Dual Tax Residency

How Can Individuals Deal with Dual Residency in Income Tax?

How Can Individuals Deal with Dual Residency in Income Tax?

The tax residency of an individual is determined under Section 6 of the Income Tax Act. Recently a clarification had been issued by the CBDT via a circular for determining the residential status of NRIs stranded in India for the Financial Year 2019-20 in the event of national lockdown and suspension of international flights on account of COVID-19. The role of determining the residential status of any person is to determine his taxability in a particular jurisdiction. In most of the treaties, a person is considered to be a resident of that country under the tax laws of which he is liable to pay taxes due to the reason of his stay, residence, or other similar criteria.

But sometimes, it may happen that you simultaneously become a tax resident of more than one country according to the domestic tax laws of both the countries. The consequence will be that you, being an individual will be liable to pay tax on your global income in both the countries since most jurisdictions tax their residents on the global income.

To provide double taxation relief India has entered into DTAAs with various countries. Article 4 of most tax treaties deal with the situation of dual tax residency. It provides a tie-breaker rule for deciding the tax residence of a person. This helps the jurisdictions in the allocation of taxation rights between themselves. For individuals, the tie-breaker rule is as follows:

Permanent Home

You shall be considered as a resident of that country where a permanent home is available to you. Permanent home means a place of residence that is available to you for staying at all times, even if it is rented. However, places that have been taken for short-term accommodation like a hotel room or a guest house can not be considered as a permanent home.

Personal Economic Relations

If you have a permanent home in both the countries, then you shall be a resident of that country in which your personal and economic relations are closer. Such a place is known as your center of vital interests. While considering personal relations, consideration is given to your family and social relations, cultural and other activities carried out by you. Economic relations takes into account factors like the place of your business or occupation or place of administration of your properties.

Habitual Abode

This rule applies if you don’t have a permanent home in any of the two countries or if you have a permanent home available to you in both the countries but your place of the center of vital interests can’t be determined due to any reason. This may be the case when you keep on traveling from one country to another for work purposes and do not have a home, whether owned or rented, in any of the two countries. In such cases, you will be a resident of that country where you have a habitual abode. By the term habitual abode, we mean the place where you normally reside.

Nationality

If it turns out that you have a habitual abode in both the countries or none of the countries, then tax treaties suggest that you will be a resident of that country of which you are a national.  For tax treaties, you will be considered as a national of that country of which you possess the nationality or citizenship.

Mutual Agreement Procedure

If your tax residency can not be determined after sequentially following the above methods, then your residency shall be determined by the decision arrived at by both the countries through the Mutual Agreement Procedure (MAP).

You must also understand that these methods or rules are to be applied sequentially. One can’t skip to the next rule before following the previous rule, and so on. If after applying the above rules you come out to a Non-Resident in India, then you must file your income tax return accordingly.

Post by Niti Gupta

Niti Gupta is a Chartered Accountant who has experience working with different industries. She loves to write about anything and everything, but majorly research and write about finance and taxation.