First stage : Identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company\u2019s business as a whole<\/span><\/p>\n<\/td>\n

Second stage : Determination of place where these decisions are in fact being made<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM it is the substance which would be conclusive rather than the form.<\/span><\/p>\n

Some of the guiding principles which may be taken into account for determining the POEM are as follows:<\/strong><\/span><\/p>\n

(a) The location where a company\u2019s Board regularly meets and makes decisions may be the company\u2019s place of effective management provided, the Board-<\/span><\/p>\n

(i) retains and exercises its authority to govern the company; and<\/span><\/p>\n

(ii) does, in substance, make the key management and commercial decisions necessary for the conduct of the company\u2019s business as a whole.<\/span><\/p>\n

It may be mentioned that mere formal holding of board meetings at a place would by itself not be conclusive for determination of POEM being located at that place. If the key decisions by the directors are in fact being taken in a place other than the place where the formal meetings are held then such other place would be relevant for POEM. As an example, this may be the case where the board meetings are held in a location distinct from the place where head office of the company is located or such location is unconnected with the place where the predominant activity of the company is being carried out.<\/span><\/p>\n

De facto delegation by BOD<\/em><\/strong>: <\/em>If a board has de facto <\/em>delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder, promoter, strategic or legal or financial advisor etc. and does nothing more than routinely ratifying the decisions that have been made, the company\u2019s place of effective management will ordinarily be the place where these senior managers or the other person make those decisions.<\/span><\/p>\n

(b) Place of development of develops and formulates the key strategies and policies: <\/strong>A company\u2019s 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. In these situations, the location where the members of the executive committee are based and where that committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered to be the company\u2019s place of effective management.<\/span><\/p>\n

The delegation of authority may be either de jure <\/em>(by means of a formal resolution or Shareholder Agreement) or de facto <\/em>(based upon the actual conduct of the board and the executive committee).<\/span><\/p>\n

(c) Location of head office: <\/strong>The location of a company\u2019s head office will be a very important factor in the determination of the company\u2019s place of effective management because it often represents the place where key company decisions are made.<\/span><\/p>\n

The following points need to be considered for determining the location of the head office of the company: –<\/span><\/p>\n

Senior management in a single location: <\/strong>If the company\u2019s senior management and their support staff are based in a single location and that location is held out to the public as the company\u2019s principal place of business or headquarters then that location is the place where head office is located.<\/span><\/p>\n

If the company is more decentralized (for example where various members of senior management may operate, from time to time, at offices located in the various countries) then the company\u2019s head office would be the location where these senior managers, –<\/span><\/p>\n

(i) are primarily or predominantly based; or<\/span><\/p>\n

(ii) normally return to following travel to other locations; or<\/span><\/p>\n

(iii) meet when formulating or deciding key strategies and policies for the company as a whole.<\/span><\/p>\n

Location of highest level of management<\/strong>: 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 situation, the head office would normally be the location, if any, where the highest level of management (for example, the Managing Director and Financial Director) and their direct support staff are located.<\/span><\/p>\n

Decentralised senior management: <\/strong>In situations where the senior management is so decentralised that it is not possible to determine the company\u2019s head office with a reasonable degree of certainty, the location of a company\u2019s head office would not be of much relevance in determining that company\u2019s place of effective management.<\/span><\/p>\n

(d) The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. Therefore, physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. In such cases the place where the directors or the persons taking the decisions or majority of them usually reside may also be a relevant factor.<\/span><\/p>\n

(e) In case of circular resolution or round robin voting the factors like, the frequency with which it is used, the type of decisions made in that manner and where the parties involved in those decisions are located etc. are to be considered. It cannot be said that proposer of decision alone would be relevant but based on past practices and general conduct; it would be required to determine the person who has the authority and who exercises the authority to take decisions. The place of location of such person would be more important<\/span><\/p>\n

(f) Shareholders involvement in certain cases: <\/u><\/strong>The decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company\u2019s place of effective management. Such decisions may include sale of all or substantially all of the company\u2019s assets, the dissolution, liquidation or deregistration of the company, the modification of the rights attaching to various classes of shares or the issue of a new class of shares etc. These decisions typically affect the existence of the company itself or the rights of the shareholders as such, rather than the conduct of the company\u2019s business from a management or commercial perspective and are therefore, generally not relevant for the determination of a company\u2019s place of effective management.<\/span><\/p>\n

However, the shareholder\u2019s involvement can, in certain situations, turn into that of effective management. This may happen through a formal arrangement by way of shareholder agreement etc. or may also happen by way of actual conduct. As an example, if the shareholders limit the authority of board and senior managers of a company and thereby remove the company\u2019s real authority to make decision then the shareholder guidance transforms into usurpation and such undue influence may result in effective management being exercised by the shareholder.<\/span><\/p>\n

