PoEM

What does PoEM stand for?

Place of effective management.
The Finance Act 2015 has proposed to amend the test of residence for foreign
companies to provide that a company would be treated as resident in India if its
place of effective management in the previous year is in India.
Place of effective management has been defined 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. A set of guiding principles
to determine POEM is also proposed to be issued
Likely trigger of PoEM

Impact of PoEM

Residential status for companies

Place of effective management means the location where key

decisions necessary to conduct business are made. It is used
internationally to determine the residence of a company incorporated
in a foreign jurisdiction
The place of effective management in case of a company engaged in active business outside India shall be presumed to be
outside India if
the majority meetings of the board of directors of the company are held outside India, the draft rules suggested. The
company will considered
to be engaged in active business outside India if the majority of its income, assets, employees and employee expense is
from outside India
However, if the company directors are not exercising their powers of management and such powers are being exercised by
either the
holding company or any other person resident in India, then the place of effective management shall be considered to be in
India, the draft
said.
In case a firm is not classified as active outside India, a twostage
process will be followed, where the person making key management
decisions and the location where such decisions will be taken will be looked at.
Interestingly, for determining whether a firm is engaged in active business outside India, the average of the past three years
data will be
taken into account, a provision analysts say is almost like taxation based on retrospective changes to tax laws.
In case a companys board delegates some of its authority to one or more committees such as an executive panel consisting
of key members
of senior management, the location where the members of the executive panel formulate the key strategies will be
considered as the firms
place of effective management.

The guidelines explain how to apply the rules in case technology is used by directors to participate in a board meeting.
Members of the senior management may operate from different locations on a more or less permanent basis and the
members may
participate in various meetings via telephone or video conferencing rather than by being physically present at meetings in a
particular
location. In such a situation, the head office would normally be the location, if any, where the highest level of management
and their direct
support staff are located, it said. It is no longer necessary for the persons taking decision to be physically present at a
particular location,
the draft said, adding that in such a case, the place of residency of the directors may also be important.

Amendment by Finance Act, 2015

From 1 April 2015, residential status of any company will be determined by the
concept of POEM.
A company will be considered an Indian resident company if:
It is incorporated in India; or
Place of effective management, in that year, is in India.
Place of effective management is the country where key management and
commercial decisions necessary for conduct of business of an entity as a whole
are, in substance, made.
Guidelines are proposed to be issued for benefit of taxpayers as well as tax
administration.

Background to Amendment
Under Section 6 of the Income-tax Act, 1961 (the Act) , a company is
considered to be an Indian resident company, only if it is incorporated in India
or the control and management of its affairs is situated wholly in India.
However, the proposed amendment, seeks to make a foreign company an
Indian resident if its POEM in that year is situated in India.
The concept of POEM is not new; it is already present in the Tenth Schedule
of the Act dealing with tonnage tax scheme for a shipping company. However,
the definition of POEM for determining the residency of a company is different
from what is defined under the tonnage tax scheme.
Earlier Direct Tax Code, 2013 had also laid down a similar POEM based test for
determining the residential status of the company.

Consequences of having POEM in India

The resultant resident company will be liable to tax in India on its global income
while a non-resident company is generally taxed only on its Indian sourced
income.
The resultant resident company may still be regarded as a non-domestic
company (assuming the dividend declaration and payment arrangement is not
made within India). Thereby, it will continue to be taxable at the rate of 40%
(plus surcharge and cess), though dividend paid by such company does not
trigger dividend distribution tax in its hands.
The resultant resident company may not be able to set off or carry forward

Way forward
Companies, which have headquarters in
India and have outbound operation, should
understand the concept of POEM to assess if
they would qualify as an Indian tax resident.
Health check of various foreign companies
(whether operating or set up for strategic
holding purposes) should be conducted.
Adequate training should be provided to
all stakeholders, i.e., employees, board
members and promoters of the finer
nuances of POEM.
Formulation of detailed guidelines of the
dos/donts for various stakeholders of
foreign companies may be undertaken,
keeping in mind legal provisions and judicial

interpretation of these requirements

Consequences for Indian MNCs.

