Place of Effective Management in India – A Detailed Analysis | Resident Company

A company shall have a tax liability in India if it is a resident or non-resident in India. 

If the company is non-resident, tax is payable only in that case when its income arises or received or deemed to be arisen or received in India.

But now suppose the company is resident in India. In that case, you are supposed to pay tax in India whether income arises or received or deemed to be arisen or received in India or not. In short, the company shall have to pay tax in every case if the income is taxable in India.

But to determine its residency, it is necessary that the Place of Effective Management (POEM) should be in India. POEM of a company shall help the company understand if it should pay tax in India. 

It is applicable to all foreign company whether incorporated in the USA, UK or any other country.  

Let's move forward to determine whether your company is required to pay tax in India or not.

How to determine the place of effective management of the company

With effect from the assessment year, 2017-18 a company  would be resident in India in a previous year
  • if it is an Indian company
  • its place of effective management in that year is in India

Guiding principles for the determination of place of effective management of a company other than an Indian company


Place of effective management is an internationally recognized test determination of residence of a company incorporated in a foreign jurisdiction.

Any determination of the poem will depend upon the facts and circumstances of a given case.

Before determining whether the company has POEM in India, It is necessary to determine whether THE COMPANY has an ACTIVE BUSINESS in INDIA. 

To determine active business in India there are some criteria which given as below

Criteria are as follows
  • If passive income in India is not less than 50% of its total income
  • Not less than 50% of its total assets are situated in India
  • Not less than 50% of the total number of employees are situated in India or are resident in India
  • The payroll expenses incurred on such employees is not less than 50% of its total payroll expenditure
Now based on the criteria as mentioned above we are able to determine whether the company has an active business in India. So let's find out whether the company has effective management in India.

Let's go..................

If the active business of a company is outside India and the Majority of the board meetings are held outside India, it will be presumed that the company has effective management outside India.
  • The points to be noted which is very important that if the board of directors is not the decision making authorities but Indian parent or resident, POEM shall be in India

What about the case in which the company has an active business in India | How to determine the POEM in that case

In case the company not engaged in active business outside India, guidelines provide a two-stage process for determination of poem in case of companies engaged in active business in India
  • The first stage is identifying the person who actually makes the key management and commercial decisions for the conduct of the company as a whole
  • The second stage is to determine the place where these decisions are in fact being made
It's very important to note the decision made by the shareholders on matters which are reserved for shareholder decision under the company, are not relevant for the determination of a company's place of effective management.

However, the shareholders' involvement can in certain situations turn into that effective management. This may happen through a formal arrangement by way of shareholder agreement or may also happen by way of actual conduct.

Day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of the determination of the poem.

If the above factors are not able to determine the poem of a company, the final guidelines provide that following secondary factors may be considered
  • Place where the mean and substantial activity of the company is carried out
  • Place where accounting records of a company are kept.
The focus to determine the place of effective management should be on all the points mentioned above.

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DISCLAIMER


The information provided in this article is for general informational purposes only. All efforts have been made to provide accurate information in this document, however, it should not be perceived as professional or legal advice. The reader should consult a professional before making any decision based upon this document. Under no circumstance, the author or the publisher shall have any liability to you for any loss or damage of any kind incurred as a result of the use of this information.