Therefore, whether the shareholder involvement is crossing the line into that of effective management is one of fact and has to be determined on case-to-case basis only.<\/span><\/p>\n

(g) \u00a0Routine operational decisions: <\/u><\/strong>\u00a0It may be clarified that day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM. The operational decisions relate to the oversight of the day-to-day business operations and activities of a company whereas the key management and commercial decision are concerned with broader strategic and policy decision. For example, a decision to open a major new manufacturing facility or to discontinue a major product line would be examples of key commercial decisions affecting the company\u2019s business as a whole. By contrast, decisions by the plant manager appointed by senior management to run that facility, concerning repairs and maintenance, the implementation of company-wide quality controls and human resources policies, would be examples of routine operational decisions. In certain situations, it may happen that person responsible for operational decision is the same person who is responsible for the key management and commercial decision. In such cases, it will be necessary to distinguish the two type of decisions and thereafter assess the location where the key management and commercial decisions are taken.<\/span><\/p>\n

Secondary factors can be considered <\/u><\/strong><\/span><\/p>\n

If the above factors do not lead to clear identification of POEM then the following secondary factors can be considered: –<\/span><\/p>\n

(i) Place where main and substantial activity of the company is carried out; or<\/span><\/p>\n

(ii) Place where the accounting records of the company are kept.<\/span><\/p>\n

It needs to be emphasized that the determination of 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:<\/span><\/p>\n

(i) 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.<\/span><\/p>\n

(ii) 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.<\/span><\/p>\n

(iii) 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.<\/span><\/p>\n

(iv) 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.<\/span><\/p>\n

(v) 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.<\/span><\/p>\n

No single principle will be decisive in itself: <\/em>It is reiterated that the above principles for determining the POEM are for guidance only. No single principle will be decisive in itself. The above principles are not to be seen with reference to any particular moment in time rather activities performed over a period of time, during the previous year, need to be considered. In other words a \u201csnapshot\u201d approach is not to be adopted. Further, based on the facts and circumstances if it is determined that during the previous year the POEM is in India and also outside India then POEM shall be presumed to be in India if it has been mainly \/predominantly in India<\/span><\/p>\n

Prior approval of the Principal Commissioner or the Commissioner<\/u><\/strong><\/span><\/p>\n

\u00a0The Assessing Officer (AO) shall, before initiating any proceedings for holding a company incorporated outside India, on the basis of its POEM, as being resident in India, seek prior approval of the Principal Commissioner or the Commissioner, as the case may be. <\/strong><\/span><\/p>\n

Further, in case the AO proposes to hold a company incorporated outside India, on the basis of its POEM, as being resident in India then any such finding shall be given by the AO after seeking prior approval of the collegium of three members consisting of the Principal Commissioners or the Commissioners, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to the company before issuing any directions in the matter.<\/span><\/p>\n

