Residential Status of Companies under Income Tax Law

With effect from AY 2017-18 company would be resident in India if in any previous year:

1. It is an Indian Company (i.e. Incorporated as per Companies Act 2013 or 1956)

2. Its Place of Effective Management (POEM) is in India for a particular PY.

POEM means a place where key managerial and Commercial decisions for the conduct of the business of an entity as a whole are in substance made.

The CBDT by Circular No. 6/2017, dated 24.01.2017 & Circular No. 8/2017 dated 23.02.2017 has provided guiding principles for determination of POEM for companies other than Indian Company i.e. Foreign Company:

• Concept of Substance over Form

          Determination of POEM will depend on Facts and Circumstances of each case.

It may be noted that entity may have more than one place of management but it can have only one Place of Effective Management.

Since residence is to be determined for each year POEM shall also be determined for each year separately.

• Process of Determination of POEM would be primarily be dependent on whether or not the company is engaged in active business outside India.

The company shall be said to be in Active Business outside India if all the below conditions are satisfied:

1. If passive income is not more than 50% of Total income,

2. Less than 50% of its total assets are situated in India,

3. Less than 50% of total employees are situated in India or are resident in India,

4. The payroll expenditure on such employees are less than 50% of its total payroll expenditure.

Meaning of certain Terms:

Income	a) As computed for tax purpose in accordance with the laws of the country of Incorporation. b) As per Books of Account, where the laws of the Country of Incorporation does not require such computation.
Passive Income	Aggregate of – a) Income from transactions where both purchase and sale of goods if from/to its associated enterprises and b) Income by way of royalty, dividend, interest, capital gains or rental. Exception: Income by way of Interest shall not be included if company is engaged in business of Banking or is a Financial Institution.
Value of Assets	a) Individually depreciable Assets	The average of its value for Tax Purpose in the country of incorporation of the company at the beginning and at the end of the previous year.
	b) In case of pool of assets being treated as Block of Assets	The average of its value for Tax Purpose in the country of incorporation of the company at the beginning and at the end of the year.
	In case of any other Assets	Value as per Books.
No. of Employees	The average of Employees at the beginning and at the end of the year and shall include persons who are not directly employed by company, performs similar tasks to those performed by employees.
Payroll Expenditure	Includes cost of salaries, wages, bonus, and social costs borne by employer.

Place of Effective Management:

• In case of Companies engaged in Active business outside India i.e. all the above conditions are fulfilled.

POEM of a company engaged in Active business outside India shall be presumed to be outside India if majority of board meetings are held outside India. (i.e. more than 50%)

However, if Company is not exercising power of management and the same is exercised by holding company or any person resident in India the POEM shall be in India.

For the purpose of determining the active business outside India the average of the data of previous year and the two years prior to that shall be taken into account.

Where the accounting year for tax purpose of a country of Incorporation is different than the previous year, then data of the accounting year which ends during the relevant previous year and two year preceding it shall be considered.    

 For example company follows tax period 1^st Jan 2019 to 31^st Dec 2019 the data as on 31^st Dec 2019 shall be considered for the PY 2019-20 

• In case Company is not engaged in Active business outside India

There is two stage process for determination of POEM

1. 1^st Stage: Identification of person(s) who actually make key managerial and commercial decisions for the conduct of activities of company as a whole.

2. 2^nd Stage: Determining place where these decisions are actually made.

The place where decisions are taken is more important than the place where such decisions are actually implemented.

Some of the Guiding principles which may be taken into account for determining POEM are as follows:

1. Location where the BODs meet and make decisions

2. Location of Head Office.

3. Location of Executive Committee where powers are delegated by Board to them.

4. Use of Modern Technology such as Audio/Video Conferencing.  -In this case place where persons making decision resides plays a key role.

5. Decisions via circular

6. Decisions made by Shareholders are not relevant in determination of POEM

7. Day to day operational decisions taken by junior or middle level management are not relevant.