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A business may earn income from multiple countries, and due to domestic laws, this income could be subject to taxation in both locations, even if the business is considered a tax resident in only one. To prevent this, companies can use a TRC certificate and utilize the Double Taxation Avoidance Agreement (DTAA) to avoid paying taxes in multiple countries.
What do these agreements do? They try to stop you from paying taxes twice on the same money to multiple countries. If you pay tax in the first country, the DTAA lets you reduce the tax you owe in the second country.
India has signed these agreements with many countries. To prove which country considers you a tax resident a special document called a Tax Residency Certificate (TRC) is needed. The TRC certificate helps show you have a right to use the DTAA. Let’s explore this idea more.
A Tax Residency Certificate (TRC) is an official document from a country’s tax office showing where a person or company lives for tax reasons. It proves the person or business pays taxes in that country. This document is essential in most international financial and tax matters.
TRCs are important because they let people take advantage of agreements between countries called Double Taxation Avoidance Agreements (DTAAs). These agreements stop people from paying taxes on the same money in two places. Got a TRC? Then maybe you don't need to pay as much tax when working with another country or even avoid paying taxes there.
Besides that, a TRC also helps people follow international tax laws. It's useful for anyone working in different countries. The document proves to other countries that you legally pay taxes where you say you do.
A person's tax liability under Indian income tax laws depends upon his residency status, as defined under the Income Tax Act, 1961. A residency status decides how much of the income of the individual or business is taxable in India. There are three broad categories of residency:
People classified as RORs are taxed on all their income from everywhere in the world, that is, from India and also from abroad. A person becomes ROR only if conditions mentioned below are satisfied for physical presence in India:
‘He/She has been to India for 182 days or more during the current year, or They have been in India for at least 60 days in the previous financial year, and for an aggregate period of 365 days in all the previous four financial years.’
In addition to this, they would have to meet a specified condition concerning the years of the earlier year wherein they would be treated as a resident
RNOR is an intermediate status between Resident and Non-Resident status.
Tax is paid by RNOR only on their Indian income or income from a business or profession controlled or established in India.
‘The individual must have been non-resident in 9 out of the preceding 10 financial years or have stayed in India for 729 days or less in the preceding 7 financial years for one to become RNOR.’
Non-residents are those who do not come under the criteria of being a resident in India. They are taxed only on income earned or accrued in India. It is not at all taxable in India in respect of income earned abroad for non-residents.
The status of your residency can help in understanding your tax obligations and claiming the benefits provided for under DTAAs. For instance,
Determining your residency status accurately helps you to remain compliant with the Indian tax law and reap maximum benefits from international tax treaties.
1. Income from Salary
2. Income from Business or Profession
3. Income from Investments
4. Income from Property
5. Income from Royalties or Technical Services
6. Capital Gains
1. Income from Non-Treaty Countries
2. Income from Restricted Sources like gambling, lottery, or other restricted activities.
3. Income Subject to Domestic Tax Exceptions like agricultural income in India
4. Personal Income without Commercial Nexus, such as gifts or inheritances.
5. Income from Tax-Haven Countries
Getting a Tax Residency Certificate (TRC) is easy but paying attention to details is important and specific steps must be followed. Here’s a guide to help you understand how to get a TRC.
Every resident of India as per the income tax laws is eligible to obtain a TRC. Here are some of the documents you may need to provide the IT department:
Step 1: Collect Documents
Gather all needed documents like proof you live in the country and proof you pay taxes. Check they are up-to-date and official.
Step 2: Fill Out Application
Get the application form from the income tax office. Write details about where you live and where you get money from in the form.
Step 3: Submit the Application
Turn in the filled-out form with all your papers to the tax office. Maybe you will submit it online or by mail. Maybe in person.
Step 4: Wait for Approval
After you apply your forms will be checked by the tax office. If the details are correct, a TRC certificate will be issued.
The waiting period to get a TRC depends a lot on the country and how fast the local tax office works. Sometimes it could be a few days. Other times it could take weeks.There might be extra waiting time during the busy tax period or if they ask for more details about your business.
In India, the application for the TRC certificate is filed with the Income Tax Department; consequently, it typically takes about 15 to 20 days to obtain your TRC. Meanwhile, NRIs need to apply in their respective countries to get their country-specific TRC.
In international tax compliance, a TRC is often submitted with many other forms. Some of the major forms associated with the TRC in India are mentioned below:
Form 10F: This is usually forwarded along with the TRC by non-resident taxpayers wanting to avail of DTAA. TRC and Form 10F provide the necessary information for the appropriate tax to be applied.
Form 15CA and 15CB: These forms are the heart of international remittances from India. Form 15CA is a declaration about tax compliance on international payments, while Form 15CB is a certificate issued by a Chartered Accountant, wherein he certifies that the payment made is in accordance with Indian tax laws.
These forms, when accompanied by the TRC, guarantee the proper establishment of tax residency. Combining the proper forms and the TRC, businesses and individuals can fully comply with international tax obligations and benefit from preventing unnecessary tax burdens from tax treaties.
A Tax Residency Certificate (TRC) is required when an individual or business wants to claim benefits under a Double Taxation Avoidance Agreement (DTAA). It is needed when income is earned in one country but taxed in another, helping avoid double taxation. For example, suppose a business in India earns revenue from a foreign country. In that case, the TRC proves tax residency in India and enables the business to avail reduced tax rates or exemptions under the DTAA with that country.
To get a TRC in India you usually need:
- A filled-in application form
- Your ID proof (like a passport)
- Address Proof (like a utility bill or rental papers)
- Tax return papers to show your tax residency
- Other documents that the Income Tax Department asks for
Yes, there might be a small fee to apply for a TRC in India. The fee changes based on the tax rules. The latest fee can be found on the Income Tax Department website or by talking to a tax expert.
A TRC in India is usually valid for the financial year it gets approved for.
Yes, companies in India are allowed to get a TRC. They need to follow steps similar to personal applications and give proof that shows they are paying taxes and staying in India.
If your TRC request doesn’t get approved the tax office will tell you why. Then you may be able to fix the problems and apply again. It could be a good idea to ask a tax expert to help with the next try.
People in India who earn outside the country can use a TRC to get lower tax rates through double taxation agreements (DTAA) that stop double taxation between India and other countries. This helps businesses pay less tax on income they earn abroad.
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