CONCEPT OF RESIDENCE Seminar on Basics of International Taxation SIRC of ICAI Date : 5 th September 2014 1
Particulars Section Resident RNOR Non- Resident Income received in India Sect 5 IncomeAccruing or Arising in India Sect 5 Income deemed to be Sect 7 received in India Incomedeemed to accrue or arise in India Incomeaccruing or arising outside India from Business controlled in India Sect 9 - Businesscontrolled outside India 2
Under the Income Tax Act 1961 Under the Double Taxation Avoidance Agreement Section 2(30) Non-resident Section 6(1) to Sec 6(4) Resident Section 6(6) - Resident Not ordinarily resident (RNOR) Article 4(1) General Rule Article 4(2) Tie breaker for Individuals Article 4(3) Tie breaker for others 3
Residence as per the Income Tax Act 1961 Section 6(1) to Sec 6(4) 4
Basic Tests of residence for an Individual An Individual is said to be resident in India in any previous year, if he a) Is in India in that year for a period or periods amounting in all to 182 days or more OR c) Having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India for a period or periods amounting in all to 60 days or more in that year. 5
Non- Resident Resident 0 days 60 days 182 days 365 days Cannot conclude by the clause (a) or (c) alone. Must be further tested for conditions in explanations 6
Explanation In the case of an Individual, being a citizen of India a) Who leaves India in any previous year, as a member of the crew of Indian ship or for the purpose of employment outside India, the provisions of clause (c) shall apply as if for the words sixty days occurring there in, the words one hundred and eighty two has been substituted. b) Or a Person of Indian origin, who being outside India, comes on a visit to India in any previous year, the provisions of clause (c) shall apply as if for the words sixty days occurring there in, the words one hundred and eighty two has been substituted. 7
S.No 1 2 3 Issue Involved Whether un-employed alone are eligible under explanation to Sec 6(1)(c) or employees who leave Indiaontripsarecovered? Ref:BritishGasIndiaPLtd285ITR218(AAR) Whether benefit of explanation is available only to employeesorisitavailabletoothersalso?? Ref:K.SambasivaRao 62SOT167 O. Abdul Razak 337 ITR 350 WhatisvisittoIndia?? Ref:SmitaAnand 362ITR38(AAR) ManojKumarReddy 34SOT180(Trib) 8
Particulars HUFs,Firms, AOPs, Every other Person Residential Status Indian Company Other Company Controland Management of its affairs is situated Wholly within India Resident Resident Resident Partly within India and Partly outside India Resident Resident Non-Resident Wholly outside India Non-Resident Resident Non-Resident Control and Management of affairs has not role in case of Indian Company 9
Supreme Court in Subbayya Chettiar Vs CIT 19 ITR 168 held as follows, Control and Management signifies the controlling and directive power, the head and brain; and situated implies the functioning of such power at a particular place with some degree of permanence. Further the Supreme Court held that Control and Management means de facto control and management and not merely the right to power to control and management. In the case of company, place of control and management means the place where the directors meetings are held. 10
S.No Issue Involved 1 Whether absence of Kartha from India throughout the year, by itself suggest that HUF is non-resident in that year. Ref:AnnamalaiVsITO34ITR88 2 If one shareholder has absolute majority of shares, can the place where shareholders meetings are held, be construed as Place of control and Management. 11
Residence as per Model Tax Convention (MTC) OECD Model Article 4 12
For the purposes of this Convention, the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein. 13
Para 8.6 of the OECD Commentary states that the term liable to tax does not mean Actual Imposition of Tax. Right to tax persons by the State is sufficient treat them as Liable to tax. Cases in favour of Assessee Emirates Fertilizer Trading Company 272 ITR 706 Green Emirate Shipping and Travels 100 ITD 206 Azadi Bachao Andolan 263 ITR 706 (SC) DIT (IT) Vs ICICI Bank (Mum HC) 49 Taxmann.com 1 (2014) Cases against the Assessee Cyril Pereira s Case 239 ITR 650 Abdul Razzak Meman 276 ITR 306 General ElectricPension Trust 280 ITR 125 (AAR) 14
If an individual is a resident of both Contracting States, then his status shall be determined as follows Permanent Home in one State No No PH Habitual Abode No National of one State Not determined Yes PH in two States Yes State where Personal and Economic Relations are closer (COVI) Yes Yes R E S I D E N T MAP 15 Next
