How to decide Residential Status of Foreign Company in India - Place of effective Management (POEM) as per Income Tax Act, 1961

Introduction

The time has come when we can sit and decide on the residential status of your foreign company in India. Earlier, a company is said to be a resident in India if the control and management of its affairs are situated wholly in India. However, internationally and under the tax treaties as well, the concept of Place of Effective Management (POEM) was emerging high and far which also does an impact on the Indian government to accept and introduce the concept of Place of Effective Management (POEM) in India.

It has also been done to prevent the tax planning which is being done by many corporate to avoid taxation liability in India. The finance act, 2015 introduces the concept which in later on amended by Finance Act, 2016 to give effect to this provision.

Applicability of Place of Effective Management (POEM)

The concept of Place of Effective Management was originally made applicable from 1st April 2016 however, finance act, 2016 defer the applicability w.e.f 1st April 2017. Hence, the concept shall be effective w.e.f 1st April 2017 i.e. the assessment year 2017-18 (the financial year 2016-17: the current financial year).

Meaning of Place of Effective Management (POEM)

The POEM has been defined by the section 6 of the Income-tax Act, 1961. It means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

Deciding Factor for Residential Status of the Foreign Company – Place of Effective Management (POEM)

To simplify and better understanding, we have drafted 10 guiding principles to decide the place of effective management of the Foreign Company in India.

• Understand the Relevant Facts and the effective management: an ongoing process and will have to be checked year on year.

Any determination of the residential status depends upon the given facts. There can many places of management, but there can be only one place of effective management and that we have to find out. Further, this shall be

• No Indian Resident if Active business outside India: If any company is having  an active business outside India and also the majority meetings of the board of directors are held outside India, then that Company shall not be treated as Indian resident, and its place of Effective management shall be outside India.
   
• That Important Person:

For companies other than those having active business outside India, will have to verify the POEM rules, via two stages:

• Identify the person or persons who make key management and commercial decision for the company
• The second stage would be to determine the place where these decisions are taken.

The place where these decisions are taken would be more important than the place where such decisions are implemented.
 

• Location where Board of Directors Meet

This is another very important guiding principle. The location where the board of director meet and makes decision may be the company’s place of effective management. However, this is subject to two conditions:

• The board is independent and retains its authority to govern the company. It should not accustom to act upon some other person guidance, or someone else controls.
• The board makes the key decisions necessary for the conduct of the company’s business as a whole.

 

• ​​​Formal or on paper meetings are irrelevant:

Many tax planners may have thought about this trick after reading the point no.4, but that is irrelevant. A mere formal meeting at a place would not be conclusive for determination of POEM.
If the decisions by the directors are taken at some other place, then that place would be treated as a Place of Effective Management (POEM).
 

• Location of Company Head Office:

The location of company’s head office is a very important parameter in deciding the residential status of the Company. This is because all the important decisions are generally taken at the head office of the company.

Factors responsible for determining the head office of the Company:

• If the senior management is from a single location and that location is held out to public as a principle place of business, then that location may be treated as the head office of the company.
• If senior management operates from a different location and interacts through video conferencing, then the location of head office shall be placed where the highest level of management (for example, the managing director, CFO, etc.) and their support staff is located.
• In case, it is not possible to determine the company’s head office with certainty, the location of a company’s head office would not be of much relevance in determining the POEM.

 

• Location where Director Reside:

Now days, due to increasing use of technology, the physical meetings are losing their importance, and people prefer to meet online. In that case, the place where the directors or the person taking the decisions or majority of them reside may also be an important parameter in deciding the POEM.

 

• Shareholding is not so important:

The decision taken by the shareholders in the shareholding meetings as mentioned in Company law are not much relevant for the deciding the Place of Effective Management (POEM). However, the shareholder meeting becomes important in the following cases:

• If shareholders are somehow involved in business management e.g. through shareholder agreement.
• Where the board of directors are accustomed to act as per the shareholder's decision.

 

• Routine Operational Decisions are not relevant:

Any decision taken by the lower andmiddle-level management are not relevant for the purpose of determination of POEM. However, it may prove to be relevant in some exceptional cases where any manager is appointed by the director to run in a prescribed manner.

 

• POEM should be on Relevant Facts:

The decision on where the place of effective management falls should be based on a macro level and not on isolated facts. A single factor shall not decide the effective management or the residential status of the Company. For example:

• If a foreign company is a 100% subsidiary of an Indian company, then it is not conclusive evidence that POEM is in India.
• Any permanent establishment of the foreign entity in India would not be conclusive evidence.

Conclusion

The guidance is out, but still, it is very complex and confusing. Hence, each and every case needs to be interpreted on its own. Further, no single point will serve as a deciding factor rather all the points should go hand in hand, and the POEM should be decided accordingly.

Hubco.in stands ahead regarding preparation for this. In case you are having a problem  in deciding the POEM or effective management or the residential status of the company.
We can help you in this, just put your query in our CONTACT FORM.

SOURCE: Place Of Effective Management Guiding Principles (POEM)