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Place of Effective Management

Company tax residency rule


POEM
Brief Discussion

BY: CA. Gaurav Garg


Content
Finance Act 2015
Understanding POEM
Consequance
Finance Act 2015
Till March 2015, a company not incorporated in India was treated as tax resident
only where the control and management was situated wholly in India.
This threshold allowed many taxpayers to set-up companies outside India for
avoiding taxes in India through proper planning.
In order to plug this loophole, Finance Act 2015 has amended provision of Section
6(3) of the Income-tax Act 1961 (the Act) and replaced control and
management criteria to Place of Effective Management (POEM).

Finance Act 2015 Prior Act


A company is said to be resident in India in any previous year, if,-
i) It is an Indian company; or i) It is an Indian company; or
ii) Its place of effective management, ii) During that year, the control and
in that year, is in India management, of its affairs is situated
wholly in India
Finance Act 2015
Further, an explanation as been added in the Act, and POEM has been defined as
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 change is in line with most of the DTAAs signed by India with other countries.
Understanding POEM
Concept of POEM is found in OECD Model Convention and the same advocates the use
of POEM to decide tax residency, tie-breaker rule, in a case wherein a taxpayers
becomes resident of more than one country.
POEM is also used to decide taxation of profits from shipping and air transport.
Place of effective management refers to actual management over ostensible or formal
management. In Commentary on Article 4(3) on POEM, OECD attaches importance to
company actually managed over formal criterion like registration.
Place of effective management is different from place of management as generally
place of management is interpreted as the centre of top-level management, the place
where the person authorised to represent the company carries on his business
management activities.
The term effective implies realistic, positive managementit is where the shots are
called
As per international tax expert Mr. Vogel, for POEM what is decisive is not the place
where the management directives take effect, but rather the place where they are
given.
Understanding POEM
As per meaning given in the Act, POEM is
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
Where key management and commercial decisions
key management and commercial: idea is not to cover any decision but very
important management and commercial decisions. It will not include decisions
relating to supervisory functions, or routine decisions taken by lower level
management for day-to-day operations.
decisions: s at the end, suggests some sort of continuity in decision
making function from a place, so merely one time activity will not fall under
this concept.
Under the Finance Bill initially presented, the definition included the phrase
at any time. There was an apprehension that due to this phrase, if the POEM
Understanding POEM
is situated in India even for a day, the company will be treated as Indian
Resident. However, these words are removed in the final version, it is clear
that Government does not intend to cover occasional/ casual decision taking
from India.
that are necessary for the conduct of the business of an entity as a whole are
decisions should be with regard to entity as a whole
a place where decisions are taken only for a part of an entity say branch,
manufacturing unit, sales unit etc will not get covered
in substance made
It is a place where actually decisions are taken and not a place where
decisions are minuted or formalised in board meeting
It is also not a place where decisions are implemented
Consequence
If POEM is held to be India, a company not incorporated in India would be treated
as tax resident company
Being tax resident company,
Its global income would be taxable in India;
It need to obtain PAN, TAN, maintain books of accounts and get them audited;
It need to compute its taxable income as per the Act and file its income tax
return in India; and,
All other provisions of the Act would be applicable which are applicable on
companies
Contact
For further discussion on POEM and how it can impact your taxability, feel
free to contact:

CA. Gaurav Garg


(E): gaurav@jgarg.com
(P): +91 11 47094934
(M) +91 9899994934