Guiding Principles for determination of Place of Effective Management (POEM) of a Company
According to Section 6(3) of the Income-tax Act, 1961, a company is said to be resident in India in any previous year
- if it is an Indian company or if during that year,
- The control and management of its affairs is situated wholly in India
The existing provisions of section 6(3) of the Income-tax Act, 1961 were amended vide Finance Act, 2015, with effect from 1st April, 2016 to provide that a company is said to be resident in India in any previous year, if-
- It is an Indian company; or (ii) Its place of effective management in that year is in India
- Its place of effective management in that year is in India
Place of effective management (PoEM) is an internationally recognized test for determination of residence of a company incorporated in a foreign jurisdiction.
For the purpose of above provision the Place of Effective Management of the company would be –
1. The 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;
2. The place where the company actively engaged in the business
- A company shall be said to be engaged in “Active business outside India” if the passive income is not more than 50% of its total income and :-
- Less than 50% of its total assets are situated in India; and
- less than 50% of total number of employees are situated in India or are resident in India; and
- the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure ;
- “ Passive income” of a company shall be aggregate of :-
- Income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and
- income by way of royalty, dividend, capital gains, interest or rental income;
3. The place where the majority meetings of the board of directors of the company are held ; 4. The place where the company’s senior management and their direct support staff are located or, if they are located at more than one location, the place where they are primarily or predominantly located.
4. The place where the company’s senior management and their direct support staff are located or, if they are located at more than one location, the place where they are primarily or predominantly located.
- Here senior management means the person or persons who are generally responsible for developing and formulating key strategies and policies for the company and for ensuring or overseeing the execution and implementation of those strategies on a regular and on-going basis.
Guiding principles for determining the place of effective management-
- The PoEM concept is one of substance over form. It may be noted that an entity may have more than one place of management, but it can have only one place of effective management at any point of time. Since “residence” is to be determined for each year, POEM will also be required to be determined on year to year basis.
- For the purpose of determining whether the company is engaged in active business outside India the average of the data of the previous year and two years prior to that shall be taken into account.
- It may be mentioned that mere formal holding of board meetings at a place would by itself not 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 POEM.
- It may be clarified that day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM.
- If the above factors do not lead to clear identification of POEM then the following secondary factors can be considered :-
- Place where main and substantial activity of the company is carried out; or
- Place where the accounting records of the company are kept.
- Some illustrative examples for the the determination of PoEM
- The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing PoEM in India have been satisfied.
- The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing PoEM in India have been satisfied.
It is reiterated that the above principles for determining the PoEM are for guidance only. No single principle will be decisive in itself. The above principles are not to be seen with reference to any particular moment in time rather activities performed over a period of time, during the previous year, need to be considered. In other words a “Snapshot” approach is not to be adopted. Further, based on the facts and circumstances if it is determined that during the previous year the PoEM is in India and also outside India then PoEM shall be presumed to be in India if it has been mainly /predominantly in India