INDIA: Overseas families float local trusts to escape RNOR tag.

As published on economictimes.indiatimes.com, Monday 4 April, 2022.

Patriarchs of many business families living abroad and persons 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 least 10 Indian families from the US, Africa and the UK have set up irrevocable, discretionary trusts in India since the residency law was changed two years 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 India and spending more than 120 days (but less than 182 days) is treated as RNOR if the person's income from assets in India is ₹15 lakh or more. Such a person has to fork out higher tax (like a resident Indian) - unlike an NRI who pays a much lower tax (of 12.5% to 15%) in accordance with the respective tax treaty between India and the country where she is based. But more than the tax impact, the fear that this may be the first step towards a mandatory disclosure of all overseas assets has unnerved many. Currently, only resident Indians have to spell out their foreign assets in the Income Tax (I-T) return forms while NRIs and RNORs do not have to make any such disclosure. This, they fear, may change 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 philanthropy. Some also fear that a change in the RNOR status could be a precursor to a change in disclosure regulations on their overseas assets - something 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 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 India and need to be present here for managing the business. This necessitates their presence in India 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 India below ₹15 lakh. This, of course, has larger asset divestment issues; but it could act as a means of permitting stay in India beyond 120 days and up to 182 days," said Dinesh Kanabar, founder and CEO of Dhruva Advisors, one of the largest 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 ₹15 lakh (or more) is earned by the trust and not by the PIO, the person is not categorised 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 India 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 day as long as her income from India is ₹15 lakh 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 trusts in which the income earned in India 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'," said an UAE consultant.

The provision was introduced to catch the proverbial 'tax travellers' 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 avoid the RNOR tag by paying a small tax," he said.

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