More than half a century of rapid globalization has linked nations, economies and markets in new configuration. Yet, while global connectivity continues apace, static notions of nationality remain, and citizenship – the birth lottery that determines where individuals can travel and reside, what markets and networks they can access – continues to define and constrain people. Wealthy individuals and families, if they are not globally connected, will remain limited by the particular context, policies and resources of their birth citizenship. These can hinder their ability to respond to new threats or opportunities or to access the global travel, lifestyle, culture, and residence options that appeal to them.
Individuals interested in insuring against the political and economic uncertainty of a particular jurisdiction, as well as those determined to capitalize on the rapidly changing mix of markets, business and culture on offer around the globe, cannot afford to ignore the value of expanding their residency and citizenship options. Today an increasing number of countries are offering opportunities to global high net-worth individuals to obtain citizenship or residency through various programmes in exchange for a substantial financial contribution to their domestic economy. The investment migration industry is in a period of evolution and growth, with residency and citizenship by investment now part of every savvy investor’s vocabulary.
Wealthy individuals in India are willing to capitalize on the opportunities in an emerging market across the world. According to Indian Wealth Report (2019) by Karvy Private Wealth, there has been increased level of interest in emigration scheme and many HNIs have been looking at shifting their base to international locations. Further, in 2020, wealthy Indians again topped the list for ‘residency by investment’ or ‘citizenship by investment’ and the number of enquiries rose from 2019. Immigrant Investor Programs are appealing to Indian HNIs for reasons like improvement in international mobility, tax planning, expansion of business, quality of life, political reason, wealth management and portfolio diversification, family security, etc. Another reason may be that such investments can provide a hedge against the domestic economy and market risk. While Indian HNIs are considering investment under citizenship and residency programmes outside India, they have to bear in mind the following relevant factors in India:
• Stipulations of the Foreign Exchange Management Act, 1999, while making investment outside India under residency or citizenship programme;
• Tax impact in India under the Income-tax Act, 1961, and in foreign country post investment under residency and citizenship programme; and
• Citizenship status in India under the Citizenship Act, 1955, if investment is made under Citizenship programme.
Overall, the analysis of the above factors will play a crucial role for effective decision-making while opting for Immigrant Investor Programs offered by various countries.
Residency and Citizenship Programme by countries
Various countries across the world have chosen to implement Immigrant Investor Programs which offer residence by investment or citizenship by investment or both residence and citizenship by investment to wealthy individuals. It is prudent to briefly understand the programmes and how they work prior to discussing the Indian legislations.
Citizenship by investment is a means to secure a second citizenship and passport in another country by investing in its economy. This can be accomplished through different types of investment options including real estate, government bonds, one-time donation and establishing business with minimum capital outlay. Such options vary country to country. Grenada, for example, provides investment options like donation to government or investment in qualified real estate with minimum capital outlay of USD 150,000 while St. Lucia provides investment options like donation to government, investment in real estate or investment in enterprise project with minimum capital outlay of USD 100,000. Further, citizenship by investment programs legally confer citizenship status faster than traditional immigration processes and do so without requiring investors to put their lives on hold. Whereas, residency by investment, better known as “Golden Visa”, is the process of obtaining a permanent residency card in another country by investing in the economy of that country, like the residency permit provided by United Kingdom, Cyprus, Malta, etc. Permanent residency status is then conferred at an accelerated rate compared to traditional applications like number of days stay requirement.
One of the aspects that can be observed under these programmes is that wealthy individuals looking to avail the emerging opportunities across the world have to invest substantial funds in the other country. Indian HNIs should consider such aspect as a prominent factor while applying for residency or citizenship programme offered by various countries since India has exchange control regulations which place certain limitations on individuals for remitting funds outside India. Further, it can be observed that the above programmes provide for bare minimum days of physical presence or no physical presence requirement in the countries. Therefore, Indian HNIs’ physical presence in those countries may not be obligatory. On the other hand, if they are staying in India, they have to be mindful of their tax position in India. Considering the observations, it is imperative for Indian HNIs to be well versed with Indian legislations so that comparatively they are in a better position to deal with the logistics.
