Summary: A company incorporated outside India may nevertheless be treated as an Indian tax resident if its place of effective management (POEM) is situated in India during the relevant year. Under Section 6(3) of the Income-tax Act, 1961, the determination depends on where key management and commercial decisions for the business as a whole are actually made. The corresponding provision under the Income-tax Act, 2025 is Section 6(10). The CBDT guidelines prescribe a framework examining active business outside India, passive income, assets, employees, payroll, board meetings and the actual location of decision-making. Circular No. 8 of 2017 clarifies the exclusion for companies having turnover or gross receipts of ₹50 crore or less in a financial year. Companies may face POEM exposure where India-based directors, executives or management teams exercise effective control over foreign business decisions, even if formal board meetings occur abroad. An Indian residency finding can expose worldwide income to Indian taxation and create double taxation concerns, subject to applicable treaty relief. Foreign groups should therefore maintain evidence of genuine overseas management, including board papers, minutes, decision-making records, delegated authority and tax residency certificates. Regular reviews are particularly important when senior executives relocate to India or when investment and strategic decisions are taken by India-based personnel. Effective documentation and genuine management substance are essential to managing POEM-related tax risks.
The rule
Under section 6(3) of the Income-tax Act, 1961, a company is resident in India if it is an Indian company, or if its place of effective management in that year is in India. The provision is re-enacted in the Income-tax Act, 2025, so check the current section number when you cite it. Place of effective management means the place where key management and commercial decisions that are necessary for the conduct of the business as a whole are, in substance, made.
The CBDT guidelines
The Central Board of Direct Taxes issued guidelines in Circular No. 8 of 2017. They set out a sequence of steps.
1. Small companies are outside the guidelines. Companies with turnover or gross receipts of ₹50 crore or less in a year are not examined under them.
2. Active business outside India. A company is treated as engaged in active business outside India if its passive income is not more than 50 per cent of total income, less than 50 per cent of its assets are in India, less than 50 per cent of its employees are in India or resident in India, and less than 50 per cent of its payroll is paid to them.
3. If the active business test is met, the place of effective management is presumed to be outside India where a majority of board meetings are held outside India.
4. If it is not met, the facts are examined to see where key decisions are made, with the location of the board, the executive committee and senior management weighed.
Where groups go wrong
An India-based director or the Indian subsidiary’s head also acts as the chief executive of the foreign company and takes its main decisions from India.
Board meetings of the foreign company are held abroad, but decisions are in fact made earlier by email or calls among managers in India.
Minutes record decisions that were reached somewhere else.
A holding company with few staff that relies on an India-based team for investment decisions.
Consequences
A finding of residence brings the foreign company’s global income into the Indian tax net, with a possible double tax issue if the other country also taxes it. Tax treaties may help through the residence tie-breaker, which often refers to the place of effective management as well, but relief is not automatic and a claim must be supported by facts.
A practical checklist
Map where each director and senior manager lives and works, and where decisions are in fact taken.
Hold board meetings at the foreign company’s own location, with the directors present, and keep agendas, papers and minutes that show real discussion.
Avoid giving one India-based person authority over the foreign company’s key decisions without written limits.
Keep a tax residency certificate from the home country each year.
Review the position whenever a senior person relocates to India.
The test is one of substance, so a note on file that explains how decisions are actually made is worth more than the label on the board papers.
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Author bio: N. Sudheer, M.Com., FCS, LL.B., is a Partner at A2 Consultants, Hyderabad
