Guiding Principles for determination of Place of Effective Management (POEM) of a Company
The concept of “Place of Effective Management” (POEM) was introduced for deciding the residency status of a non-Indian company, by Finance Act, 2015 which is applicable from 1st April, 2017. Further it shall be applicable to a company having turnover or gross receipts of more than Rs. 50 cr. in a financial year. Any determination of the POEM will depend upon the facts and circumstances of a given case. Since “residence” is to be determined for each year, POEM will also be required to be determined on year to year basis.
Prior to its amendment a company was said to be resident in India only if it is an Indian company or during that year, the control and management of its affairs is situated wholly in India. Through which companies were creating tax avoidance opportunities to artificially escape the residential status by shifting insignificant or isolated events related to control and management outside India.
POEM is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction and 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. Most of the tax treaties entered into though India recognises the concept of POEM for determination of residence of a company.
For determining the POEM, we need to perform “ACTIVE BUSINESS OUTSIDE INDIA” (ABOI) test alongwith the guiding principles, namely:
For this purpose, merely because the BoD follows general and objective principles of global policy of the group laid down by the parent entity and not being specific to any entity or group of entities per se; would not constitute a case of BoD of companies standing aside.
However in case of a company engaged in business of banking or public financial institution, income by way of interest will not be considered to be passive income.
The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM it is the substance which would be conclusive rather than the form.
♣ The location where BoD regularly meets and makes decisions may be the company’s POEM provided, the Board retains and exercises its authority to govern the company and, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole.
♣ A company’s board may delegate* some or all of its authority to one or more committees like executive committee, consisting of senior management or any other person including a shareholder, promoter, strategic, legal or financial advisor. POEM shall be deemed to be the place where
*The delegation of authority may be either de jure or de facto.
Location of HO is a very important factor in determining the POEM because it represents the place where the key decisions are made.
If the company’s senior management and their support staff are based in a single location and that location is held out to the public as the company’s principal place of business then POEM will be the place where HO is located.
But in certain situations the shareholder’s involvement can turn into that of effective management. For example, if shareholders restrict the authority of board and senior managers to make decision then the shareholders guidance transforms into usurpation and such undue influence may result into effective management.
If the above factors do not lead to clear identification of POEM then the following Secondary Factors can be considered:-
The determination of POEM is based on all relevant facts related to the management and control of the company, and is not determined on the basis of isolated facts illustrated below:
Prior approval of senior tax officers is necessary before the Assessing Officer (AO) determines a foreign company’s POEM residency.
The three-member board’s approval, consisting of Principal Commissioners or the Commissioners must be obtained before holding that foreign company is a POEM resident. The collegium so constituted will grant the taxpayer opportunity of being heard before issuing directions to the tax officer.