\u00a0<\/strong>Summary<\/strong><\/span><\/h3>\n\n\n\n\n\n\n

\n Determination of POEM<\/strong><\/span><\/p>\n<\/td>\n<\/tr>\n
\n Active business outside India (\u2018ABOI\u2019)<\/strong><\/span><\/p>\n<\/td>\n<\/tr>\n
\n Yes<\/span><\/p>\n<\/td>\n	\n No<\/span><\/p>\n<\/td>\n<\/tr>\n
\n 1) POEM is considered to be outside India if majority of the meetings of the Board of directors are held outside India.<\/span><\/p>\n 2) However, if it is established that the BOD of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person (s) resident in India, then the POEM shall be considered to be in India.<\/span><\/p>\n<\/td>\n	Stage 1: Identification of persons who<\/span> \n actually make the key management and<\/span> \n commercial decision for conduct of the<\/span> \n company\u2019s business as a whole<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Stage 2: Determination of place where these decisions are in fact being made<\/span><\/p>\n Determination of Active business outside India<\/strong><\/span><\/p>\n\n\n\n\n\n\n\n\n *Passive Income Shall be aggregate of :<\/span><\/p>\n \n Income from Transactions where both the purchase and sales of goods is from\/to AE’s<\/span><\/li>\n Income by way of royalty, dividend, capital gain, interest or rental income<\/span><\/li>\n<\/ol>\n<\/td>\n<\/tr>\n Passive Income * (Wherever earn)<50% of total Income ?<\/span><\/td>\n<\/tr>\n Assets in India < 50% of total assets?<\/span><\/td>\n<\/tr>\n Employees situated in India; or are resident in India<50% of total number of employees<\/span><\/td>\n<\/tr>\n Payroll expenses incurred on such employee <50%of its total payroll expenditure<\/span><\/td>\n<\/tr>\n Activity Business Outside India<\/span><\/strong><\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Illustrations<\/span><\/h3>\n The following are certain illustrations intended to highlight applicability of certain principles enumerated in the foregoing paragraphs of the guidelines. The facts assumed have been simplified to highlight the principle. Actual determination of POEM of a company shall depend on all relevant facts.<\/span><\/p>\n Example 1<\/strong>: Company A Co. is a sourcing entity, for an Indian multinational group, incorporated in country X and is 100% subsidiary of Indian company (B Co.). The warehouses and stock in them are the only assets of the company and are located in country X. All the employees of the company are also in country X. The average income wise breakup of the company\u2019s total income for three years is, –<\/span><\/p>\n (i) 30% of income is from transaction where purchases are made from parties which are non-associated enterprises and sold to associated enterprises;<\/span><\/p>\n (ii) 30% of income is from transaction where purchases are made from associated enterprises and sold to associated enterprises;<\/span><\/p>\n (iii) 30% of income is from transaction where purchases are made from associated enterprises and sold to non-associated enterprises; and<\/span><\/p>\n (iv) 10% of the income is by way of interest.<\/span><\/p>\n Interpretation: In this case passive income is 40% of the total income of the company. The passive income consists of, –<\/span><\/p>\n (i). 30% income from the transaction where both purchase and sale is from\/to associated enterprises; and<\/span><\/p>\n (ii). 10% income from interest.<\/span><\/p>\n The A Co. satisfies the first requirement of the test of active business outside India. Since no assets or employees of A Co. are in India the other requirements of the test is also satisfied. Therefore, company is engaged in active business outside India.<\/span><\/p>\n Example 2<\/strong>: The other facts remain same as that in Example 1 with the variation that A Co. has a total of 50 employees. 47 employees, managing the warehouse, storekeeping and accounts of the company, are located in country X. The Managing Director (MD), Chief Executive Officer (CEO) and sales head are resident in India. The total annual payroll expenditure on these 50 employees is of Rs. 5 crore. The annual payroll expenditure in respect of MD, CEO and sales head is of Rs. 3 crore.<\/span><\/p>\n Interpretation: Although the first limb of active business test is satisfied by A Co. as only 40% of its total income is passive in nature. Further, more than 50% of the employees are also situated outside India. All the assets are situated outside India. However, the payroll expenditure in respect of the MD, the CEO and the sales head being employees resident in India exceeds 50% of the total payroll expenditure. Therefore, A Co. is not engaged in active business outside India.<\/span><\/p>\n Example 3<\/strong>: The basic facts are same as in Example 1. Further facts are that all the directors of the A Co. are Indian residents. During the relevant previous year 5 meetings of the Board of Directors is held of which two were held in India and 3 outside India with two in country X and one in country Y.<\/span><\/p>\n Interpretation: The A Co. is engaged in active business outside India as the facts indicated in Example 1 establish. The majority of board meetings have been held outside India. Therefore, the POEM of A Co. shall be presumed to be outside India.<\/span><\/p>\n \u00a0Example 4<\/strong>: The facts are same as in Example 3 but it is established by the Assessing Officer that although A Co.\u2019s senior management team signs all the contracts, for all the contracts above Rs. 10 lakh the A Co. must submit its recommendation to B Co. and B Co. makes the decision whether or not the contract may be accepted. It is also seen that during the previous year more than 99% of the contracts are above Rs. 10 lakh and over past years also the same trend in respect of value contribution of contracts above Rs. 10 lakh is seen.<\/span><\/p>\n Interpretation: These facts suggest that the effective management of the A Co. may have been usurped by the parent company B Co. Therefore, POEM of A Co. may in such cases be not presumed to be outside India even though A Co. is engaged in active business outside India and majority of board meeting are held outside India.<\/span><\/p>\n Example 5<\/strong>: An Indian multinational group has a local holding company A Co. in country X. The A Co. also has 100% downstream subsidiaries B Co. and C Co. in country X and D Co. in country Y. The A Co. has income only by way of dividend and interest from investments made in its subsidiaries. The Place of Effective Management of A Co. is in India and is exercised by ultimate parent company of the group. The subsidiaries B, C and D are engaged in active business outside India. The meetings of Board of Director of B Co., C Co. and D Co. are held in country X and Y respectively.