Consider an Indian professional who relocates to the United States, becomes a US tax resident, and serves as a senior executive of a US company in which he holds a controlling stake, say 70 per cent. As a sale of those shares approaches, a second move is contemplated: open a branch office in the UAE with a single employee and minimal activity, spend enough days in the Emirates to claim UAE tax residency, and sell the shares as a resident of a jurisdiction that levies no personal income tax. The sequence looks tidy on a whiteboard. Under Indian law it runs into at least three independent obstacles, each capable of defeating the plan on its own: the deemed-residency rule in Section 6(1A) of the Income Tax Act 1961, the General Anti-Avoidance Rules (GAAR) in Chapter X-A, and the indirect-transfer provisions of Section 9(1)(i). This piece examines each in turn, because the structure recurs in cross-border planning conversations far more often than its prospects justify.
Losing Indian Residency Is the Easy Part
An individual's Indian tax residency is determined annually under Section 6 of the Income Tax Act 1961, which sorts taxpayers into three categories: resident (taxed on global income), resident but not ordinarily resident (RNOR, taxed on a narrower base), and non-resident (taxed on Indian-source income only). The basic day-count tests provide that an individual is resident if he
"is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or ... having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year."
An individual who fails both tests is a non-resident. The Finance Act 2020 added a further wrinkle: an Indian citizen or person of Indian origin visiting India, whose income (excluding foreign sources) exceeds ₹15 lakh, can be caught by a reduced 120-day threshold. Subject to that, a genuine relocation to the United States that keeps Indian presence below the thresholds does end ordinary residency. So far, the plan works.
The Deemed-Residency Rule: Section 6(1A)
The same Finance Act 2020 introduced Section 6(1A), effective from Assessment Year 2021-22, and it is aimed squarely at the citizen who arranges to be tax resident nowhere. An Indian citizen whose total income, excluding income from foreign sources, exceeds ₹15 lakh in a previous year is deemed a resident of India if he is not liable to tax in any other country by reason of residence or domicile. The deemed resident is automatically classified as RNOR, which means foreign-source income (not derived from a business controlled in India) stays outside the net, but income earned, accruing or arising in India, and income from a business controlled from India, remains fully taxable.
The sharper consequence is the loss of treaty access. Once deemed residency is invoked, the individual cannot claim benefits under any Double Taxation Avoidance Agreement (DTAA). As one recent analysis of the rule puts it, if Indian-source taxable income from property sales, equity gains, dividend or interest crosses ₹15 lakh in a financial year, "deemed residency kicks in and every treaty benefit disappears."
Here lies the structural flaw in the UAE leg of the plan. The UAE imposes no personal income tax on individuals; its 2023 corporate tax applies only to businesses above an AED 375,000 threshold. However long the individual stays in the Emirates, no personal tax liability arises there. That means he is not "liable to tax" in any other country, which is precisely the trigger for Section 6(1A). A move designed to place the individual in a zero-tax jurisdiction is, by that very design, a move into the deemed-residency rule, in every year in which the conditions are met.
What the Treaties Do and Do Not Promise
India-USA: both states may tax capital gains
The India-USA DTAA (signed 12 September 1989, effective 1 January 1991) takes an unusually permissive approach to capital gains. Article 13 provides simply that "each Contracting State may tax capital gains in accordance with the provisions of its domestic law." Neither state gets exclusive taxing rights; double taxation is relieved through the foreign tax credit mechanism in Article 25. So even a clean US residency does not oust India's ability to tax gains that Indian domestic law reaches (on which, see Section 9 below) - it only guarantees credit relief.
Where dual residency arises, Article 4 applies the familiar tie-breaker cascade: permanent home, centre of vital interests, habitual abode, and finally nationality. The treaty's Limitation of Benefits clause (Article 24) is directed principally at entities rather than individuals, and the treaty contains no explicit principal purpose test (PPT), though the BEPS Multilateral Instrument reflects the broader move toward denying benefits to arrangements whose principal purpose is a tax advantage. Under Indian law, that function is already performed by GAAR.
