On January 24, 2017, India’s Ministry of Finance published Circular No. 6 of 2017, which provides guidelines for determining the place of effective management (“POEM”) of a company. See BEPS Action 6.
Finance Act 2015 amended Section 6(3) of the Income Tax Act (“ITA”), effective from April 1, 2016. Based on these amendments, a company is considered an Indian resident in any previous year if: (i) it is an Indian company or (ii) its place of effective management in that year is in India. The ITA defines POEM as a place where key management and commercial decisions, that are necessary for the conduct of the business of an entity as a whole, in substance, are made. POEM is used to determine the residence of a company incorporated in a foreign jurisdiction. Finance Act 2016 changed the effective date from April 1, 2016 to April 1, 2017, and will apply to the 2017-18 assessment year and subsequent assessment years.
The POEM must be determined on a yearly basis. For a company engaged in active business outside India, the presumption is that the POEM is outside India if the majority of the meetings of the board of directors are held outside India. For the purpose of determining whether the company is engaged in active business outside India, the average of the data of the prior three years shall be taken into account. A company is engaged in an active business outside India if the passive income is equal to or less than 50% of its total income and the following apply:
- 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.
Passive income of a company shall be the aggregate of:
- Income from transactions where both the purchase and sale of goods is from / to its associated enterprises.
- Income by way of royalty, dividend, capital gains, interest or rental income.
Any interest income shall not be considered passive in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated under the applicable laws of the country of incorporation.
Guiding principles to determine a company’s POEM include the following (list is not exhaustive):
- Location where a company’s board meets regularly and makes decisions, provided the board retains and exercises authority to govern the company, and in substance, makes the key management and commercial decisions necessary for the conduct of the company’s business as a whole.
- A company’s board may delegate some or all of its authority to one or more committees, such as an executive committee consisting of key members of senior management. The location where the members of the executive committee are based and where that committee develops key strategies and policies for formal approval by the full board will often be considered the POEM.
- The location of a company’s head office is an important factor in determining the POEM, as it generally represents the place where key company decisions are made.
- Physical location of board meetings or other meetings with executives or senior management may not be where key decisions are made. In these situations, the place where directors or persons making decisions generally reside may be a relevant factor.
- Day-to-day routine operational decisions undertaken by junior and middle management is not relevant in determining POEM.
The guidance includes secondary factors that India will consider to determine the company’s POEM. These include: (i) place where the main and substantial activity of the company is carried out or (ii) place where the accounting records of the company are kept.