Lot of times US based NRIs who have investments in India need to claim the benefits of Indi -USA DTAA in the form of reduced/nil rate of tax deducted at source by payers on their incomes in India (e.g. NRO bank deposits) or need to claim the credit of tax paid in USA in their Indian tax return.
In such cases, Indian tax rules require them to obtain a Tax Residency Certificate (TRC) from USA. Hence in this post, I am discussing the relevant rules under the US tax law on how an individual can obtain tax residency certificate (TRC) in USA.
How to apply
The Tax Residency Certificate issued by IRS is in Form 6166 & the application that has to be made for grant of Form 6166 has to be in Form 8802.
Who Is Eligible for Form 6166
IRS rules say that any “resident” of USA is eligible for Form 6166. In general, under an income tax treaty, an individual or entity is a resident of the United States if the individual or entity is subject to U.S. tax by reason of residence, citizenship, place of incorporation, or other similar criteria. U.S. residents are subject to tax in the United States on their worldwide income. An entity may be considered subject to tax on its worldwide income even if it is statutorily exempt from tax, such as a pension fund or charity.
Similarly, individuals are considered subject to tax even if their income is less than the amount that would require that they file an income tax return. In general, the IRS will issue Form 6166 only when it can verify that, for the year for which certification is requested one of the following applies.
- You filed an appropriate income tax return (for example, Form 1120 for a domestic corporation).
- In the case of a certification year for which a return is not yet due, you filed a return for the most recent year for which a return was due.
- You are not required to file an income tax return for the tax period on which certification will be based and other documentation is provided.
Also refer my detailed post on IRS Tax Residency Rules – Taxation of US persons: An Overview
Who Is Not Eligible for Form 6166
In general, you are not eligible for Form 6166 if, for the tax period for which your Form 6166 is based, any of the following applies.
- You did not file a required U.S. return.
- You filed a return as a non-resident (including Form 1040-NR, Form 1040-NR-EZ (before tax year 2020), Form 1120-F, Form 1120-FSC, or any of the U.S. possession tax forms).
- You are a dual resident individual who has made (or intends to make), pursuant to the tie-breaker provision within an applicable treaty, a determination that you are not a resident of the United States and are a resident of the other treaty country.
- You are a fiscally transparent entity organized in the United States (that is, a domestic partnership, domestic grantor trust, or domestic LLC disregarded as an entity separate from its owner) and you do not have any U.S. partners, beneficiaries, or owners.
- The entity requesting certification is an exempt organization that is not organized in the United States.
- The entity requesting certification is a trust that is part of an employee benefit plan during the employee benefit plan’s first year of existence, and it is not administered by a qualified custodian bank, as defined in 17 CFR 275.206(4)-2(d)(6)(i).
So, for US based NRIs it is important to ensure that they have filed their returns and filed as a resident else they will not be able to obtain TRC.
Additional documentation reqd. in case of US non-resident Individuals
If you are in any of the following categories for the current or prior tax year for which you request certification, you must submit a statement and documentation, as described below, with Form 8802.
Category 1 – You are a resident under the internal law of both the United States and the treaty country for which you are requesting certification (you are a dual resident).
Documentation required – You need to submit evidence to establish that you are a resident of the United States under the tie-breaker provision in the residence article of the treaty with the country for which you are requesting certification.
Category 2– You are a lawful permanent resident (green card holder) of the United States or U.S. citizen who filed Form 2555 (relates to Foreign Earned Income).
Category 3 – You are a bona fide resident of a U.S. possession.
Documentation for Category 2 or 3 – Attach a statement with Form 8802 and documentation to establish why you believe you should be entitled to certification as a resident of the United States for purposes of the relevant treaty. Under many U.S. treaties, U.S. citizens or green card holders who do not have a substantial presence, permanent home, or habitual abode in the United States during the tax year are not entitled to treaty benefits. U.S. citizens or green card holders who reside outside the United States must examine the specific treaty to determine if they are eligible for treaty benefits and U.S. residency certification. See Exceptions, later.
If you are described in category 2 and are claiming treaty benefits under a provision applicable to payments received in consideration of teaching or research activities, you need to enter the penalties of perjury statement on line 10 of Form 8802 or attach to the form.
Exceptions
You do not need to attach the additional statement or documentation requested if you:
- Are a U.S. citizen or green card holder; and
- Are requesting certification only for Bangladesh, Bulgaria, Cyprus, Hungary, Iceland, India, Kazakhstan, Malta, New Zealand, Russia, South Africa, Sri
- Lanka, or Ukraine; and
- The country for which you are requesting certification and your country of residence are not the same.
So as we can see above, this is a beneficial provision for Indian community. So if you are asking the TRC for purposes of claiming treaty benefits in India & are living in US right now, you are not required to attach any additional statement/documentation to prove that you tie-break to USA as per DTAA.
Category 4 – If you have filed or intend to file a Form 1116 claiming either a foreign tax credit amount in excess of USD $5,000 or a foreign tax credit for any amount of foreign earned income for the tax period for which certification is requested, you must submit evidence that you were (or will be if the request relates to a current year) a resident of the United States and that the foreign taxes paid were not imposed because you were a resident of the foreign country.
In this case, if you have already filed your federal income tax return, you need to also submit a copy of it, including any information return(s) relating to income, such as Form W-2 or Form 1099, along with the Form 1116.
When To File
IRS requires you to mail your application, including full payment of the user fee, at least 45 days before the date you need to submit Form 6166. We will contact you after 30 days if there will be a delay in processing your application. You can call 267-941-1000 (not a toll-free number) and select the U.S. residency option if you have questions regarding your application.
IRS also has expressly stated that they don’t accept early submission of requests. For example, Form 6166 that has a postmark date before December 1 of the prior year. Requests received with a postmark date earlier than December 1 will be returned to the sender. For example, a Form 6166 request for 2021:
- Received with a postmark date before December 1, 2020, cannot be processed;
- Received with a postmark date on or after December 1, 2020, can be processed with the appropriate documentation
Note that presently there is no option to electronically get this certificate. Yes, the fee payment you can do electronically at Pay.gov website.
Fee for obtaining this certificate
Fee per application is USD 85 for individual applications & USD 185 for corporate applications.
Note that the fee is non-refundable. This fee is payable by check/MO or electronically at the Pay.gov website. The transaction number received on electronic payment need to be quoted on the application in Form 8802
Important points:
- It is not that obtaining TRC means you can claim the DTAA benefits. Whether an income is eligible for DTAA benefit needs to be seen holistically with criteria’s other than residence like beneficial ownership etc.
- IRS recommends providing a Daytime Phone Number in your application so that if they have any questions, they can call you instead of mailing a letter. If you are filing a joint application, you can enter either your or your spouse’s daytime phone number.
References – IRS website https://www.irs.gov/forms-pubs/about-form-8802
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