Permanent Home refers to a place which the Individual retains it for his permanent use. Homecouldbeinanyform; House or Apartment Furnished or unfurnished Own or rented out. Permanence of the home is essential. This means individual has arranged to have the dwelling available at all times and occasionally for thepurposeofstay,whichisofshortduration. 16
Determining the Centre of Vital Interests gains importance when a person has Permanent Home in two states. Factors to be kept in mind, while determining which state has closer personal and economic relations (Centre of vital interests) are as follows, Family and Social Relations Occupations Political, cultural and other activities Place of Business Place from which he administers his property All the above circumstances must be examined as a whole. 17 Back
Situation1:HasPermanentHomeinboththeStatesandCentreofVital Interest cannot be determined. Inthiscase,numberofdaysofstaymustbedeterminedineachStateto see, in which state the Individual has stayed for long ie, Habitual Abode. Stay not only at Permanent Home but also at other places in the same State must be taken into consideration. Situation 2 : No Permanent Home in both the States. (Eg : Person going from one hotel to another) All stays in each of the States must be considered to determine place of Habitual Abode. Reasons for stay in each State is not necessary. 18 Back
Where, by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its Place Of Effective Management (POEM) is situated. POEM is the place where the key management and commercial decisions that are necessary for the conduct of the entity s business asawholeareinsubstancemade. An entity may have more than one place of management but it can haveonlyonepoematanyonetime. 19
For the purposes of this Convention, the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that (a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and (b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. 20
Article4- (3) Where, by reason of paragraph 1, a company is a resident of both Contracting States, such company shall be considered to be outside the scope of this Convention except for purposes of paragraph 2 of Article 10 (Dividends), Article 26 (Nondiscrimination), Article 27 (MAP), Article 28 (EOI) and Article 30 (Entry into force). (4) Where, by reason of the provision of paragraph 1, a person other than an individual or a company is a resident of both Contracting States, the competent authorities of the Contracting State shall settle the question by mutual agreement and determine the mode of application of the Convention to such person 21
UK -Article 4 (1) as per Old provision For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. However, new Article 4(1), which is same as in USA, has been introduced vide Notification No. 10/2014 w.r.e.f 27/12/2013. Singapore- Article 4(1) For the purposes of this Agreement, the term "resident of a Contracting State" means any person who is a resident of a Contracting State in accordance with the taxation laws of that State. 22
In several countries, Partnerships are not taxable entities. Income of partnership is taxable in the hands of the partners only. In such cases, are treaty benefits available?? Let us examine the India UK Tax Treaty Article 1 : This Convention shall apply to persons who are residents of one or both of the Contracting States. Article 3 : The term "person" includes an individual, a company, a body of persons and any other entity which is treated as a taxable unitunder the taxation laws in force in the respective Contracting States; 23
Article 4 : For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that: a) this term does not include any person who is liable to tax in that StateinrespectonlyofincomefromsourcesinthatState;and b) in the case of income derived or paid by a partnership, estate, or trust,thistermappliesonlytotheextentthattheincomederivedby suchpartnership,estate,ortrustissubjecttotaxinthatstateasthe income of a resident, either in its hands or in the hands of its partners or beneficiaries. 24
OECD recommended (in para40) that Treaty entitlements must be denied to the Partnership firm. However, it has also recommended that treaty benefits must accrue to the partners of the firm. India has rejected the above view. In the case of Link latersllp Vs ITO, 40 SOT 51, the Mumbai Tribunal has held that treaty benefits must be available to the Partnership firm as long as the income is taxable either in its own hands or in the hands of the partners. 25
Tax Residency Certificate Circular No. 789 dt 13/4/2000 Sec 90(4) of the Income Tax Act 1961 read with Rule Azadi Bacho Andolan Case Treaty Shopping Limitation of Benefits Clause U.S.A Singapore 26
Thank you E. Chaitanya 27