Applicability of Foreign Exchange Management Act (FEMA), 1999
Foreign Exchange Management Act, 1999 is the principal legislation in India governing all foreign exchange transactions in India. FEMA in itself is not an independent and isolated law. It has to be analysed along with the regulations, rules, notifications, circulars and master directions issued thereunder. Under FEMA, the foreign exchange transactions are categorized in two parts – current account transactions and capital account transactions. The governing of the said transactions under FEMA varies based on the residential status of the individual. The criteria to determine the residential status of an individual under FEMA differs from the conditions prescribed under the Income-tax Act, 1961. Under both the laws the residential status has to be determined independently.
Determination of residential status under FEMA: Under FEMA, the term “person resident in India” is defined under 2(v) of FEMA. As per the said section, an individual will be considered a “person resident in India” if that person has been in India in the preceding financial year for more than 182 days. However, there are exceptions in clauses (A) and (B) to section 2(v) of FEMA as under:
• As per clause (A) to section 2(v), if a person leaves India for the purpose of taking up employment outside India or for carrying on any business outside India or for any purpose which indicates his intention to stay outside India for an uncertain period, he will not be a person resident in India.
• As per clause (B) to section 2(v), a person who has come to or stays in India otherwise than for employment, or carrying on business, or for any other purpose which indicates his intention to stay in India for an uncertain period will not be a person resident in India. However, if the person comes or stays in India for employment, or for carrying on business, or with an intention to stay in India for an uncertain period, he shall be considered as person resident in India.
Further, section 2(w) of FEMA defines the term “person resident outside India” to mean a person who is not resident in India. The terms Non-Resident Indian (“NRI”), Person of Indian Origin (“PIO”) and Overseas Citizen of India (“OCI”) are also defined under different regulations of the FEMA. NRI means an individual resident outside India who is a citizen of India. The term PIO means a person resident outside India who is not a citizen of India, and satisfying other prescribed conditions mentioned in the relevant regulation for being eligible as a PIO. OCI refers to an individual resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955.
An understanding of the above terms plays a significant role under FEMA as the permissibility to remit the funds from India differs according to the status of the individual. Having analysed the same, we now deal with the permissible limits for remittance outside India by a person resident in India and person resident outside India.
Remittance facility for person resident in India: An Indian resident individual who proposes to invest outside India can remit the funds under the Liberalised Remittance Scheme (“LRS”). LRS was introduced by the Reserve Bank of India (“RBI”) on February 4, 2004 as a liberalization measure to facilitate resident individuals to remit funds abroad within the limits for permitted capital or current account transactions or a combination of both. The scheme and limit under the scheme are amended from time to time by way of notification or circulars. Currently, under the LRS, Authorised Dealers (“AD Bank”) are permitted to freely allow remittances by an Indian resident individual upto USD 250,000 per financial year (April- March) for any permitted current or capital account transaction or a combination of both. Any release of foreign exchange exceeding the LRS limit per financial year shall require prior permission from the RBI.
The permissible current account transactions are specified in Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, viz., private visit; gift/donation; going abroad on employment; emigration; maintenance of close relatives abroad; business trip; medical treatment abroad; studies abroad. The permissible capital account transactions are specified in the Schedule I of Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, respectively. The permissible capital account transactions by an individual under LRS are as under:
Opening of foreign currency abroad with a bank;
Purchase of property abroad;
Making investments abroad – acquisition and holding shares of both listed and unlisted overseas company or debt instruments; investment in units of mutual funds, venture capital funds, unrated debt securities, promissory notes;
Setting up wholly owned securities and joint ventures outside India for bona fide business;
As analysed under the residency or citizenship by investment programme, individuals either have to make investment in real estate or make donation to government etc. Indian HNIs, under the LRS scheme, may apply for the residency or citizenship by investment as the same are permissible foreign exchange transactions. However, currently they can remit the funds only upto the limit of USD 250,000 per financial year. Such limit has to be reviewed at the time of remittance. Considering this, HNIs should plan in advance how the minimum funds required under the said programme can be remitted from India. It is possible that the minimum outlay of funds required may be more than the limit allowed under LRS depending on the type of programme applied for. In such a scenario, Indian HNIs may plan to accumulate their funds in their foreign bank account by making remittance within the LRS limits per financial year and then apply for the residency or citizenship programme in the foreign country.
