In our previous post, we discussed the idea of Place of Effective Management and how it came into existence. Today we will be focusing on the POEM guidance for companies that are engaged in active business outside India.
Determination of “active business outside India”
A company shall be considered as engaged in “active business outside India” if the passive income is not more than 50% of its total income; and if the following conditions are met –
(i) less than 50% of its total assets are situated in India; and
(ii) less than 50% of total number of employees are situated in India or are resident in India; and
(iii) the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.
Note: “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 or rental income;
(iii) less than 50% of the total number of employees are situated in India or are resident
in India; and
(iv) the payroll expenses incurred on such employees is less than 50% of its payroll expenditure.
What is Passive Income of a company?
Passive income of a company is defined to mean the aggregate of income from transactions where both purchase and sale of goods is from/ to its associated enterprises; and income by way of royalty, dividend, capital gains, interest or rental income.
The final guidelines have clarified that income by way of interest shall not be considered passive income in case of a regulated company engaged in the business of banking or a public financial institution. The income for the above purpose shall be as computed for tax laws in the country of incorporation, or as per the books of accounts (if no such tax computation is required).
Guidance has also been provided in the final guidelines for the computation of the value of assets, the number of employees and payroll expenses. It is relevant to note that ‘employee’ shall include persons who perform tasks similar to those performed by employees, though not employed directly by the company.
POEM guidance for “active business outside India”
For a company engaged in active business outside India, the POEM will be presumed to be outside India if a majority of the meetings of the board of directors of the company are held outside India.
However, if it is established that the board of directors are standing aside and not exercising their powers of management, and such powers are being exercised by either the holding company or any other person resident in India, then the POEM shall be considered to be in India.
The final guidelines have clarified that for this purpose, merely because the board of directors follow the general and objective principles of the global policy of the group laid down by the parent entity, which may be in the field of payroll functions, accounting, human resource functions, IT infrastructure and network platforms, supply chain functions, routine banking operational procedures, and not being specific to any entity or group of entities per se, would not constitute a case of board of directors of the company standing aside.
In our next post, we will be discussing the POEM guidance for companies not engaged in active business outside India. To know more about the ‘Place of Effective Management’ and how it affects your business, talk to our experts at Integra Books today.