<\/span><\/p>\n Merely because the Place of Effective Management of an intermediate holding company is in India the POEM of its subsidiaries shall not be taken to be in India. Each subsidiary has to be examined separately. As indicated in the facts since\u00a0 companies B CO. C CO. and D CO. are independently engaged in active business outside India and majority of Board meeting of these companies are also held outside India. The POWM of B.CO., C CO., and D CO., shall be presumed to be outside India.<\/span><\/p>\n Way out<\/strong><\/span><\/h3>\n Determination of residential status is the key factor in determination of taxability of Income. With the change in section 6(3) given the new definition of corporate tax residence in India, it has become very important for foreign companies, for overseas joint ventures, or subsidiaries of Indian entities to review, analyse and change if required the corporate decision making process presently followed.<\/span><\/p>\n Documentation is the key to showcase of substance. It is compulsory to properly document the process and demonstrate adherence thereto in substance at the ground level to mitigate any potential tax risks arising from the change in the definition.<\/span><\/p>\n 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:<\/span><\/p>\n (a) Independent Board of Directors(BOD) of the foreign entity<\/strong><\/span><\/p>\n 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.<\/span><\/p>\n (b) Place and Nature of Decisions\u00a0 <\/strong><\/span><\/p>\n To the extent possible, the BOD meetings of the foreign entity should be held only in the foreign country. No strategic\/major commercial decisions should be taken in the meetings, if any held in India. The mintues of the meeting should be properly documented. All the directors should attend these meetings outside India.<\/span><\/p>\n (c) Clarity on Key roles and activities<\/strong><\/span><\/p>\n Charter documents should bring out clearly the key business role and activities of the foreign subsidiaries or JVs in foreign jurisdiction. Shareholders agreements, employment agreement and any other incorporation or other document should adequately provide all powers to run the business activities on its own to foreign subsidiaries or JVs in foreign jurisdiction. Foreign corporate law compliances to be undertaken- minutes, quorum, registers, secretarial records, etc. should be maintained in the registered office of the foreign country.<\/span><\/p>\n \u00a0(d) Extent of parent company support and stewardship function<\/strong><\/span><\/p>\n Parent company\u2019s influence on subsidiary should be restricted to only to give visionary direction to its business and shall, at no time, extend to the actual steering of the subsidiary\u2019s key activities. It should be ensured and documented 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 general meeting of the shareholders, where the key decisions are taken like declaration of dividend, sale of undertakings etc. (Where parent company, being the majority shareholder, can decide on matters) should preferably be held in the country of incorporation. 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. Parent company should only recommend the actual decision should be taken by the subsidiary company after due deliberation. Communication flow regarding management decisions and functions should be appropriately documented.<\/span><\/p>\n (e)Board of Directors and Senior management <\/strong><\/span><\/p>\n As far as possible the key managerial personnel of the company like Executive directors, CEOs, COOs, CFOs of the foreign subsidiary should not be of Indian nationality and should be based outside India. Mostly in case of BOD and Senior management it so happens that they are not fully acquainted about the exposure arising out of their roles. Therefore, to make proper orientation and create awareness amongst BOD and Senior management about the issues related to POEM by conducting regular sessions for them highlighting key dos and don\u2019ts while with regard to important aspects like conducting business, their international mobility, meetings, video conferencing, work permit documents, communicating through emails etc. As seen above one of the most relevant factor in determination of POEM is the where the key decisions are made, the location of HO and the location of BOD therefore it become very pertinent that various working documents like appointment letters, titles of designations offered, work visas, business cards, service records, domicile proofs, and social security compliances of the BOD and Senior management should be critically examined from the POEM perspective and should be regularly reviewed. The powers of the respective BOD and Senior management about taking any strategic or commercial decisions should be documented adequately and such decisions should be subjected to BOD approval. Due consideration should also be given to the information posted on the website of the foreign subsidiary or the Indian parent company about the foreign company\u2019s operations as well as about the key functions and role of the executive directors and officers of the foreign company should be regularly reviewed and updated.<\/span><\/p>\n [1]<\/a> Circular No. 06 of 2017, F. No. 142\/11\/2015-TPL , Government of India ,Ministry of Finance, Department of Revenue ,Central Board of Direct Taxes , Dated: 24th January, 2017<\/span><\/p>\n","protected":false},"excerpt":{"rendered":" There has been change in section 6(3) regarding the determination of residential status of Company. As per the new provisions the residential status of companies which are not incorporated under the corporate laws of India, would be determined by the concept of \u201cPlace of Effective Management\u201d. Extant Position => Revised position a company is said … Read more<\/a><\/p>\n","protected":false},"author":132,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[442],"tags":[466,465,468],"class_list":["post-3853","post","type-post","status-publish","format-standard","hentry","category-fema","tag-fema","tag-gaar","tag-poem"],"yoast_head":"\n