The CBDT has given guiding principals for determination of Place of Effective Management (POEM) of a Company. Therefore, if you are planning to or have already incorporated a company outside India, it is extremely important for you to understand the concept of POEM and how it affects your tax liability in India, even with regards to your overseas entity.
History and Background:
In normal parlance, Companies incorporated and situated outside India would be regarded as a non-resident entity and it will be liable to taxation only in the country in which it is incorporated or situated. It however has to pay tax on the income that accrue or arises in India or the income is earned through a business connection or permanent establishment in India. In case where a Company is resident in India, India has right to tax it on its worldwide income and will give credit for the taxes it has paid in other country/ies.
The Indian Income Tax Act provided that a Company incorporated outside India will be regarded as resident in India if the control and management of its affairs is situated wholly in India. The Companies were escaping residential status by artificially shifting insignificant or isolated events related to control and management outside India, thereby limiting the scope for the Indian tax authorities to making it resident in India.
To address this concern, the section 6(3) was amended with effect from Assessment Years 2017 – 18, to provide that a Company is said to be resident in India if its Place of Effective Management (POEM) in that year is in India.
POEM is defined to mean "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."
The CBDT also issued a guiding principal notification to determine the situation of POEM. This notification is applicable only for the companies having turnover of more than INR 50 crores.
Active Business Outside India (ABOI):
If a Company is engaged in ABOI, the POEM is considered to be outside India if majority of its board meetings are held outside India.
The Company is considered to be engaged in ABOI if;
- Its "Passive Income" is not more than 50% of its total income;
- 50% or more of its total assets are situated outside India;
- 50% or more of its total number of employees are situated outside India or they are not resident in India and
- Total Payroll cost of such employees are less than 50%.
Passive Income of a company would mean income from:
- Transactions where both the purchases and sales of goods is from/to its related enterprises and
- Royalty, Interest, Dividend, Rental income, Income from Capital Gains etc.
It is clarified that the value of assets shall be its value as per its books of accounts maintained. In case of depreciable assets, the value shall be its average value for the tax purpose at the beginning and at the end of the previous year. It is also clarified that the number of employees shall be the average number of employees at the beginning and at the end of the previous year.
The data to be considered for the purpose of above calculation shall be the data of Three years ie. the previous year in question and two years prior to that year. In case of existence of the company for a shorter period, the data of such period shall be considered.
If Active Business is NOT Outside India:
If a Company does not have ABOI, the POEM will be determined in two stages:
- Identification of the person/s who actually make the key management and commercial decisions for the conduct of the company's business as a whole
- Determination of place where these decisions are made.
The place where these decisions are made are more important than the place where they are implemented and therefore the place where such decisions are made would constitute POEM for the company.
In case the company does not have ABOI, following 'guiding principals' needs to be taken into consideration in determination of POEM:
- The location where the Companies' Board regularly meets and takes key management decisions;
- In case the Companies' board has delegated some of its authority to an executive committee consisting of some key members of management, the location where the executive committee meets and formulates key strategic and policies on behalf of the board;
- The location where the Company's senior management and their support staff are based and that location is held out to public as Company's principal place of business or its Headquarter.
- It is quite prevalent that the members of senior level management operate from different locations. They participate in the board meetings via video conferencing. In such situation, the Head Office would normally be considered to be the location where highest level of management like Managing Director and CFO and their support staff are located.
Following factors DO NOT determine location of POEM:
- The fact that a foreign entity is wholly owned by an Indian company
- The fact that there exists a Permanent Establishment of a foreign entity in India;
- The fact that one or some of the directors of foreign company reside in India;
- The fact that some of the support functions that are preparatory and auxiliary in nature are performed from India.
One may conclude by stating that the above principals are for guidance purpose only. No single principal is conclusive in itself. All the relevant facts related to the management and control of the company (and not some isolated facts or events) need to be seen over a period of time during that financial year. The principal of POEM is based on the premise of "Substance over Form".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.