Foreign Tax Credit in USA on sale of shares in India

Posted by Sanket Shah | General | Thursday 3 May 2018 3:21 pm

FOREIGN TAX CREDIT IN USA ON SALE OF SHARES IN INDIA

Under U.S. tax law, a foreign tax credit is available for foreign-source income and gains that were taxed in the foreign jurisdiction.

The general U.S. source rule provides that subject to certain exceptions, the source of capital gains from the sale of a personal property is determined based on the residency of the person selling the asset.

For these purposes, “U.S. resident” is

  1. any individual who
    1. is a U.S. citizen or a resident alien and does not have a tax home in a foreign country, or
    2. any corporation, trust, or estate that is a U.S. person.
  2. is a nonresident and has a tax home in the U.S.; and

The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). The regulations provide that an individual’s tax home is located where his or her regular or principal place of business is located. An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.

When an individual has more than one abode available (i.e., one in the U.S. and one in a foreign country), claiming a foreign tax home may not be simple.

Here is a determination test:

Determination for Personal Property sourcing rules IRC Status Tax Home in India Tax Home in US Tax Levied on Foreign Source
US resident 865(g)(1)(A) Resident Alien No Yes None
US resident 865(g)(1)(A) Non Resident Alien No Yes None
US non resident 865(g)(1)(B) Resident Alien Yes No 10%
US non resident 865(g)(1)(B) Non Resident Alien Yes No 10%

 

Let us understand Indian tax rules:

FY 2018 -19 tax law in India on sale of shares for an Individual:

Sale of Shares of Long Term Capital Gain tax rate Short Term Capital Gain tax rate
Listed Entity (STT paid) 10% (subject to certain conditions) 15%
Unlisted Entity or Non STT paid 20% (if claiming indexation benefit)10% (if not claiming indexation benefit) Depending on the Slab rates

* Subject to surcharge and cess as applicable.

Based on the above:

  1. If a client is living in US and HAS a home in US and NO home in India, then Foreign tax credit shall not be available for the taxes paid in India on the gain on sale of shares.
  2. If a client is living in India and HAS a home in India and NO home in US, then Foreign tax credit shall be available if the taxes paid in India are 10% or more on the gain on sale of shares.
  3. If a client is living in US and HAS a home in India and HAS a home in US, then first we have to determine where he has domestic ties (e.g. usual work location, familial, economic and personal ties). Based on the ties:
    1. if it determined that he closer ties with US, then Foreign tax credit shall not be available for the taxes paid in India on the gain on sale of shares.
    2. if it determined that he closer ties with INDIA, then Foreign tax credit shall be available if the taxes paid are 10% or more on the gain on sale of shares.

 

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