The idea of Place of Effective Management or POEM was first introduced in the Finance Act 2015 for the purpose of determining the residential status of foreign businesses. As per the act, any business having its place of effective management in India will be considered as an Indian resident and accordingly, it’s global income will be taxable in India.17
But the Finance Act was missing the entire criteria and process for determining the place of effective management. For this purpose, the Central Board of Direct Taxes (CBDT) introduced the Guiding Principles for determination of Place of Effective Management (POEM) of a Company.
With effect from 1st April 2016, the existing provisions of section 6(3) of the Act were amended vide Finance Act, 2015 were amended.
As per the new amendments, a company is said to be resident in India in any previous year, if-
(i) it is an Indian company, or
(ii) its place of effective management in that year is in India
What does Place of Effective Management (POEM) mean?
“Place of effective management” is defined in the Act to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.
POEM is an internationally recognized test for the determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognizes the concept of ‘place of effective management’ for determination of residence of a company as a tiebreaker rule for the avoidance of double taxation.
General guidelines for determination of POEM
- The process of determination of POEM would generally be:
− based on facts and circumstances;
− driven by substance over form;
− based on the place where decisions are taken, rather than the place of implementation of the decisions.
- Day-to-day routine operational decisions shall not be relevant for the determination of POEM.
- An entity may have more than one place of management, but it can have only one POEM at any point of time.
- The POEM will be required to be determined on a year-to-year basis.
Place of Effective Management further provides clarification on the following areas –
- Computational aspects for the determination of ‘active business outside India’ test.
- Exclusion for shareholder decisions by the parent company.
- Adherence to global group policies on accounting, HR, IT, supply chain and routine banking
operations shall not lead to POEM in India.
- Broader strategic and policy decisions to be relevant in determining POEM, as against routine
operational decisions for oversight of day-to-day business operations.
- The Assessing Officer shall initiate POEM determination only after prior approval of the Principal
Commissioner/ Commissioner. The decision on upholding the determination of POEM needs to
be approved by a collegium of three Principal Commissioners/ Commissioners.
- The POEM guidelines shall not apply to companies having turnover or gross receipts of INR 500
million or less in a financial year (this has been provided in the CBDT press release dated 24
January, 2017, but has not been stated in the guidelines).
Going forward we will be writing a series of articles on POEM with regards to the guidelines issued for businesses that are engaged in active business outside India and for those that aren’t.
For a deeper insight to how ‘Place of Effective Management’ affects your business, talk to our experts at Integra Books today.