Residential Status

Residential Status based on Place of Effective Management (POEM):

Any determination of POEM will depend on the facts and circumstances of each case. The concept of POEM is one of substance over form. The process of determination of POEM is based primarily on .

 

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 number of employees are situated in India or are resident in India

  • payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

If a company is engaged in active business outside India, it’s POEM shall be deemed to be outside India. Accordingly, it shall be classified as a Non-Resident.

Guiding Principles for Determination of POEM:

  1. Location where the Board of Directors meet and make decisions.
     

  2. Location of Executive Committee, in case powers are delegated by the board.
     

  3. Location of Head Office
     

  4. Use of Modern Technology - It is no longer necessary for persons taking decisions to be physically present at a particular location. Accordingly, in such cases, the place where the directors or persons taking the decisions usually reside may also be a relevant factor.
     

  5. Decisions made by Shareholders are not relevant for determining POEM.
     

  6. Day to day routine operational decisions are not relevant for determining POEM.
     

If the above factors do not lead to clear identification of POEM then the following secondary factors can be considered:

  • Place where main and substantial activity of the company is carried out

  • Place where the accounting records of the company are kept.

POEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on the basis of isolated facts that by itself do not establish effective management, as illustrated by the following examples:

  • The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

  • The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

  • The fact that one or some of the Directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

  • The fact of, local management being situated in India in respect of activities carried out by a foreign company in India will not , by itself, be conclusive evidence that the conditions for establishing POEM have been satisfied.

  • The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

Points to Remember:

  • In case the BOD follows general and objective principles of global policy of the group laid down by the parent entity which may be in the field of Pay roll functions, Accounting, Human resource (HR) functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and not being specific to any entity or group of entities per se; it would not, in itself, constitute a case of BoD of companies standing aside. This is relevant in cases where MNCs with regional head-offices have their employees working in India with responsibility or oversight over various countries.

  • The provisions of GAAR may get triggered in cases where the above clarification is found to be used for abusive/ aggressive tax planning

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