EY Quick reference on Place of Effective Management (POEM)

May 2015

Amendment by Finance Act, 2015• From 1 April 2015, residential status of any company will be determined by the

concept of POEM. • A company will be considered an Indian resident company if:

• It is incorporated in India; or• Place of effective management, in that year, is in India.

• Place of effective management is the country where key management and commercial decisions necessary for conduct of business of an entity as a whole are, in substance, made.

• Guidelines are proposed to be issued for benefit of taxpayers as well as tax administration.

Background to Amendment• Under Section 6 of the Income-tax Act, 1961 (the Act) , a company is

considered to be an Indian resident company, only if it is incorporated in India or the control and management of its affairs is situated wholly in India.

• However, the proposed amendment, seeks to make a foreign company an Indian resident if its POEM in that year is situated in India.

• The concept of POEM is not new; it is already present in the Tenth Schedule of the Act dealing with tonnage tax scheme for a shipping company. However, the definition of POEM for determining the residency of a company is different from what is defined under the tonnage tax scheme.

• Earlier Direct Tax Code, 2013 had also laid down a similar POEM based test for determining the residential status of the company.

Consequences of having POEM in India• The resultant resident company will be liable to tax in India on its global income

while a non-resident company is generally taxed only on its Indian sourced income.

• The resultant resident company may still be regarded as a non-domestic company (assuming the dividend declaration and payment arrangement is not made within India). Thereby, it will continue to be taxable at the rate of 40% (plus surcharge and cess), though dividend paid by such company does not trigger dividend distribution tax in its hands.

• The resultant resident company may not be able to set off or carry forward losses of previous years.

Points for consideration for a POEM analysis• Whether charter document of the foreign

company gives veto power to Indian parent or Indian promoter for undertaking key decisions?

• Whether board of directors of foreign company merely approves (i.e. in form) the decisions taken by the Indian parent/ Indian board/ Indian promoter without any independent consideration?

• What is the employee strength and constitution of board of foreign companies and do they have the competence to exercise independent decisions?

• Whether policy decisions relating to strategy, finance and operations of foreign company are taken from India?

• Whether secretarial, administrative and accounting work, including operation of the foreign bank account of foreign company is carried out from India?

• Are there suitable internal controls existing in the foreign companies, which prevent the exercise of control by Indian parent/ Indian board/ Indian promoter?

Way forward• Companies, which have headquarters in

India and have outbound operation, should understand the concept of POEM to assess if they would qualify as an Indian tax resident. Health check of various foreign companies (whether operating or set up for strategic holding purposes) should be conducted.

• Adequate training should be provided to all stakeholders, i.e., employees, board members and promoters of the finer nuances of POEM.

• Formulation of detailed guidelines of the dos/don’ts for various stakeholders of foreign companies may be undertaken, keeping in mind legal provisions and judicial interpretation of these requirements.

International experience

• Organization of Economic Cooperation and Development (OECD) recognizes the concept of POEM for determination of residence of a company.

• Company triggering residency under Income-tax law may tie break treaty residency in India, which is linked to POEM. BEPS Action Plan proposes tie breaking to be resolved by mutual consideration by competent authorities.

For more information, please contact your EY advisor.

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