India has a 'residence' as well as 'source' based taxation. The criterion for determination of residential status of a company was recently amended by the Finance Act, 2015 with effect from 1 April 2015. Prior to the amendment, a company was considered as a resident in India in a year (1 April – 31 March), if it was an Indian company or if in that year, its 'control and management' was situated wholly in India. This allowed opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with 'control and management' outside India. Hence, to curb tax avoidance while controlling a foreign company from India, this test was amended to provide that a company would be considered as a resident in India in any year if it is an Indian company or if its 'place of effective management' (POEM) in that year is in India.

It is in this context that the Central Board of Direct Taxes (CBDT) has issued the draft guidelines for determination of POEM (Draft Guidelines) and has invited comments and suggestions from the stakeholders.

The key features of the Draft Guidelines are set out below.

Determination of POEM | Approach

  • Factual determination, based on 'substance' not the 'form', taking a holistic approach

    These are the fundamental principles for determination of POEM. Tax Authorities are required to gather facts based on the 'substance' of the management and control structures and carry out this review on an annual basis for determination of POEM.
  • Ascertain if the foreign company is engaged in 'active business outside India'

    The Draft Guidelines provide that where a company is engaged in 'active business outside India', the POEM shall be presumed to be outside India if the majority of the meetings of the Board of Directors of the company are held outside India.

    A company can be said to be engaged in 'active business outside India' if its passive income (i.e. aggregate of income from purchase and sale of goods from its associated enterprises, and income from royalty, dividend, capital gains, interest or rental income) is not more than 50% of its total income and the following cumulative conditions are satisfied:

    1. less than 50% of its total assets are situated in India;
    2. less than 50% of the total number of its employees are situated in India or are resident in India and;
    3. the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.
    For this determination, an average of the data of the relevant year and the preceding two years is to be considered (where the company has been in existence for a shorter period, then data for such period is to be used).

    Manifesting the 'substance' over 'form' principle, the Draft Guidelines, however provide that if on the basis of facts and circumstances it is established that the Board of Directors are standing aside and not exercising their powers, and that such powers are being exercised by either the holding company or any other person resident in India, then the POEM shall be considered to be in India.
  • Two stage process where the foreign company is not engaged in active business

    The Draft Guidelines provide for a two stage process for determining POEM for companies other than those that are engaged in active business outside India viz.:

    1. Identification of the person(s) who actually make the key management and commercial decisions for conduct of the company's business as a whole;
    2. Determination of place where these decisions are in fact being made; place where the decisions are implemented is of lesser importance.
    The guiding principles for such determination are:

    Situs of the Board Meetings

    The location of the board meetings would be considered as POEM of a company if the Board retains and exercises its authority to govern the company; and makes key management and commercial decisions necessary for the conduct of the company's business as a whole, in such meetings.

    Mere formal holding of board meetings at a place would not, by itself, be conclusive for determination of POEM being located at that place. If the key decisions by the directors are in fact being taken in a place other than the place where the formal meetings are held, then such other place would be relevant for determining POEM.

    Delegation of authority by the Board

    In a case where the Board has de facto (i.e. by conduct) delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder and does nothing more than routinely ratify the decisions that have been made, the company's POEM will ordinarily be the place where these senior managers or other persons make those decisions.

    Further, in a case where a company's Board delegates some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management, the location where the members of the executive committee are based will be considered as the company's POEM. The Draft Guidelines define 'senior management' as the persons who are generally responsible for developing and formulating key strategies and policies for the company; and for overseeing the execution and implementation of those strategies on an on-going basis. These persons may include the managing director, chief executive director, chief financial officer, financial director and heads of various divisions.

    Location of Head Office

    The Draft Guidelines provide that the location of a company's head office will be a very important factor in the determination of the company's POEM because it often represents the place where key decisions are made. The parameters relevant for determining the location of the head office of the company are:

    1. Centralised senior management- If the company's senior management and their support staff are based in a single location and that location is held out to the public as the company's principal place of business or headquarters then that location is the place where head office is located.
    2. Decentralised senior management- If the company is more decentralized then the company's head office would be the location where these senior managers:

      1. are primarily based; or
      2. normally return to, following travel to other locations; or
      3. meet when formulating or deciding key strategies and policies for the company as a whole.
      Where the members of the senior management operate from different locations on a more or less permanent basis and the members participate in various meetings via telephone or video conferencing, the head office would normally be the location, if any, where the highest level of management and their direct support staff are located.

      In a situation where the senior management is so decentralised that it is not possible to determine the company's head office with a reasonable degree of certainty, the location of a company's head office would not be of much relevance in determining that company's POEM.
    Meetings through electronic mode

    The Draft Guidelines recognise that the use of modern technology impacts the POEM in many ways. Therefore, physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. In such cases, the place where the directors or the persons taking the decisions or majority of them usually reside may also be a relevant factor.

    Secondary factors

    The Draft Guidelines provide that where the factors enlisted above do not lead to clear identification of POEM then secondary factors such as the place where the main and substantial activity of the company is carried out; or the place where the accounting records of the company are kept, can be considered for determining POEM.

Factors not conclusive for determination of POEM

The following factors would not be conclusive for determination of POEM:

  • Day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM;
  • The determination of POEM is not to be determined on the basis of isolated facts that by itself do not establish effective management. For instance, the following factors should not be considered as conclusive of existence of POEM in India:

    1. The fact that a foreign company is completely owned by an Indian company;
    2. The fact that one or some of the Directors of a foreign company reside in India;
    3. The fact of, local management being situated in India in respect of activities carried out by a foreign company in India;
    4. The existence in India of support functions that are preparatory and auxiliary in character.

Procedural Aspects

In sync with the promise of establishing a non-adversarial tax regime, the Draft Guidelines also have inbuilt 'checks and balances' to avoid harassment in genuine cases. The Draft Guidelines require an Assessing Officer to seek prior approval of the Principal Commissioner or the Commissioner where he proposes to hold a company incorporated outside India, on the basis of its POEM, as being resident in India. Also, the Principal Commissioner or the Commissioner is required to provide an opportunity of being heard to the company before deciding the matter.


The Draft Guidelines are comprehensive and balanced. As was expected, the focus of the Draft Guidelines is largely on 'substance' rather than on 'form'. These are meant for the benefit of taxpayers as well as the tax administration so that any ingenious attempt to evade or defer tax liability in India while controlling a foreign company from India, can be addressed. At the same time, the intention of the Draft Guidelines also seems to ensure that there is no harassment of the taxpayers in genuine cases. From this perspective, the Draft Guidelines provide that before an Assessing Officer holds a foreign Company to have a POEM in India, he is required to take prior permission from the Principal Commissioner or Commissioner and an opportunity of being heard will be given to the concerned company before deciding the matter.

Another good feature of the Draft Guidelines is that, no single criteria will be determinative and an 'overall view' of the matter having regard to all the material facts and circumstances, is to be taken. The Draft Guidelines seek to provide a comprehensive framework for a proper understanding and administration of POEM provisions. One would hope that the approach as set out in the Draft Guidelines will be followed in letter and spirit for fair administration of POEM guidelines for both the taxpayer and the tax administration.

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