Govt issues draft guidelines for determination of POEM

The government has issued draft guiding principles for determination of Place of Effective Management (POEM), a test for ascertaining the tax residency of a company incorporated in a foreign jurisdiction.

The draft guidelines say that the place of effective management of a company would be determined primarily on the basis of whether or not the company is engaged in active business outside India.

According to the draft guidelines, a company would be said to be engaged in "active business outside India" if its passive income is not more than 50 per cent of its total income, its total assets situated in India is less than 50 per cent, less than 50 per cent of 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 per cent of its total payroll expenditure.

Passive income of a company would include income from the transactions where both the purchase and sale of goods are from/to its associated enterprises and those by way of royalty, dividend, capital gains, interest or rental income.

A company engaged in active business outside India would be considered to be non-resident for tax purpose if majority of meetings of the board of directors of the company are held outside India.

However, the draft guidelines say that if it is established that the board of directors of the company are not exercising their powers of management and instead these powers are being exercised by either the holding company or any other person (s) resident in India, then the place of effective management should be considered to be in India.

If a company, engaged in active business outside India, has a place of effective management in India or not, would be determined in two stages. The first stage would be ascertaining the person or persons who actually make the key management and commercial decisions for conduct of the company's business as a whole. And second would be to determine the place where these decisions are being made.

According to the draft guidelines, the place where these management decisions are taken would be more important than the place where such decisions are being implemented.

The guidelines further elaborate that the location where a company's board regularly meets and makes decisions would be the company's POEM only if the board has the authority to govern the company, and does, in substance, make the key management and commercial decisions necessary for the conduct of the company's business.

The guidelines clearly mention that mere formal holding of board meetings at a place would not by itself 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," the guidelines say.

The draft guidelines have been placed on the website of the finance ministry for comments and suggestions from stakeholder till 2 January 2016.