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Residential Status of Company.

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June 5, 2021 |

6 mins read

Bird’s Eye view of the ‘Residential Status of Company’

Concept of taxation Non-Resident Taxation
Provision of Income Tax Act, 1961 Section 6- Residential Status
Types of Residential Status
  • Resident
  • Non-Resident
Factor for determining residency Place of Effective Management (POEM)

Residential Status of a Company – Introduction

Residential status of a company, is an important factor to determine, whether the company would be liable to pay tax in or outside India on a particular income, i.e, whether in India or outside India.

  • Upto Assessment Year 2016-17, the residential status of a company in India was dependent on whether the control and management of the companies affairs was situated wholly in India .
  • From Assessment Year 2017-18 and Onwards, the residential status  of  a company in India is dependent on its place of effective management (“POEM”). POEM, is an internationally acceptable test to determine, whether a company incorporated in a foreign jurisdiction, is a tax resident of another country.

Let us now understand these two provisions in detail : –

Residential Status of a Company – Upto Assessment Year 2016-17 – Pre-amended Section 6

Prior to  it’s amendment, Section 6(3) of the Income Tax Act, 1961 (“IT Act”) provided that a company is said to be resident in India in any previous year, if –

  • it is an Indian company; or
  • during that year, the control and management of its affairs is situated whollyin India.

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Thus,  under these provisions,  an Indian Company was always considered as a tax resident of India. It did not matter whether,  the control and management of its affairs,  was situated partly in India,  whollyin India or whollyoutside India.

However,  in case of a foreign company, it was considered as a tax resident of India,  only when the control and management of its affairs was situated whollyin India.  Thus, if the control and management of its affairs,  was situated partly  in India or whollyoutside India,  it was considered as a non- resident.

Residential Status of a Company – From Assessment Year 2017-18 and Onwards

Under the amended provisions, a company is said to be resident in India in any previous year,  if : –

  1. it is an Indian company; or
  2. its Place of Effective Management (‘POEM’), in that year, is in India.

Thus,  under the revised provisions the criterion to consider an Indian company as a resident of India, has not been changed. An Indian Company would always a tax resident of India irrespective of whether,  the control and management of its affairs,  was situated partly  in India,  wholly in India or wholly outside India.

However,  in case of a foreign company, it would be considered as a tax resident of India,  only when its Place of Effective Management (‘POEM’), in that year, is in India.  Thus,  the criteria of control and management of affairs,  has been replaced by the concept of POEM to determine the residential status of a foreign company for Indian tax purpose

Related Content

Residential Status –  Section 6 of Income Tax Act

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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