Wednesday, February 15, 2017

Residence test for companies- POEM Guidelines

Section 6(3) of the Act were amended vide Finance Act, 2015, with effect from 1st April, 2016 to provide that a company is said to be resident in India in any previous year, if- 
It is an Indian company; or
Its place of effective management in that year is in India.
A company shall be said to be engaged in “active business outside India” if the passive income is not more than 50% of its total income; and
  • Less than 50% of its total assets are situated in India; and
  • Less than 50% 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% of its total payroll expenditure.

“Passive income” of a company shall be aggregate of, -
  • Income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and
  • Income by way of royalty, dividend, capital gains,interest or rental income;

However, any income by way of interest shall not be considered to be passive income in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation. “Senior Management” in respect of a company means the person or persons who are generally responsible for developing and formulating key strategies and policies for the company and may include Managing Director/CEO, Director of Finance/CFO, COO, Sales head, Technology or Production head.

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 unless the Board of directors of the company are standing aside and not exercising their powers of management.For the purpose of determining whether the company is engaged in active business outside India, the average of the data of the previous year and two years prior to that shall be taken into account. In cases of companies other than those that are engaged in active business outside India:-

  • First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.
  • Second stage would be determination of place where these decisions are in fact being made.

Some of the guiding principles:-
  • The location where a company’s Board regularly meets and makes decisions.
  • If a board has de facto delegated the authority, place of effective management will ordinarily be the place where these senior managers or the other person make those decisions.
  • 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
  • The location of a company’s head office.
  • 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’s place of effective management.
  • It 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.

If the above factors do not lead to clear identification of POEM then the following secondary factors can be considered:-
  • Place where main and substantial activity of the company is carried out; or
  • Place where the accounting records of the company are kept.

Determination of POEM is to be based on all relevant facts. POEM shall be presumed to be in India if it has been mainly /predominantly in India.

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