India-UAE: the 183-day test and its limits
The India-UAE DTAA (effective 22 September 1993) defines a UAE-resident individual as one "present in the UAE for a period or periods totalling in the aggregate at least 183 days in the calendar year concerned." For treaty purposes this is a pure day-count test, with no requirement of employment, business activity or substance. UAE domestic law is stricter for shorter stays: presence of 183 days or more suffices on its own; 90 to 182 days requires proof of employment, business or a permanent place of residence; below 90 days, the individual must show a primary place of residence and centre of financial and personal interests in the UAE.
The 183-day route is superficially attractive, but three features undermine it. First, the memo's central point: because the UAE levies no personal income tax, treaty residency does not make the individual "liable to tax" there, so Section 6(1A) deemed residency can still apply once Indian-source income crosses ₹15 lakh - and with it the loss of treaty benefits. Second, where a residency conflict must be resolved, the tie-breaker factors (permanent home, vital interests, habitual abode, nationality) are likely to point back to India for an Indian citizen whose home, family or economic interests remain there. Third, even a residency claim that survives on paper is exposed to GAAR's substance scrutiny, to which we now turn.
GAAR: The Override Built for This Arrangement
The General Anti-Avoidance Rules, codified in Chapter X-A (Sections 95 to 102) of the Income Tax Act, were enacted by the Finance Act 2012 and took effect from 1 April 2017. They permit the tax authorities to declare an arrangement an "impermissible avoidance arrangement" (IAA) and to recharacterize its tax consequences. Critically, Section 90(2A) makes GAAR applicable notwithstanding anything in a tax treaty: where the rules bite, treaty benefits can be denied.
When an arrangement is impermissible
Under Section 96, an arrangement is an IAA only if the principal purpose of the arrangement (or a step in it) is to obtain a tax benefit - a rebuttable presumption the taxpayer can displace with contemporaneous evidence of commercial objectives - and at least one "tainted element" is present: rights or obligations not ordinarily created between parties dealing at arm's length; misuse or abuse of the Act's provisions; lack of commercial substance as defined in Section 97; or a manner of execution not ordinarily employed for bona fide purposes. A monetary floor applies: under Rule 10U(1)(a), GAAR is invoked only where the tax benefit exceeds ₹3 crore in a financial year - a threshold the gains on a 70 per cent stake in an operating company would comfortably cross.
The CBDT's implementation circular (Circular 7/2017) stresses that GAAR targets aggressive, large-value avoidance structures, not ordinary commercial choices: taxpayers remain free to choose entity form, funding route or exit mechanism for bona fide reasons. But where a structure is designed primarily for a tax benefit with no legitimate business purpose, GAAR applies.
The illustration that mirrors the plan
GAAR guidance materials contain an example that could have been drafted for this fact pattern:
"Mr. A is an Indian resident. He is expecting substantial gain from sale of his foreign assets. He becomes a non-resident, sells the foreign assets, and then returns to India. Here residence of Mr. A is involved. If there is no commercial purpose for Mr. A to become a non-resident, it will be considered as a tainted transaction."
Applied to the hypothetical: the move to the United States for genuine employment is unobjectionable. The tainted step is the onward shift to the UAE, timed immediately before the share sale, supported by a one-employee branch office conducting no business. The temporal proximity between the residency change and the disposal, combined with the absence of commercial substance in the UAE presence, supplies both the principal-purpose finding and the tainted element.
Tiger Global: the residency certificate is not a shield
The Supreme Court's January 2026 decision in the Tiger Global International Holdings litigation - arising from the sale of Singapore-held Flipkart shares to Walmart - confirmed three propositions of direct relevance. First, GAAR can apply to arrangements entered into before 1 April 2017 where the tax benefit arises on or after that date; it is the timing of the benefit, not of the structure, that matters. Second, a tax residency certificate is not conclusive where GAAR scrutiny is attracted: authorities may look through formally compliant residency claims to the commercial substance beneath them. Third, GAAR may override treaty provisions even where the treaty would otherwise permit the claimed benefit. A UAE TRC obtained on the strength of 183 days and a nameplate branch would face exactly this analysis.
