Place of Effective Management (POEM) in India

Bird’s Eye view of the ‘Place of Effective Management (POEM) in India’

Concept of taxation	Non-Resident Taxation
International principle	Place of Effective Management (POEM)
Applicability of POEM	Engagement in “Active Business Outside India”

Topics Covered under Place of Effective Management (POEM) in India

1. Meaning Of Place Of Effective Management (POEM)
2. Non Applicability Of POEM (Place Of Effective Management)
3. Guiding Principle For Determination Of Poem (Place Of Effective Management)
4. Place Of Effective Management For Companies Engaged In “Active Business Outside India”
5. Poem For Companies Not Engaged In Active Business Outside India
6. When Is A Company Engaged In Active Business Outside India
7. Various Factors To Be Considered To Determine Place Of Effective Management

Meaning of Place of Effective Management (POEM)

“Place of Effective Management is an internationally acceptable test to determine, whether a company incorporated in a foreign jurisdiction, is a tax resident of another country.”

Place of effective management means a place where : –

1. Key management, and commercial decisions
2. that are necessary for the conduct of the business of an entity as a whole are,
3. in substance made.

Non Applicability Of POEM (Place Of Effective Management)

The criteria  to determine POEM  shall be applicable only if the turnover or gross receipts  of a company , in a financial  year,  is greater than Rs. 50 crores. The provision would not be applicable, where the turnover or gross receipts  of a company , in a financial  year  is either less than or equal to 50 crores. In such a case,  the company would be treated as a non- resident for Indian tax purposes.

Guiding Principle For Determination Of Place Of Effective Management (POEM)

In order to determine,  whether the POEM  of a company is in India, or outside India,  the first thing one needs find out  is,  whether the company is Engaged  in  Active business at a place in India or outside India (“Active Business Test”)?

Place Of Effective Management (POEM) For Companies Engaged In “Active Business Outside India”

POEM of companies, which are engaged in “Active Business Outside India” (ABOI) shall be presumed to be outside India,  if the majority of the Board meeting are held outside India.    If, majority of board meetings are held  in India,  the place of effective management would be in India.

However, there is an exception to these rules. In case of a foreign company, even if the majority of board meetings are held outside India, but the power of management is exercised by the following, then the POEM shall be considered to be in India : –

• Indian holding company ;
• Any other person, resident in India,

Example – Place of Effective Management (POEM) in India

Alpha, Inc is engaged in Active Business Outside India. During the current financial year, total of 5 meetings of its Board of Directors were held, of which 2 were held in India and 3 were held outside India. However, the Board of Directors are not exercising powers of management and such powers are being exercised by ‘Indian holding Company’ (IHC) of Alpha Inc. Determine POEM of Alpha Inc ?

Solution : –

Company having “Active Business Outside India” shall not be treated as having there Place of Effective Managment in India , when majority of their Board meetings are held outside India, provided the power of management is not exercised by the Indian Holding Company. In the present case, even though the majority of Board meetings were held outside India, since the Board of Directors are not exercising powers of management,  and such powers are being exercised by Indian holding company, the POEM of Alpha Inc shall be in India .Accordingly, Alpha Inc  would be treated as resident in India.

POEM For Companies Not Engaged In Active Business Outside India

If the company does not satisfy the test of ABOI, and is not engaged in “Active Business Outside India”, the POEM of the company would be determined  by following the two steps as under  :-

1. Step 1 : – Identify the person(s) who actually make the key management and commercial decisions , which are necessary for the conduct of the business of the company as a whole.
2. Step 2 : – Determine the place where these decisions are, in fact, being made.

In such a case,  instead of relying solely on where the Board of Directors  conduct their meetings,  emphasis is on  the person  who actually make the decisions, and the place where the decisions are made. One important thing,  that needs to be noted is  that the place where management/commercial decisions are taken is more important than the place where such decisions are implemented. So if  all of the decisions are taken in Singapore, but  they are implemented in India,  the place of decision, i.e  Singapore would be more relevant. POEM of Foreign Company would be outside India where key management and commercial decisions are taken outside India. However, POEM of Foreign Company would be in India where key management and commercial decisions are taken in India.

