Indian Tax Residence of Onshore and Offshore Trusts
A trust is considered an Indian resident where the control and management are wholly or partially located in India. The use of Indian trust structures for global citizens is often used to house particular assets to mitigate tax and provide asset protection.
India recognizes offshore trusts and places no restrictions on it having non-resident trustees or beneficiaries in an Indian trust. In the case of revocable offshore trusts where the settlor has a power to resume assets, any income derived by the trust is taxable to the settlor as if directly arisen to him. In case of an irrevocable trust certain considerations in case of an irrevocable trusts are outlined below:
- a trustee of an offshore trust is taxed in a representative capacity and comply with tax and reporting requirements if all beneficiaries are Indian residents.
- a mix of resident and nonresident Indian beneficiaries results in only Indian beneficiaries taxable for their distributions received from an offshore trust and the trustee has no representative role in India.
- an offshore trust partly having control and management in India may be taxed as an association of person in India.
The nuances with regards to trusts taxation are primarily based on the residence of the settlor, trustee or beneficiaries. The residence is an important determinant not only to calculate the tax liability but also to comply with the reporting obligations. Our whitepaper titled Interaction of Indian and U.S. Tax Laws discusses in further details regarding the use of trusts structure by high net worth individuals and how it helps in tax planning.