Determination of place of effective management (POEM) – ABOI and other principles
1. Introduction to POEM:-
Section 6(3) of the Income-tax Act, 1961 (the Act), prior to its amendment by the Finance Act, 2015, provided that 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. This allowed tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and management outside India. To address these concerns, the existing provisions of section 6(3) of the Act 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-
“Place of effective management” is defined in the Act 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.
The Finance Act, 2016 has changed the effectivity of the said amendment to section 6(3) of the Act. Therefore, the amended provision would now be effective from 1 st April 2017 and will apply to Assessment Year 2017-18 and subsequent assessment years.
The process of determination of POEM would generally be: −
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
Definitions of Important Terms:-
1. The Income shall be, –
(a) As computed for tax purpose in accordance with the laws of the country of incorporation; or
(b) As per books of account, where the laws of the country of incorporation does not require such a computation.
“Passive income” of a company shall be aggregate of, –
i. income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and
ii. income by way of royalty, dividend, capital gains, interest or rental income;
However, any income by way of interest shall not be considered to be passive income in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation.
2. The value of assets, –
(a) In case of an individually depreciable asset, shall be the average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the previous year; and
(b) In case of pool of a fixed assets being treated as a block for depreciation, shall be the average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the year;
(c) In case of any other asset, shall be its value as per books of account;
3. The number of employees shall be the average of the number of employees as at the beginning and at the end of the year and shall include persons, who though not employed directly by the company, perform tasks similar to those performed by the employees;
4. The term “pay roll” shall include the cost of salaries, wages, bonus and all other employee compensation including related pension and social costs borne by the employer
For a company engaged in active business outside India, the POEM will be presumed to be outside India if a majority of the meetings of the board of directors of the company are held outside India.
However, if it is established that the board of directors are standing aside and not exercising their powers of management, and such powers are being exercised by either the holding company or any other person resident in India, then the POEM shall be considered to be in India.
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.
In case the company has been in existence for a shorter period, then data of such period shall be considered.
Where the accounting year for tax purposes, in accordance with laws of country of incorporation of the company, is different from the previous year, then, data of the accounting year that ends during the relevant previous year and two accounting years preceding it shall be considered.
4. Guidance for Companies NOT engaged in Active Business outside India:-
For companies not engaged in active business outside India, a two-stage process for the determination of POEM is provided as follows:
The following guiding principles are provided in this context, none of which could unilaterally decide the POEM but will have to be considered on a holistic basis.
The term ‘senior management’ has been defined and it includes key managerial personnel such as managing directors, CEOs, CFOs and heads of various divisions/ departments, such as sales or marketing.
|S.No||Situation||Head Office location (POEM)|
|1.||The company’s senior management and their support staff are based in a single location, which is held out to the public as the company’s principal place of business or headquarters.||Such principal place of business or headquarters.|
|2.||The company is more decentralized, and hence, the senior management operates from time to time from offices in various countries.||The location where these senior managers are primarily or predominantly based; or normally return to, following travel to other locations; or meet when formulating or deciding key strategies and policies for the company as a whole.|
|3.||The members of the senior management operate from different locations on a more or less permanent basis, and participate in various meetings via telephone/ video conferencing.||The location, if any, where the highest level of management (e.g., managing director and financial director) and their direct support staff is located.|
|4.||Where the senior management is so decentralized that it is not possible to determine the company’s head office with reasonable certainty.||The location of the head office would not have much relevance in determining the POEM|
The determination of POEM is to be based on all relevant facts related to the management and control of the company and not on the basis of isolated facts, which do not establish effective management, as illustrated below.
5. Concluding Remarks:-
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.