CA Kinjesh Thakkar

CA Kinjesh ThakkarIntroduction

A new termed introduced by Finance Act, 2015 for determination of residential Status of foreign company is Place of Effective Management, commonly known as PoEM. Though PoEM seems to be new in context of Indian Income Tax Act, the term has already found its aplace under Article 4 of Bilateral Tax treaties entered by India with various other countries in form of tie-breaker criteria for dual resident companies.

Before Finance Act, 2015 a foreign company was treated as resident in India only if control and Management of the affairs of the company is wholly situated in India. This used to facilitate shell companies escape the taxes easily. Further, this criteria for determination of residence was not in congruence with internationally recognized principle for determination of residential status.

Therefore, the Finance Act, 2015 to correct the anomaly inherent and merge the principle of residence under Income Tax act with internationally accepted standards, the one already recognized and accepted by OECD and UN Convention has introduced PoEM for determination of residence of Foreign Company in Indian context.

PoEM: Concept and Analysis

A company resident in India is taxed for its worldwide income. To determine residential status, Section 6(3) of Income Tax act provides the criteria for the same which is reproduced as under:

 “A company is said to be resident in India in any previous year, if—

 (i)  it is an Indian company; or

 (ii)  its place of effective management, in that year, is in India.

Therefore, if a company other than Indian company has PoEM in India, it is said to be resident in India and worldwide income of such company shall be taxable in India.

The Phrase PoEM in clause (ii) to section 6(3) has been clarified as an explanation to sub section (3) of section 6 reproduced as under:

“Explanation.—For the purposes of this clause “place of effective management” means 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”. (Emphasis provided)

The above explanation i.e. definition of PoEM for easy understanding can be divided into 3 parts:

“Key Management and Commercial decisions”, the phrase used in the explanation means any Strategic decisions of company taken by Top Level Management or executive board of the company. This has to be something that impacts business and something crucial which has current or future commercial impact. Example: entry into new Geographic segment or expansion of current facilities etc.

Second part of said explanation “as a whole” as per Judicial dictionary means taking the totality of the matter in respect of which the appellant was being dealt with by the crown court[1]. It means all parts and aspects considered i.e. everything taken altogether.

Thirdly, the term “in substance” indicates that in making the necessary comparison, form should be disregarded[2]. The term signifies the test of Substance over form.

Therefore based on above analysis of explanation, what comes out on overall basis is, PoEM is a place where crucial commercial and managerial decisions are actually taken by the top management of the company considering facts in totality. To provide more clarity on same let’s assume that the apex body of the company or say Board of directors of Company X merely meets at Country AUS just to approve the decision of expansion of production facilities and entering new geographic segment but the same has been actually taken at Country IND then as per the definition the place where the key management and commercial decisions necessary for conduct of business are actually taken (substance over form test) shall be considered as PoEM. Therefore, in the current case Country IND shall be place of effective management.

To provide more clarity OECD Commentary and UN commentary provides explanation on concept of PoEM.

OECD Commentary on PoEM

The residence article i.e. Article 4 in OECD model tax Convention provides a tie-breaker rule in determining residence when an entity is resident in two countries. The residence of such dual resident entity is determined to be at place in which its PoEM is situated.

OECD model commentary mentions that PoEM is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made[3].

The definition as provided in OECD Commentary is more or less identical to one provided in Income tax Act however it also provides for factors to be considered to determine the same.

To determine PoEM on a company, OECD provides various factors as under[4]:

  1. Place where the meetings of the Board of Directors or equivalent body of the company are usually held,
  2. Place where the chief executive officer and other senior executives usually carry on their activities
  3. Place where the senior day-to day management of the person is carried on
  4. Place where the person’s headquarter is located
  5. Place of which country’s law govern the legal status of the person,
  6. Place where its accounting records are kept

Earlier OECD provided different explanation which has been amended by deleting the following Para in its explanation. The said deleted para is reproduced as under:

“…..the place of effective management will ordinarily be the place where the most of senior persons or group of persons (for example a Board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given…” (Deleted portion)

From above it is clear that earlier it used to give undue priority to place of meeting rather than the place where in substance decisions are taken which was the reason for deletion of said Para. Now, after the amendment the OECD and definition introduced in Income Tax Act, both are majorly on same lines.

Commentary to the UN Model Convention on PoEM

Similar to OECD Model Convention, UN Model Convention provides tie breaker rule for dual resident company based on PoEM.

The factors provided to determine PoEM of a company provided in UN Commentary are:

  1. Place where company is actually managed or controlled
  2. Place where the decision making at the highest level on the important policies essential for the management of the company takes place,
  3. Place that plays a leading part in management of the company from an economic and functional point of view, and
  4. Place where the most important accounting books are kept

The factors provided by UN Commentary is more or less alike to that provided in OECD Model Convention mentioned above.

Impact of technology on PoEM

In the era of telecommunications and technology revolution with tools like Video conferencing or group discussions or calls, it is increasing difficult to establish the PoEM as the decisions may be taken by people comprising BoD from different countries. Hence, in such a scenario determination of PoEM is most difficult and quite complex.

The decision differs from fact to fact however, as broad guideline in such a instance may be; PoEM is situated at place where majority of people of executive board (BoD) meets or the country in which chairman or president is attending the meeting.


PoEM is a complex and subjective concept which differs based on facts and analysis of same. Factors provided to determine the same in OECD and UN Commentary shall surely help. However, the same shall be coupled with proper analysis and appropriate documentation of same. Further, necessary planning shall be made to take decisions from one place, wherever practicable so as to avoid the entire hassle of determination and analysis of large number of facts to determine PoEM.

(The Contents of this article are views expressed by author in its personal capacity and to the best of his knowledge of author. These views are based on the existing provisions of direct tax law and its interpretation, which are subject to change from time to time. No responsibility is assumed to update the views consequent to changes in law. Moreover, the article does not provide any advice/opinion/assurance that the revenue authorities/courts will concur with the views expressed herein. The article is simply for reference purpose only)

[1] Judicial Dictionary – K J Aiyar – 15th Edition 2011

[2] The Law Lexicon – 3rd Edition 2012

[3] Para 24 of Article 4 of Commentary to the OECD Model Convention

[4] Para 24 of Article 4 of Commentary to the OECD Model Convention


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June 2021