Alternatively, the scheme provides that remittances under LRS can be consolidated in respect of close family members subject to the individual family members complying with the terms and conditions of the scheme. Such clubbing is permitted by other family members only for capital account transactions such as opening a bank account / investment / purchase of property, if they are the co-owners/co-partners of the investment / property / overseas bank account. However, it is pertinent to note that a resident cannot gift to another resident, in foreign currency, for the credit of the latter’s foreign currency account held abroad under LRS. Accordingly, Indian HNIs can apply for the residency or citizenship programme along with the family members where they act as co-owners of the property under the programmes. However, if the programme requires a direct donation to the government, such consolidation may not be permissible.
HNIs who have remitted funds under LRS can retain and reinvest the income earned on the investments outside India. At present, the resident individual is not required to repatriate in India the funds or income generated out of investments made under LRS. To remit the funds under LRS, Individuals have to just file Form A2 and declaration with their AD bank which is a simple process and hassle free. Further, an AD bank shall collect TCS at the rate of 5% on the amount to be remitted outside India under LRS if the amount exceeds Indian rupees seven lakhs in a financial year. In non-PAN/Aadhaar cases, the rate shall be 10%. This TCS amount can be adjusted by individuals while filing their tax returns.
Remittance facility for person resident outside India: Under the Foreign Exchange Management (Deposit) Regulations 2016 (‘Deposit Regulations’) any person resident outside India is eligible to open and maintain Non-Resident Ordinary Account (“NRO”) account with an AD Bank in India for the purpose of putting through bona fide transactions denominated in rupees not involving any violation of the provisions of FEMA, and the rules and regulations made thereunder. Such person resident outside India can freely remit outside India current income like dividend, rent, interest, etc., earned in India net of applicable taxes through NRO account. Further, an NRI or a PIO (which includes OCI) is also permitted to remit amounts out of balances held in NRO account through AD bank upto USD 1,000,000 (US Dollar one million) per financial year without end use restrictions.
Consequently, Indian HNIs who are planning to shift internationally may plan their affairs as they can remit more funds outside India being NRI or PIO out of the balances lying in NRO account. Such funds may be utilised for investment under residency or citizenship programme.
To remit the funds from NRO account, the NRI or the PIO has to file form A2 and a declaration along with Form 15CA / CB with his AD bank. Form 15CB is a certificate from chartered accountant which is required when individuals remit income which is chargeable to tax in India. In case the balance is to be transferred from NRO account to their foreign bank accounts, only Form 15CA is required however practically certain banks request to file Form 15CB too.
Applicability of the Income Tax Act, 1961
In India, the Income Tax Act, 1961 (“Act”) as such does not place any restrictions with respect to investment outside India by individuals. However, taxability of income in India earned through such investment may vary depending on the residential status of the individual. The scope of total income of individuals under the Act differs as per the residential status. Residential status of individual is determined under section 6 of the Act. Section 6 prescribes a test which classifies individual as (1) residents and (2) non-residents. Residents are further classified then into (i) resident and ordinarily resident and (ii) resident but not ordinarily resident.
Test 1 – Residency by physical presence in India: Under section 6(1) of the Act an individual is said to be “resident” in India in any financial year, if he satisfies any one of the following basic conditions:
• His stay in India in that year (1 April–31 March) is for a period of 182 days or more; or
• His stay in India is for a period or periods amounting to 60 days or more during the relevant financial year (1 April–31 March) and 365 days or more during 4 years immediately preceding the relevant financial year (1 April–31 March).
