How to deal with double taxation and dual residency in year of migration

When migrating, tax residency and taxation are important topics to consider, especially in the year of migration from India. The possibility of dual residency and double taxation of income arises mainly due to differences in tax years, income-tax laws and residency rules that are applicable in different countries. This situation could be pertinent for individuals who have recently migrated or plan to migrate from India for personal or economic considerations.

There are many facts and circumstances that play an important role while analysing the double-tax situation such as tax residential status in both countries, the sources and nature of income, and the availability of relief under Double Taxation Avoidance Agreements (DTAA). Prominent nations with which India has signed DTAAs include the US, the UK, Canada, Germany, Japan, Australia, Singapore, France and Switzerland.
India taxes global income for the resident and ordinarily resident (ROR) taxpayer and largely India-sourced income for the non-resident and not ordinarily resident (NOR) taxpayer.

A resident is defined as an individual whose stay in India is either 182 days or more during a financial year (FY), or 60 days or more during a FY (subject to certain exceptions) along with 365 days or more in the four FYs immediately preceding the relevant FY.

Further, a resident taxpayer would qualify as an ROR if the total stay in the preceding seven FYs was 730 days or more and the person was resident in India in at least two FYs in the preceding 10 FYs.

As an example, if an individual who has always lived in India in the past moves to the US to take up employment there on December 1, 2021, such an individual would qualify as an ROR of India for FY 2021-22.

It should be noted that the Finance Act, 2020, provided that with effect from FY 2020-21, an Indian citizen would be deemed to be a resident in India if such an individual is not ‘liable to tax’ in any other country or territory on account of residency or domicile (or any other criteria of similar nature) in that country, provided his total income, other than income from foreign sources, exceeds Rs 15 lakh in the relevant FY. Further, such a deemed resident individual would qualify to be an NOR in India for such FY.

Hence, keeping track of residential status that may undergo a change, especially in the year of migration as well as a ‘visit’ to India in the subsequent years post settling abroad, becomes vital.

Determination of residential status under the applicable DTAA is important, especially in the year of departure, in cases where an individual is an ROR of India and also a resident of a foreign country under domestic tax laws of both countries. Some countries, including the US, consider their citizens and green card holders as residents for tax purposes at all times – whether they are physically present in the country or not.

Also, a difference in tax years – India has an April-to-March tax year whereas major European countries have the calendar year as their tax year – can often result in dual residency. As a result, an individual could continue to be taxed on his worldwide income in India and his host country.

In such a situation, while both countries would have first claim to tax the income sourced from the respective country, the question to resolve would be which country would let go of taxing rights in case of income that’s considered taxable in both countries because of dual residency. Therefore, determination of residential status under DTAA is essential in ascertaining the ultimate right to tax.

Many countries require individuals to produce a tax residency certificate issued by the relevant taxation authority to prove tax residency.

Tie-breaker
When an individual qualifies as a resident of both countries, the DTAA provides for application of a ‘tie-breaker test’ to ensure that such an individual is an ultimate resident of one of the two countries.
The ‘tie-breaker test’ requires the resolution of dual residency into single residency by applying specified criteria including availability of permanent home, location of centre of vital interest (economic and social relations), habitual abode and nationality. Such criteria are applied in a sequential manner and subject to the conditions specified in the applicable DTAA as well as careful evaluation of the facts and circumstances applicable to each individual.

Generally, the country of ultimate residence always retains the right to tax all income of the taxpayer. However, double taxation is relieved in most cases by either the source country (where the income arises) giving an exemption to the taxpayer or the country of ultimate residence giving credit for taxes paid in the source country (foreign tax credit or FTC) on such doubly taxed income, subject to specified limits and conditions.
The general principles for determining the availability of FTC are:

Tax credit could be claimed in the country in which an emigrated individual would be ultimate tax resident under DTAA

Income should be taxed in both countries

Tax credit would be available to the extent of tax paid on the doubly taxed income

Relevant proof of tax paid in the other country on such doubly taxed income should be available

Details of doubly taxed income and FTC claimed thereon is required to be reported in Form 67 to be filed alongside the income-tax return
It should also be noted that a claim under DTAA may be questioned, especially in the lower levels of the income-tax authorities. Thus, it is important to maintain robust corroborative documentation to substantiate the claim.

Double-taxation nuances in the case of migration should be evaluated on a timely basis to avoid unintended non-compliances. While this article provides general guidance on such matters, the facts of each case will be evaluated on a case-to-case basis for specific actions to be undertaken.