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Overseas Indians Float Local Trusts to Escape RNOR Tag

Patriarchs of many business families living abroad and person of Indian origin (PIO) are housing their funds, properties and other income generating assets here in local trusts to escape the tag of RNOR (resident but not ordinary resident), spend more time in India, and address a lurking fear that the government could change the law in the near future to make them disclose their assets across the world. At last 10 Indian families from the US, Africa and UK have set up irrevocable, discretionary trusts in Indian since the residency law was changed two year ago, said persons who have advised them. The status of an RNOR lies in between that of a non-resident Indian who stays more than 181 days in the country and a regular resident Indian. Under the new law, a non-resident visiting Indian and spending more than 120 days (but less than 182 days) is treated as RNOR if the person’s income from assets in Indian is ₹15lakh or more. Such a person has to fork out higher tax (like a resident Indian) – un like an NRI who pays a much lower pays a much lower tax a (of 12.5% to 15%) in accordance with the respective tax treaty between Indian and the country where she is based. But more than tax impact, the fear that this may be the first step towards a mandatory disclosure off all overseas assets has unnerved many. Currency, only resident Indians have to spell out their foreign assets in the Income Tax (I-T) return forms while NRIs and RNORs do have make any such disclosure. This, they fear, many changes for RNORs. “Most of them are in the autumn of their lives, having spent decades abroad and amassing wealth. But they have deep bonds with India, miss their motherland and want to spend five to six months every year to handhold and guide local entrepreneurs and participate in entrepreneurs and participate in philanthropy. Some also fear that a change in the RNORs status could be a precursor to a change in disclose sure regulations on their overseas assets – some high they are not comfortable with they are not comfortable with. So a combination of factors is going in the formation of the trusts despite the fact there is absolutely no tax advantage,” said Bijal Ajinkya, partner at the law firm Khaitan & Co. The head of the trust family acts as the settlor of the trust, professionals are invited as trustees while children and grandchildren are named as beneficiaries of the trust. “Several non-residents have business interests in Indian and need to be present here for managing the business. This necessitates their presence in Indian beyond 120 days but for less than 182 days. They do consider settling their assets into trusts of which they are not the beneficiaries – thereby, reducing their income in Indian below ₹15lakh. This, of course, has larger asset divestment issues; but it could act as a means of permitting stay in Indian beyond 120 days and up to 182 days, “said Dinesh Kanabar, founder and CEO of Dhruva Advisors, one of the large tax and regulatory boutiques.

Transferring assets to trusts does not help in lowering tax as the income earned by the domestic trust is taxed at the same rate as applicable to a resident, which could be as high as 43%. However, the advantage is that since the income of ₹15lakh (or more) is earned by trust and not by the PIO, the person is not categorized as RNOR. An RNOR who wishes to lower his tax outgo to the level of an NRI has to demonstrate that his economic and personal ties in the foreign country are deeper than those in Indian under the tie-breaker test allowed under tax treaty. But convincing the tax office isn’t easy. A non – resident can slip into an RNOR status even if she doesn’t visit for a days as long as her income from India is ₹15lakh or more and is ‘not liable to pay tax’ in the country where she resides thanks to another provision introduced in the law. This has impacted many senior professionals working in the UAE and Gulf countries having no income tax on individuals. “Some of them are also in the process of forming trust in which the income earned in Indian is booked, “said Ajinkya. NRI business families in Dubai, however, have found a workaround after the UAE introduced a 9% tax this year on ‘business income’ above Dirham 375,000. “They show a small part of their income as business income, and pay tax on it to avoid the RNOR status. Once they are taxed, no matter how little the amount, they can no longer be described as those ‘not liable to pay tax’.” Tax said an UAE consultant The provision was introduced to catch the proverbial to catch the provision was introduced to catch the proverbial ‘tax travelers’ who reside in zero – tax jurisdictions, avoids tax on overseas income and pays very little tax in India. “They had lobbied with the UAE after the RNOR rule was changed in India. That has paid off with the UAE introducing a nominal tax. But unfortunately, the well-paid salaried NRIs in India are impacted as they can’t show any part of their earnings as business income and paying a small tax,” he said.

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