Does the appointment of a non-resident trustee make the trust itself non-resident? More broadly, how is the residential status of a trust determined under the Income-tax Act and Fema?- Name withheld on request
Under Indian income-tax law, the residential status of a trust determines the scope of income that may be subject to tax in India—broadly, worldwide income for a resident trust and India-sourced income for a non-resident trust.
Indian tax law does not prescribe a separate residence test specifically for trusts. A trust therefore falls within the residuary rule, under which every other person is regarded as resident in India in a tax year unless, during that year, the control and management of its affairs is situated wholly outside India.
A trust would qualify as non-resident only where its control and management, as exercised by its trustees, is wholly outside India. If even part of that control and management is exercised from India, the trust would ordinarily be regarded as resident in India.
This makes the question fundamentally one of substance rather than form. The analysis is inherently factual and turns on where the trust’s key decisions are actually taken and, more fundamentally, where its affairs are actually administered and managed. The mix of resident and non-resident trustees may also be relevant, particularly where it affects where effective decision-making and control are exercised.
Accordingly, the mere appointment of a non-resident trustee would not, without more, render the trust non-resident. Non-resident status follows only where the trust is wholly controlled and managed outside India.
Fema takes a different approach
The position under exchange control law is less straightforward. Foreign Exchange Management Act (Fema) does not contain specific provisions dealing with the creation or operation of trusts, nor do the extant foreign exchange regulations prescribe a separate test for determining the residential status of a trust.
Further, a trust is not expressly included within the definition of a ‘person’. Accordingly, a separate residential status is not ordinarily assigned to the trust itself for Fema purposes.
The cross border analysis therefore shifts to the parties connected with the trust, including the settlor, trustees and beneficiaries, as well as the nature and situs, or legal location, of the underlying assets and the transactions undertaken in relation to them.
Ultimately, under Fema, the overarching principle is that what cannot be done directly cannot be achieved indirectly through the interposition of a trust. Conversely, where a transaction is permissible between the relevant settlor, trustee and/or beneficiary, the use of a trust should not, by itself, alter that position.
Rohit Jain is the managing partner and Keshav Singhania, head of Private Client at Singhania & Co.