The new year has commenced with a heated debate on whether India
is right in treating an offshore company as tax resident in India
if its place of effective management is established in India. The
natural corollary to this principle, which was brought in by an
amendment to the income tax laws by the Finance Act, 2015, is that
pursuant to such determination, the global income of such an
offshore company would be taxable in India.
Who Should Take Notice?
Offshore subsidiaries of Indian residents or corporate entities
should be aware of the DraftPlace of Effective
Management Guidelines (POEM Guidelines)
promulgated by the Central Board of Direct Taxes
(CBDT) in India. It is important to note
that these guidelines are still subject to stakeholder comment and
What Do the POEM Guidelines Purport to Do?
Simply put, the POEM Guidelines task the tax authorities to
annually obtain facts on the management and control structures of
offshore companies and ascertain if they are engaged in active
business outside India. A company will be deemed to be engaged
in active business outside India if its income from purchase and
sale of goods from its associated companies, royalty, dividend,
capital gains, interest or rent is not more than 50 percent of its
total income. In addition, such an offshore company needs to
satisfy that less than 50 percent of its total assets and employees
are situated in India.
Therefore, for a company engaged in active business outside
India, its POEM will be presumed to be outside India if the
majority of the meetings of the board of directors of the company
are held outside India. However, if it is established that the
board of directors are not exercising their powers of management,
and such powers are being exercised by either the holding company,
or any other person resident in India, then the company's POEM
shall be considered to be in India.
If a company is not engaged in active business outside India,
the POEM Guidelines require: (1) identification of the persons
involved in making key management decisions; and (2) determination
of the place where such decisions are being made. Some illustrative
factors, including the location of the meeting of the board of
directors, the executive committee (if any) and the head office,
will guide the taxman in determining the POEM of such a
Will You Be Told Overnight That Your Offshore Company Is
Tax Resident in India?
No. The tax authorities pursuant to the POEM Guidelines will
need to provide companies with an opportunity to present their side
of the picture before making the determination.
Potential Future Course
Those companies likely impacted by the POEM principles may want
to carry out a holistic factual analysis on the governance
structures of their offshore entities and revisit them from the
prism of the POEM Guidelines. The key goal of the POEM Guidelines
is to weed out substantive structures from structures in form to
shelter offshore proceeds from Indian taxation. As an aside, the
POEM Guidelines are a step in reducing adversarial tax litigation
and providing a pathfinder with regard to the direction that the
tax authorities will take.
Disclaimer:This Alert has been
prepared and published for informational purposes only and is not
offered, nor should be construed, as legal advice. For more
information, please see the firm's
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Recently the Delhi High Court's in the case of CUB Pty Ltd granted relief to multinationals licensing and registering their intellectual property in India and held that the situs of an intangible asset like IPRs, shall be the situs of the owner of such asset.
Mumbai Income Tax Appellate Tribunal in the case of Praful Chandaria, dealt with the issue of taxability of consideration received by the assessee pursuant to grant of call option in respect of shares of an Indian company.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).