tax treatment.

• Promoting Transparency in Transactions

TRC enhances transparency in international transactions by confirming tax residency status. This clarity fosters trust among parties involved in financial dealings, whether it’s conducting cross-border trade or making international investments. 

What Are The Requirements Of Tax Residence Certificate?

Now, let’s explore the specific requirements that individuals or businesses need to meet in order to obtain a tax residency certificate:

• Tax Residency

Assessees must be recognised as tax residents of the country from which they are seeking the tax residency certificate. This typically involves meeting certain criteria set forth by the tax authorities of that country, such as spending a certain number of days within its borders or having significant ties to the country for tax purposes.

• Fixed Business Establishment

They must have a permanent business establishment or presence in the foreign country for which they are seeking the tax residency certificate. This could include having an office, a branch, or any other fixed place of business that is recognized under the tax laws of that country.

What Are The Steps To Apply For A Tax Residence Certificate?

Here are the essential steps that you need to follow in order to apply for a Tax Residence Certificate:

• Fill Out Form 10FA

Start by completing application Form 10FA, which you can obtain from the Income Tax Department.

• Submit Your Application

Once you’ve filled out the form accurately, submit it to the appropriate authority within the Income Tax Department.

• Assessment by the Officer

The assessing officer will carefully review your application and the accompanying documents to determine your eligibility for the TRC.

• Receive Your TRC 

If the assessing officer is satisfied with your application, they will issue the Tax Residence Certificate via Form 10FB, confirming your tax residency status in India.

What Are The Steps To Apply For A Tax Residence Certificate For NRIs? 

Now, let’s take a closer look at the steps you need to follow in order to apply for a Tax Residence Certificate as an NRI:

• Obtain TRC from Foreign Country Authorities

NRIs need to obtain a tax residence certificate from the authorities of the foreign country where they reside. They must provide various details, including their name, taxpayer status (individual, firm, company, etc.), Aadhaar number or Permanent Account Number (PAN), nationality (for individuals) or country/country of registration (for others), Tax Identification Number (TIN), and period of residential status as specified under Section 90 (4) or Section 90A (4). Additionally, they must provide their address in the foreign country.

• Ensure Information Alignment

The format of the TRC may vary across countries. If the certificate issued by the foreign government does not include all required details, NRIs must ensure that this information is provided while filing Form 10F.

• Renewal of TRC

NRIs can renew their TRC certificate before the end of the financial year to continue availing benefits under the DTAA treaty. This involves submitting updated documents and complying with renewal requirements specified by the income tax authorities.

Conclusion 

In conclusion, getting a Tax Residence Certificate is important for individuals and businesses to show where they pay taxes and access benefits under Double Tax Avoidance Agreements. By following the steps outlined and providing the required information, applicants can get their TRC. It’s also a good idea to renew the TRC certificate before the end of the financial year to keep benefiting from DTAA.

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