If any of the above conditions is fulfilled, the individual shall be “resident of India” even if they may be citizen of a foreign country. However, certain relaxation is provided to an Indian citizen or PIO who comes on a visit to India. Such individual shall be resident in India only if their stay in India exceeds 182 days or more. Recently, the Government of India through the Finance Act, 2020 has curtailed this relaxation and has categorized an Indian citizen or PIO into two categories:
• Category 1: Having total income, other than the income from foreign sources, not exceeding Rs 15 lakhs during the previous year and stay in India exceeding182 days or more;
• Category 2: Having total income, other than the income from foreign sources, exceeding Rs. 15 lakhs during the previous year and stay in India exceeding 120 days or more.
Therefore, where an Indian citizen or a PIO, falling under Category 2 above, comes on a visit to India and his stay in India is equal to or more than 120 days during the relevant year and his stay in India during the 4 years preceeding the relevant year exceeds 365 days, he shall be considered as a resident in India. Thus, it can be seen that the benefit of Explanation 1(b) to Section 6(1) has been curtailed only in respect of Indian citizens and PIOs falling under Category 2. The threshold under the said Explanation 1(b) for Indian citizens and PIOs falling under Category 1 remains 182 days.
Test 2 – Deemed residency test: Even if individuals who are Indian citizen do not fulfil the above physical presence test, they may still qualify as a resident of India. The Finance Act, 2020 has inserted a new Sub-Section (1A) in Section 6 that provides for deemed residency in respect of an Indian citizen. As per the newly introduced sub-section, an individual who is a citizen of India shall be a resident of India, irrespective of his physical presence in India, if he fulfils the following conditions –
• His total income, other than the income from foreign sources, exceeds Rs. 15 lakhs during the previous year and
• He is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature;
Therefore, an Indian citizen may become tax resident (deemed residency) even where such person has not spent even a single day in India. Through the Finance Act, 2021, the definition of “liable to tax” is inserted by Section 2(29A) of the Act. The term “liable to tax” in relation to a person and with reference to a country means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country.
Resident but Not Ordinarily Resident: Once an individual is considered as a resident of India by virtue of the above test, the next limb is to determine whether he is resident and ordinarily resident or resident but not ordinarily resident. A resident individual is treated as “Not Ordinarily Resident” in India if he satisfies any of the following conditions:
a) He has not been a non-resident in India in 9 out of 10 financial years [according to basic condition cited in section 6(1) above] immediately preceding the relevant financial year; or
b) He has not been in India for a period of 729 days or less during 7 years immediately preceding the relevant financial year.
If both the conditions are not satisfied, an individual shall be resident and ordinary resident of India. Further, the Finance Act, 2020 has outrightly extended the status of “Not Ordinarily Resident” to a citizen of India, or a person of Indian origin who becomes resident of India under category 2 as discussed above and a citizen of India who is deemed to be resident in India under sub-section (1A). Therefore, such individuals shall always be resident but not ordinarily resident in India.
Scope of Total Income: Section 5 of the Act determines the scope of total income of a person. In case of resident and ordinarily resident, his global income, i.e., income earned in India as well as income earned outside India will be charged to tax in India. On the other hand, non-resident and resident but not ordinarily resident’s tax liability is restricted to the income they earn in India. They need not pay any tax in India on their foreign income.
Impact on Indian HNIs looking for residency or citizenship programme outside India: As analysed, India taxes individuals considering their residential status. When Indian HNIs take up residency or citizenship outside India, they have to be conversant about their residential status in India each financial year. In case if they continue to stay in India and if they pass the physical presence test under Sections 6(1) and 6(6), they shall be resident and ordinary resident of India. In such scenarios, HNIs may become a dual-resident whereby both the countries shall have right to tax their resident. India taxes resident and ordinarily resident individuals on their world-wide income which shall have a great impact on the cash inflows of the individual. However, HNIs may resort to the tie-breaker tests under the tax treaty between India and the foreign country to determine their final residential status.
Tie-breaker tests take into consideration various factors pertaining to the individual such as availability of a permanent home in the state, personal and economic relations (centre of vital interests), habitual abode and state of nationality of the individual in a sequential order to determine the residential status of an individual. Considering the above tests, if HNIs can prove their residential status as a resident of the foreign country under the tie-breaker tests, he shall be a non-resident of India. But to prove the same before the Indian tax authorities would involve its own set of challenges. Further, if HNIs take up residency or citizenship of a country with which India does not have tax treaty, like British Virgin Islands, Belize, Ecuador, Panama, Paraguay, etc., HNIs will end up paying taxes in India on their world-wide income. This is also a major concern which HNIs should bear in mind before finalising the countries in which they plan to opt for residency or citizenship.