Many executives are associated with the Indian parent company function as directors of its
foreign
subsidiaries. Now the power will have to be entirely delegated to an independent board abroad,
only associated with the foreign entity. This may increase compliance cost for Indian companies
If an Indian company has a subsidiary in another country where it has certain operations and
pays
taxes to the local authority there, it will have to pay tax back home in India if key decisions with
respect to the foreign business are determined to have been taken in India, or if key
management
personnel like a director on the board of the overseas firm resides in India.
Many overseas subsidiaries are created for the purpose of facilitating business activities like
fundraising
and did not have any operations of their own, and these may be especially impacted as a
consequence of the proposed amendment law.
Consequences for Foreign MNCs
Foreign companies with legitimate business operations outside India would end up being
treated as
Indian tax residents and consequently, be subjected to tax in India on their global income. This
could occur if, for example, a board member of the foreign company is present in India and
participates in the decisionmaking
process from India only in that single board meeting. This
anomalous situation will result in double taxation of income which may not be mitigated by tax
treaties as both countries (viz. India and the country of incorporation) will seek to tax the global
income of the foreign company.
4.3 Other Areas of litigation in determining POEM in India
POEM: Safeguards to be adopted
Given the new definition of corporate tax residence in India , it is important for foreign
companies,
particularly for overseas joint ventures, or subsidiaries of Indian entities to review the corporate
decision
making process. Further it is also relevant to appropriately document the process and
demonstrate
adherence thereto in substance at the ground level to mitigate any potential tax risks arising in
the tax
proceedings.
Highlighted below are some of the illustrative practical suggestions that might help in
substantiating the
POEM of a foreign subsidiary or joint venture in foreign jurisdiction:
5.1 Independent Board of Directors(BOD) of the foreign entity
The BOD of the foreign entity should be an Independent and autonomous body.
The decisions of the BOD should be well informed and duly deliberated upon. The deliberations
undertaken by the BOD should be documented and recorded appropriately in the minutes of the
meeting.
5.2 Place of BOD and Nature of Decisions:
The BOD meetings of the foreign entity should be held only in the foreign country.
Strategic and major commercial decisions should be taken in such meetings held outside India.
All the directors should attend these meetings outside India.

No BOD meetings should be held in India and no strategic decisions should be taken from India.
In case the BOD meeting is conducted through video or teleconferencing, the host countrys
corporate law is relevant for determining place of meeting in such cases.
5.3 Clarity on Key roles and activities
There should be absolute clarity on the key business role and activities of the foreign
subsidiaries or
JVs in foreign jurisdiction as evidenced in its Charter documents
Charter documents of the foreign subsidiary should adequately provide all powers to run the
business activities on its own.
Foreign corporate law compliances to be undertakenminutes,
quorum, registers, secretarial
records, etc. should be maintained in the registered office of the foreign country.
5.4 Extent of parent company support and stewardship function
Ensure that the parent companys influence on subsidiary is restricted to only to give visionary
direction to its business and shall, at no time, extend to the actual steering of the subsidiarys
key
activities.
Regarding the Indian Parent companys involvement in the foreign subsidiary, it must be noted
that
exercise of powers by the parent company must be in the capacity of majority shareholder to
protect its interest and not to take control of subsidiary and run it.
The role of parents nominee (preferably nonresident
Indian and not having any exceptional
powers to run the subsidiary) acting on behalf of the parent company can only be limited to
giving
strategic direction and coordination
to protect the shareholders interests.
The general meeting of the shareholders, where the parent company, being the majority
shareholder, can decide on matters like declaration of dividend, sale of undertakings etc. should
preferably be held in the country of incorporation.
The parent company shall not act in a steering role to carry out day to day management of the
subsidiary.
The decision of the appointment of directors of the foreign subsidiary should not be taken in
India
however a recommendation may be made by the representative directors of the parent
company in
India.
Any recommendations made by the parent company should be actively and independently
discussed and decided by the subsidiary company.
5.5 Functioning of Executive Directors and officers
Executive directors, CEOs, COOs, CFOs and other key management personnel of the foreign
subsidiary should be based outside India.
The foreign company should make proper orientation and create awareness amongst the
executive
directors, officers and board members about the issues related to POEM by conducting regular
sessions for them highlighting key dos and donts while with regard to conducting business, their
international mobility, meetings, video conferencing, work permit documents, communicating
through emails etc.
Various working documents in relation to these executive directors and officers like appointment