GAAR does carry procedural safeguards: the assessing officer cannot invoke it unilaterally but must refer the matter to the Principal Commissioner or Commissioner, who must form a prima facie opinion and issue a reasoned notice; an independent Approving Panel chaired by a High Court judge then examines the matter and issues directions binding on both sides. Those safeguards discipline the process; as Tiger Global shows, they do not rescue arrangements that are avoidance on their face.
Substance: The Factual Battleground
Section 97 treats an arrangement as lacking commercial substance where, among other markers, it is entered into to obtain a tax benefit, would not have been entered into but for that benefit, and serves no genuine business purpose. Artificial residency and the use of "accommodating parties" - persons or entities inserted solely to facilitate a tax benefit - are among the statutory indicators. A branch office with one employee and no operations exists solely to generate a residency claim; it is the paradigm case.
The statutory test sits on older judicial foundations. In Azadi Bachao Andolan v. Union of India, (2003) 8 SCC 705, the Supreme Court accepted that a transaction, though legal in form, may be disregarded where it is a sham or colourable device lacking business substance. Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613, preserved the space for genuine strategic tax planning while confirming that structures may be disregarded where they are shown to be shams or colourable devices without commercial substance. The dividing line the courts have drawn is precisely the one the hypothetical structure falls on the wrong side of.
In practice, the authorities test whether a claimed foreign residence is permanent and integrated into the individual's life. The questions asked include:
- Does the individual own or rent a dwelling in the UAE genuinely suitable for residential use?
- Does the family reside there?
- Are bank accounts, insurance, investments and business ties centred there?
- Is time spent there continuous, or is the presence maintained as a formality?
A single-employee branch answers none of these. If the individual's primary residence, family and vital interests remain in India or the United States, the UAE residency claim is undermined on the facts before GAAR is even reached.
The Independent Ground: Indirect Transfers Under Section 9(1)(i)
Suppose, contrary to everything above, that non-resident status held. Indian tax could still attach through Section 9(1)(i), which deems income to accrue in India where it arises through assets or a source of income in India or the transfer of a capital asset situate in India. Explanation 5, inserted by the Finance Act 2012, extends this to indirect transfers:
"An asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India."
Substantiality has defined thresholds: the foreign company's Indian assets must exceed ₹10 crore in fair market value (without netting liabilities) and must represent at least 50 per cent of the fair market value of all its assets, generally tested at the end of the accounting year preceding the transfer (or the transfer date itself, where book values have risen 15 per cent or more since). A carve-out spares small shareholders who held 5 per cent or less in the preceding twelve months - of no assistance to a 70 per cent holder. CBDT Circular 4/2015 clarifies the boundary: dividends paid by such a foreign company are not caught, because no underlying asset is transferred, but capital gains on the transfer of the shares are squarely covered.
The consequence is that if the US company's value derives substantially from Indian assets - manufacturing facilities, intellectual property, business operations, a distribution network - the gains on selling its shares are taxable in India regardless of where the seller is resident. Taxability here follows the asset composition of the company, not the seller's itinerary. For a non-resident, long-term gains (holding above 24 months) are taxed at 12.5 per cent without indexation under the post-Budget 2024 regime, and short-term gains at slab rates, with tax to be withheld at source before proceeds are remitted to a non-resident (Section 195). Treaty credit relief remains available in principle, but as noted, Section 90(2A) allows GAAR to override treaty benefits where the arrangement is impermissible.
No Exit Tax, But No Exit Either
India imposes no formal exit tax: as at May 2026, there is no charge on unrealized gains when an individual ceases to be resident, and periodic proposals to introduce one have not been enacted. But the absence of an exit tax is not a planning opportunity, because three provisions do the same work in combination. Section 6(1A) prevents the citizen from parking himself in a no-tax jurisdiction while realizing gains. Section 9(1)(i) taxes gains that derive from Indian assets whatever the seller's residence. And GAAR treats the timing itself - residency loss followed immediately by a major disposal - as an avoidance signal, distinguishing the genuine emigrant who sells years later from the traveller whose itinerary is built around a transaction. Future legislation could yet add a formal deemed-disposal charge on departure; the direction of travel in policy terms is toward more substance requirements, not fewer.
