The Finance Act 2015 amended the test of residence for foreign companies to provide that a company would be treated as resident in India if its “place of effective management” (POEM) in the previous year is in India. The intention of the provision is to target shell companies and companies which are created for retaining income outside India although real Control and management of affairs is located in India. A set of guiding principles to determine POEM has been issued by CBDT vide Circular No. 06 of 2017 dated 24.01.2017. Further, Circular No 8 of 2017 clarifies that section 6(3)(ii) shall not apply to companies having turnover or gross receipts of Rs.50 Crore or less in a financial year. 

In this regard, Rishabh Jain (Chartered Accountant) discusses the nuances of the provision as to determination of POEM, Meaning of ‘Active business outside India (ABOI) etc. Speaking of the some instances where the facts will not be conclusive of a POEM, the author highlights a foreign company which is completely owned by an Indian company, foreign entity having a PE in India, etc. The author signs off with an opinion that the provisions and the Circulars related to POEM “lead to several tax disputes and the existence of POEM in India would be a subject matter of litigation in various cases”

Decoding ‘Place of Effective Management’ (POEM)- Test of Residency

The Finance Act 2015 has amended the test of residence for foreign companies to provide that a company would be treated as resident in India if its “place of effective management” (POEM) in the previous year is in India.

“Place of effective management” (POEM) has been 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.

A set of guiding principles to determine POEM has been issued by CBDT vide Circular No. 06 of 2017 dated 24.01.2017.The intent is to target shell companies and companies which are created for retaining income outside India although real Control and management of affairs is located in India. Further, Circular No 8 of 2017 clarifies that section 6(3)(ii) shall not apply to companies having turnover or gross receipts of Rs.50 Crore or less in a financial year.

Determination of POEM

POEM has to be determined on year to year basis on the basis of below two categories:

 

Meaning of ‘Active business outside India (ABOI)-

Foreign Co. shall be said to be engaged in ABOI if all conditions are cumulatively satisfied:-

Condition1: Passive Income (income directly from AE) <= 50% of total income &

Condition 2(a): Asset test: < 50% of total assets situated in India &

Condition 2(b): Employee test: < 50% of employee situated / resident in India &

Condition 2(c): Payroll expense test: < 50% of payroll incurred on above employees.

Other Guiding Principles (To be followed even though Co. is ABOI and majority of Board meeting outside India)

 

  

Following facts will not be conclusive evidence for POEM

► Foreign company is completely owned by an Indian company.

► Existence of a Permanent Establishment of a foreign entity in India.

► Some of the Directors of a foreign company reside in India.

► Local management being situated in India in respect of activities carried out by a foreign company in India.

► The existence in India of support functions that are preparatory and auxiliary in character.

Impact if POEM in India

► Worldwide income of company liable to tax in India at 40% (plus Surcharge and Cess)

► Liable for all tax compliances in India (Filling of Income Tax Return, TDS Return etc.)

► Tax Withholding provisions will be applicable

► Transfer Pricing Provisions will be applicable

► Interest and penalty in cases where POEM is determined in India during tax scrutiny.

 

Likely Risk and Mitigation

 

Risk                                        Mitigation

 

 

Conclusion:

POEM is used as a factor for determining the residency of a foreign company. It would majorly impact multinational groups wherein key management and commercial decision majorly taken in meeting in India. Moreover, appointment of Indian director on the board of foreign company and participation of director residing in India in meeting via telephone or video facility would be susceptible to the applicability of POEM in India. The guidelines as provided by CBDT are detailed in nature and involved complexities. It would lead to several tax disputes and the existence of POEM in India would be a subject matter of litigation in various cases.

Reference:

Circular No. 06 of 2017 dated 24.01.2017 issued by CBDT

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The contents of this article are solely for information purpose only.