letters, titles of designations offered, work visas, business cards, service records, domicile
proofs,
and social security compliances should be critically examined from the POEM perspective and
should be regularly reviewed.
The information posted on the websites of the foreign subsidiary or the Indian parent company
about the foreign companys operations as well as about the key functions and role of the
executive
directors and officers of the foreign company should be regularly reviewed.
The powers of the respective executive directors and officers about taking any strategic or
commercial decisions should be documented adequately and such decisions should be
subjected to
BOD approval which should be in foreign jurisdiction.

POEM analysis
Whether charter document of the foreign
company gives veto power to Indian parent
or Indian promoter for undertaking key
decisions?
Whether board of directors of foreign
company merely approves (i.e. in form)
the decisions taken by the Indian parent/
Indian board/ Indian promoter without any
independent consideration?
What is the employee strength and
constitution of board of foreign companies
and do they have the competence to
exercise independent decisions?
Whether policy decisions relating to
strategy, finance and operations of foreign
company are taken from India?
Whether secretarial, administrative and
accounting work, including operation of the
foreign bank account of foreign company is
carried out from India?
Are there suitable internal controls existing
in the foreign companies, which prevent the
exercise of control by Indian parent/ Indian
board/ Indian promoter?

It has proposed that a company would be considered

to be engaged in active business outside India if its passive income, which would consist of transactions
of associated
enterprises and income from royalty, dividend, capital gains, interest or rental income, is not more than
50 per cent of
its total income.
Similarly, it would be considered to be a nonresident
firm if less than 50 per cent if its total assets are situated in India
or less than half of its employees or payroll expenses is on employees situated in the country.
The CBDT, however, stressed that a foreign company would not be considered a resident taxpayer just
because it is
fully owned by an Indian firm, or some of its directors or local management is in India or existence of
support functions
in the country.
The draft guidelines have also proposed that a companys head office would be defined as the place where
its senior

management and their direct support staff are located or, if they are located at more than one location, the
place where
they are primarily or predominantly located.
I General guidance
The process of
determination of POEM
would generally be:
based on the facts and
circumstances;
driven by substance
over form;
based on the place
where decisions are
taken, rather than the
place where decisions
are implemented.
Day to day routine
operational decisions shall
not be relevant for
determination of POEM
II Guidance for companies
engaged in active business
outside India
A company would be regarded
as engaged in an active
business outside India if the
passive income of the company
does not exceed 50% of its
total income and:
less than 50% of its total
assets are situated in
India; and
less than 50% of the total
number of employees are
situated in India or are
resident in India; and
the payroll expenses
incurred on such
employees is less than 50%
of its payroll expenditure.
Passive income of a company is
defined as the aggregate of:
income from transactions
where both purchase and
sale of goods is from / to
its associated enterprises;
and
income by way of royalty,
dividend, capital gains,
interest or rental income.
For the above test, the average of
the data of the year and two years
prior to that shall be considered.

If the company has been in

existence for a shorter period,
then data of such period shall be
considered.
For a company engaged in active
business outside India, its POEM
will be presumed to be outside
India if the majority of the
meetings of the board of directors
of the company are held outside
India. However, if it is established
that the board of directors are not
exercising their powers of
management, and such powers
are being exercised by either the
holding company, or any other
person resident in India, then the
companys POEM shall be
considered to be in India.
III Guidance for companies not
engaged in active business
outside India
For companies not engaged in
active business outside India, a
two-stage process for
determination of their POEM has
been specified as follows:
Identifying or ascertaining
the person or persons who
actually make the key
management and commercial
decisions for the conduct of
the companys business as a
whole
Determination of the place
where these decisions are
being taken
Factors that do not by itself
establish POEM
Determination of POEM is to be
based on all relevant facts related
to management and control of
company and not on the basis of
isolated facts which do not
establish effective management,
as illustrated below:
A foreign company is
completely owned by an
Indian company
One or some of the Directors
of a foreign company reside
in India
Local management being
situated in India in respect of
activities carried out by a

foreign company in India

The existence in India of
support functions that are
preparatory and auxiliary in
character