The Compliance Perimeter
Whatever structure is ultimately adopted, the reporting obligations are unforgiving. Foreign assets and income must be disclosed in Schedules FA and FSI of the income tax return. A taxpayer claiming non-resident status or treaty benefits needs a tax residency certificate from the residence country and Form 10F filed with the Indian authorities. Holding a large stake in a foreign company, changing residency status, and repatriating sale proceeds each carry obligations under FEMA and RBI regulations - including disclosure and reporting through the authorised dealer bank - which operate independently of income tax and carry their own penalties. The memo underlying this analysis notes that its FEMA research (including the Liberalised Remittance Scheme and overseas direct investment rules) could not be completed, and that US and UAE domestic tax consequences fall outside its scope; specialist advice is required on each.
Practical Takeaways
- A zero-tax destination defeats itself. Because the UAE imposes no personal income tax, a UAE move leaves the individual "not liable to tax" anywhere - the exact trigger for Section 6(1A) deemed residency once Indian-source income exceeds ₹15 lakh, and with it the loss of all treaty benefits.
- A TRC is necessary but not sufficient. After Tiger Global, a residency certificate does not immunize an arrangement lacking commercial substance from GAAR.
- Substance is measured in lives, not paperwork. Home, family, financial centre of gravity and continuity of presence are the tests; a one-employee branch office fails all of them.
- Timing is itself evidence. A residency shift immediately preceding a large disposal invites the principal-purpose finding; a sale years into a genuine relocation stands on different footing.
- Residency planning cannot outrun asset-based taxation. If the foreign company's value derives substantially from Indian assets (above ₹10 crore and at least half of total assets), Section 9(1)(i) Explanation 5 taxes the gains in India whoever and wherever the seller is.
- The GAAR threshold is easily met. Gains on a controlling stake will ordinarily exceed the ₹3 crore tax-benefit floor in Rule 10U(1)(a).
- Compliance runs in parallel. Schedule FA/FSI disclosure, Form 10F, and FEMA reporting apply regardless of the tax outcome, and cross-border professional advice - Indian, US and UAE - is indispensable before any step is taken.
Key Authorities
- Income Tax Act 1961, Section 6 (including Section 6(1A) deemed residency, inserted by the Finance Act 2020) - residence tests for individuals. Source
- Income Tax Act 1961, Section 9(1)(i) and Explanation 5 - indirect transfer of assets deriving substantial value from India. Source
- Income Tax Act 1961, Chapter X-A (Sections 95 to 102) and Section 90(2A) - General Anti-Avoidance Rules and their override of treaty benefits. Source
- Income Tax Rules 1962, Rule 10U(1)(a) - ₹3 crore tax-benefit threshold for GAAR.
- CBDT Circular 7/2017 - GAAR implementation guidance; legitimate choices distinguished from impermissible arrangements.
- CBDT Circular 4/2015 - scope of Explanation 5 to Section 9(1)(i); dividends excluded, share-transfer gains covered. Source
- India-USA DTAA (1989), Articles 4, 13, 24 and 25 - tie-breaker rules; both states may tax capital gains under domestic law with credit relief. Source
- India-UAE DTAA (1993), Article 4 - 183-day treaty residency test for individuals. Source
- Tiger Global International Holdings (Supreme Court of India, January 2026) - GAAR applied to deny treaty benefits on an indirect share transfer; TRC not conclusive. Source
- Azadi Bachao Andolan v. Union of India, (2003) 8 SCC 705 - transactions that are shams or colourable devices may be disregarded.
- Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 - genuine strategic tax planning preserved; structures disregarded only where shown to lack commercial substance.
This analysis reflects the law as at May 2026. It is published for general information and does not constitute legal advice.