Introduction: In an ever-globalizing economy, understanding the nuances of where a company is recognized as resident becomes crucial. India uses a distinct criterion called the Place of Effective Management (POEM) to determine a company’s residency. This criterion plays a pivotal role in ascertaining the company’s tax obligations.
Criteria for a Company’s Residency in India:
A company would be a resident in India in any previous year if:
- It is an Indian Co., or
- Its Place of Effective Management (i.e., POEM) is outside of India.
An important criterion for the determination of POEM is: Is the company engaged in active business outside India?
A company shall be said to be engaged in active business outside India if:
- Passive income is not more than 50% of its total income,
- Less than 50% of its total assets are situated in India,
- Less than 50% of total employees are situated in India or are residents of India, and
- The payroll expenses incurred on such employees are less than 50% of its total payroll expenditure.
Meaning of certain terms:
- Income: Computed for tax purposes in accordance with the laws of the country in which the company is incorporated, OR as per the books of accounts if the laws of the country of incorporation do not require such income computation.
- Value of assets: a) In the case of individual depreciable assets – Average of the value at the beginning & end of the previous year computed for tax purposes. b) In the case of multiple assets being treated as a block for depreciation – Average of the value at the beginning & end of the previous year computed for tax purposes. c) In other cases – value as per books of accounts.
- Number of employees: Average of the number of employees at the beginning & end of the year.
- Passive income: This includes: a) Income from transactions where both the purchase and sale of goods are from/to associated enterprises. b) Income by way of royalty, dividend, capital gain, interest, and rental income.
When it is established that the company is engaged in active business outside India, can we say that the POEM is outside India? The answer is NO.
We must further check whether the majority of board meetings are held outside India. In other words, the POEM is presumed to be outside India if the company is engaged in active business outside India and the majority of board meetings are held outside India.
If the company is not engaged in active business outside India, a 2-stage process for the determination of POEM ensues:
- First stage: Identify the persons who actually make key management & commercial decisions for the entire company.
- Second stage: Determine the place where these decisions are being made. (The place where these decisions are taken would be more important than the place where such decisions are implemented.)
Some guiding principles which may be taken into account for determining POEM are as follows:
- The location of the head office because usually, all the key management & commercial decisions are made from this location.
- Decisions made by shareholders are a relevant factor in the determination of POEM.
- Day-to-day routine operational decisions are not relevant for determining POEM.
Conclusion: Determining a company’s POEM in India is a multifaceted process that combines various factors ranging from income types to decision-making locations. As businesses expand their global footprint, understanding the intricacies of POEM becomes essential for compliance and strategic planning.
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