Residential Status for Corporate & Non-Corporate Assessee - Outside India - International Taxation - Income Tax

Residential Status for Corporate Non-Corporate Assessee - Outside India Non-Corporate Non-Resident Under Sec. 2(30) of the Income Tax Act, 1961 an individual who does not fulfil any of the two conditions given in Sec. 6(1) (a) or (b) would be regarded as Non-Resident assessee during the relevant previous year for all purposes of this Act. Non-Resident Indian (NRI) Non-Resident Individual (NRIs) means whose Residential status is Non-Resident as per Section 6 of IT, Act, 1964 + Indian Citizen/Person of Indian Origin. Foreign Company A foreign Company is resident in India, only if, during the previous year, Place of effective management (POEM) is in India. Conversely, a Foreign Company is treated as Non-Resident if, during the previous year, place of effective Management (POEM) is outside India. Place of Effective Management means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made. In case where Foreign Company is said to be resident due its POEM being in India u/s 6(3) in previous year, Notwithstanding anything contained in this Act, The provisions of the Act relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward and set off losses, collection and recovery and special provision relating to avoidance of tax shall apply to foreign company for the said previous year with exception, modification and adaptations specified. [ Notification 29/2018 , dated 22.06.2018] Guiding Principles for determination of Place of Effective management ( POEM ) of a Company, other than an Indian company Circular no. 25/2017 dated 23-10-2017 , and 6/2017 dated 24-1-2017 Place of effective management' (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognises the concept of 'place of effective management' for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. The CBDT has laid down the following guiding principles to be followed for determination of POEM :- The conditions specified in the circular are depicted in the flow charts below: The determination of POEM is based on the following categorization of foreign companies: Active Business Outside India (Business Test) A company is said to be engaged in ABOI, if it fulfills the cumulative conditions of: Its passive income (wherever earned) is 50% or less of its total income; and Less than 50% of its total assets situated in India; and Less than 50% of the total number of employees are situated in India or are residents in India; and Payroll expenses incurred on such employees are less than 50% of its total payroll expenditure. Meaning of Certain Term Income shall be (a) as computed for tax purpose in accordance with the laws of the country of incorporation; or (b) as per books of account, where the laws of the country of incorporation does not require such a computation. Passive income of a company shall be aggregate of: (i) Income from the transactions where both the purchase and sale of goods is from/ to its associated enterprises ; and (ii) income by way of royalty, dividend, capital gains, interest (except for banking companies and public financial institutions) or rental income whether or not involving associated enterprises. Value of Assets (a) In case of an individually depreciable asset or shall be the average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the previous year ; and (b) In case of pool of a fixed assets being treated as a block for depreciation , shall be the average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the year ; (c) In case of any other asset , shall be its value as per books of account. Number of Employees The average of the number of employees as at the beginning and at the end of the year and shall include persons, who though not employed directly by the company, perform tasks similar to those performed by the employees. Pay roll This term include the cost of salaries, wages, bonus and all other employee compensation including related pension and social costs borne by the employer. After determination Active Business outside India Companies fulfilling the test of ABOI Companies not fulfilling the test of ABOI POEM outside India, if majority BOD meetings are held outside India. If de facto decision making authority is not BOD but Indian parent or resident, POEM shall be in India. Read with Circular No. 25/2017 dated 23.10.2017 , Clarification on if the majority meetings of the board of directors (BoD) of the company are held outside India. Stage 1 : Identification of persons who actually make the key management and commercial decision for conduct of the company s business as a whole. Stage 2 : Determination of place where these decisions are, in fact, made. POEM not apply The POEM guidelines shall not apply to a company having turnover or gross receipts of ₹ 50 crores or less in a financial year. [ Circular No 08 of 2017 dated 23.02.2017 ]