Background and Objective
- Residency of a person determines the taxability in India. If a person is resident in India, he is chargeable to tax on his entire global income.
- As per the amended provisions of section 6(3) of the Act, a Company is said to be a resident in India in any previous years, if –
- It is an Indian company; or
- Its place of effective management, in that year, is in India.
Place of Effective Management here means a place where key managerial and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.
(as per the erstwhile provisions, a company is said to be a resident in India in any previous year, if it is an Indian company or if during that year, the control and management of its affairs is situated wholly in India)
- The concept of POEM is effective from Assessment Year 2017-18.
- It is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognises the concept of ‘POEM’ for determination of residence of a company as a tie- breaker rule for avoidance of double taxation.
Determination of POEM as per CBDT Guidelines
- CBDT has issued guiding principles to be followed for determination of POEM. One of the key principle is test of Active Business Outside India.
- As pe the guidelines, a company shall be said to engaged in ‘active business outside India’ if passive income is not more than 50% of its total income. Further, there are certain additional cumulative conditions to be satisfied regarding location of total assets, employees and payroll expenses.
- The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India.
- The POEM in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
- In cases of companies other than those that are engaged in active business outside India, the determination of POEM would be a two-stage process, namely: —
- First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.
- Second stage would be determination of place where these decisions are in fact being made.
(POEM guidelines shall not apply to a company having turnover or gross receipts of INR 50 crores or less in a financial year)
- For ease of reference following diagram can be referred:
Some of the key consequences if POEM in India of a foreign company
- The foreign company would be termed as a resident under the Act.
- The entire global income of such foreign company would be subjected to tax in India at 40%.
- Liability to withhold tax on payments made to resident / non-residents as applicable to a foreign company.
- Applicability of Transfer Pricing provisions which otherwise not subject to India Transfer Pricing provisions.
- Other miscellaneous compliance as the case may be.
Points that need attention
- Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. An entity may have more than one place of management, but it can have only one place of effective management at any point of time.
- Since “residence” is to be determined for each year, POEM will also be required to be determined on year-to-year basis.
- It may not be possible to provide a detailed list of all the factors that must be considered, some of the key factors like Place of BoD Meetings, Place where the Senior Management / directors and KMPs reside, Shareholder’s influence in key management and commercial
- decision making, and day to day management, etc. must be examined as a guidance in determining a company’s POEM.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.