Example – Place of Effective Management (POEM) in India

1. Beta Inc., held the Board meeting in USA wherein Board of Directors of the Beta Inc. agreed to sign the contract of sale. However, the contract of sale was signed in India.
2. Beta Inc. is not engaged in Active Business Outside India.
3. Whether Place of Effective Management of Beta Inc. would be outside India?

Solution : –

• The Board of Directors decided to sign the sale contract outside India. Thus, key management decision is taken outside India.
• The Board of Directors signed the sale contract in India. Thus, the key management decision is implemented in India.
• POEM of FCO would be outside India as the place where these management decisions are taken would be more important than the place where such decisions are implemented .

When Is A Company Engaged In Active Business Outside India

• A company is said to be engaged in ‘Active Business Outside India’ if it satisfies all the following conditions:
  • Its passive income is 50% (or less) of its total income;
  • Its total asset situated in India are less than 50% of its asset ;
  • Total number of employees are situated in India or employees who are resident in India, is less than 50% of total employees;
  • the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

Particulars	Value of asset
In case of a individually depreciable asset	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 (i.e., average of opening balance and closing balance of individual assets)
In case of pool of fixed asset, being treated as a block for depreciation	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 (i.e., average of opening balance and closing balance of block of assets)
In case of any other asset	Value as per books of account

Various Factors To Be Considered To Determine Place Of Effective Management

The various factors which are to be considered , to determine the POEM  of a company are as under : –

Location Of Board Of Directors

The location where a company’s Board regularly meets and makes decisions is important to determine whether the company has a POEM in India. 

Other conditions include:

• Board retains and exercises its authority to govern the company. If the Board has the authority but it does not exercises such authority, this condition would not be fulfilled ; and
• The Board should, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole.

However,  in the following cases it cannot be  said,  that the Board  has exercised its  Power to make key management and commercial decisions : –

• There is only formal holding of Board Meetings at a place . The key decisions by the Directors are in fact being taken in a place other than the place where the formal meetings are held . .
• The Board has de facto delegated the authority to make the key management and commercial decisions to the senior management or any other person .  In these cases, the POEM of the company will ordinarily be the place where these senior managers*  or the other person make those decisions are based.

Example – Place of Effective Management (POEM) in India

• Ralmart Inc. (‘USA’) held Board meeting at its office in India. Board of Directors of Ralmart Inc. makes all key management and commercial decisions at USA.
• Determine POEM of RalMart ?

Solution : –

• Ralmart Inc. takes key management and commercial decisions at USA. Thus, POEM of Ralmart Inc. would be outside India.

Location Of Executive Committee

In case of several companies,  especially MNEs with operations across various tax jurisdictions, th Board may delegate some or all of its authority  to one or more Executive Committee . The delegation of authority may be either be by means of a formal resolution or Shareholder Agreement (de jure) or based upon the actual conduct of the Board and the executive committee – de facto.

Location Of Head Office

The location of a company’s head office will be a very important factor in the determination of the company’s POEM because it often represents the place where key company decisions are made.

The following points would need to be considered for determining the location of the head office of the company : –

a) Senior management and their support staff are based at a single location –

b) Members of senior management operate from offices located in the various countries from time to time

In such a case, the company’s head office would be the location where these senior managers  –

1. are primarily or predominantly based; or
2. normally return to following travel to other locations; or
3. meet when formulating or deciding key strategies and policies for the company as a whole.

c) Participate in various meetings via telephone or video conferencing

In such a case  the head office would normally be located at the place, where the highest level of management (for example, the Managing Director and Financial Director) and their direct support staff are located.

d) In situations where the senior management is so decentralised that it is not possible to determine the company’s head office with a reasonable degree of certainty, the location of a company’s head office would not be of much relevance in determining that company’s place of effective management.

Circular Resolution

 the following factors should be considered :-

• The frequency with which circular resolution  is used,
  • The nature of decisions made in that manner, i.e, whether these decisions are key manager decisions or routine decisions ; and
  • Location of the parties, who are involved in those decisions.

Place of person who exercises the authority to take decisions

Decisions Made By Shareholders

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 POEM. These decisions generally, impact the existence of the company itself or the rights of the shareholders as such, rather than the conduct of the company’s business from a management or commercial perspective, which would then constitute POEM.

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