RESIDENTIAL STATUS OF A ‘COMPANY’ based on POEM - Income Tax - Ready Reckoner - Income Tax

Section 6(3) RESIDENTIAL STATUS OF A COMPANY 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 , 8/2017 dated 23-2-2017 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) Companies fulfilling the test of ABOI Companies other than those 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. 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. What is ABOI 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. Less than 50% of its total assets situated in India Less than 50% of the total number of employees are situated in India or are residents in India 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. Payroll This term include the cost of salaries, wages, bonus and all other employee compensation including related pension and social costs borne by the employer. CBDT Clarifications Circular no. 25/2017 dated 23-10-2017 , and 6/2017 dated 24-1-2017 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 ]