Even if HNIs do not pass the physical presence test but continue to be a citizen of India, they may still be considered as a resident but not ordinarily resident of India by virtue of new deeming provisions introduced in the Act. The rationale for bringing in the new residency provisions is very clear. Indian tax authorities seek to target Indian citizens who carry out substantial economic activities from India but manage their period of stay in India so as to remain a non-resident in India in perpetuity. Therefore, HNIs who have shifted outside India or propose to shift outside India for legitimate reasons and to carry out their businesses outside India without managing it from India may not face the effect of such rigorous provision. Even the Central Board of Direct Taxes released a clarification before the provisions were enacted in the Act which states that there is no intention to tax Indian citizens who are bona fide workers in other countries, including Middle East, etc. Recently, Finance Minister Nirmal Sitharaman clarified that salary income earned by non-resident Indians in Gulf countries would continue to be exempt from tax in India. However, since these are newly inserted provisions certain clarifications are awaited from the tax authorities to ensure that the newly incorporated provisions do not have unintended consequences.
Further, the reporting obligation also differs under the Act based on the residential status of the individuals. Generally, an individual whether resident or non-resident (with certain exceptions) having income from India is required to file the return of income in India. However, under the provisions of Act, an individual who is resident and ordinary resident of India has an additional obligation to disclose all foreign assets in the FA schedule of their return of income. Therefore, those Indian HNIs who takes up residency or citizenship outside India will be under obligation to disclose all their foreign assets in India only if they are resident and ordinary resident of India.
Non-permissibility of Dual Citizenship
Every country decides who its citizens are and who cannot be. This might be decided by the virtue of a particular person being born in the territory of that country or a person migrating from some other country and living in the territory of the principal country over a period of time. Citizenship in India has been described under the statutory provisions of the Citizenship Act, 1955. Part-II of the Indian Constitution also provides for the citizenship in India. Article 9(1) of the Indian Constitution explicitly states that any citizen of India, who by naturalization or registration acquires the citizenship of another country, shall cease to be an Indian citizen. India has since the very beginning taken a stand of single citizenship. It advocates single citizenship throughout its territory.
Wealthy individuals planning to take citizenship by investment in foreign countries shall cease to be an Indian citizen. Individuals have to give up their citizenship in India as India does not allow dual citizenship. However, such individuals may apply to the Government of India for OCI. An OCI card does not make a person a citizen of India and does not grant any voting rights. However, an OCI card holder may get benefits such as multiple entries and multipurpose lifelong visas to India, exemption from registration with Foreigners Regional Registration Officer (“FRRO”) or Foreigners Registration Officer (“FRO”) for any length of stay in India subject to restrictions for certain activities, parity with NRIs in the field of finance, economy and education except in the acquisition of agricultural or plantation properties.
Economic migration is a net plus for the world, a net plus for developed nations, and a net plus for highly skilled individuals and investors. Mirroring the trend, the number of investment migration programs are increasing steadily as governments tap into their potential to boost capital and talent inflows. Even wealthy individuals are extending their arms to capitalize on the opportunities across the world. However, with the opportunities there are certain risks also. Today, the biggest challenges wealthy individual and their families face is less of an infrastructure character and more of a regulatory and tax nature. The same is the case for wealthy individuals residing in India. Indian individuals who are planning to move their base internationally have to be conversant of the remittance restrictions under the exchange control regulations. Additionally, individuals in India who are moving from one place to another and having offspring with business interest living in a number of different countries and studying or temporarily residing in other countries prompt a growing number of tax questions both at individual and business levels. However, this movement may be supported by sophisticated tax and legal planning. Such planning will not primarily aim to reduce taxes, but rather to comply with necessary regulatory requirements and to avoid the risk of double taxation of the individual income in a global context.