Under Income Tax Act, 1961, it is very important to determine the residential status of any person as it helps in determining the scope of taxable income in India. Until 2015, the concept of determination of residential status of foreign companies was very simplified.
Most of the companies were using these simplified provisions to prevent the residential status in India. However, the Finance Act, 2015 made a major amendment in Section 6(3) of Income Tax Act by introducing the concept of Place of Effective Management (POEM) while determining residential status of companies in India.
This article contains a detailed discussion of POEM provisions under Income Tax Act for foreign Companies:
1. Background
- Till 2015, As per Section 6(3) of Income Tax Act, a company is considered as Indian resident if:
- It is incorporated in India; or
- Its control and management is situated wholly in India.
- Therefore, most of the companies used these simplified provisions as a loophole to prevent residential status in India by shifting insignificant or isolated events related to control and management outside India. Since, to qualify as resident, whole control and management was required to be situated in India and by shifting insignificant events outside India, companies escaped the whole control and management in India.
- Most of the countries were using the other effective methods of determining residential status of companies such as the Central Control and Management Test. However, India decided to stick to the concept of whole control and management.
2. Amendment of Place of Effective Management (POEM)
- Finance Act, 2015 amendment the provisions of Section 6(3) of Income Tax Act with effect from 01.04.2016. As per amended provisions, a company is considered as resident if:
- It is an Indian Company; or
- Its place of effective Management in that year is in India
- However, The Finance Act, 2016 has changed the date of applicability of amendment to 1st April, 2017. Therefore, Amendment provisions become effective from Assessment Year 2017-18 onwards.
- Income Tax department issued guiding principles for determination of place of effective management (POEM) vide Circular No. 06/2017 dated 24th January, 2017.
3. Place of Effective Management (POEM) guidelines
'Place of effective management' (POEM) is an international method of determination of residential status of a company incorporated in a foreign jurisdiction. Most of the Double Taxation Avoidance agreement entered into by India recognises the concept of 'place of effective management' for determination of residential status of a company.
A company incorporated in India is considered as Indian Resident irrespective of its place of effective Management. Therefore, the POEM test is relevant for companies incorporated outside India, i.e., Foreign Company.
As per POEM Guidelines, a foreign company is categories in 2 parts namely:
- Active Foreign Company;
- Passive Foreign Company
3.1 Active Foreign Company
3.1.1 Determination of Active Foreign Company
- A company shall be said to be engaged in “active business outside India” if:
- the passive income is not more than 50% of its total income; and
- Assets situated in India are less than 50% of its total assets; and
- Total number of employees situated in India or resident in India are less than 50%; and
- The payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.
- “Passive income” of a company shall be aggregate of:
- income from the transactions where both the purchase and sale of goods with its associated enterprises; and
- income by way of royalty, dividend, capital gains, interest or rental income;
However, in case of banking companies or Public Financial Institutions, interest income shall not be considered to be passive income.
- 在确定外国公司是属于活跃还是被动状态时，“收入”应按以下方式确定：
- 根据注册地国家的法律计算的税务收入；或
- 若法律未要求进行此类计算，则按账簿记录计算。
- “资产价值”应为：
- 单项可折旧资产：该资产在年度期初和期末的平均价值，按注册地国家的税务规定确定；
- 固定资产组合（作为折旧资产组处理）：该资产组在年度期初和期末的平均价值，按注册地国家的税务规定确定；
- 其他任何资产：按账簿记录的价值
- “员工人数”应为年度期初和期末员工人数的平均值，且应包括虽非公司直接雇佣但执行与员工类似任务的人员；
- “工资总额”应包括：
- 薪金成本，
- 工资，
- 奖金；以及
- 雇主承担的所有其他员工薪酬，包括相关的养老金和社会成本。
3.1.2 活跃外国公司实际管理机构（POEM）的确定
- 实际管理机构（POEM）的确定取决于每个案例的具体事实和情况。POEM 的概念重实质而轻形式。
- 如果活跃外国公司董事会的大多数会议在印度境外举行，则应视为其“实际管理机构”位于“印度境外”。
- 然而，如果根据事实和情况确定公司董事会处于“旁观”状态，即董事会未行使管理权，而此类权力由控股公司或任何其他印度居民行使，则其实际管理机构应被视为位于印度。
- 此外，仅因董事会（BoD）遵循母公司就工资、供应链等职能制定的全球政策的一般性和原则性规定，并不意味着该公司的董事会处于旁观状态。
- “公司的居民身份必须每年确定。因此，POEM 也需要按年度进行确定。
3.2 被动外国公司
3.2.1 被动外国公司的确定
- 如果一家公司未能满足上述活跃外国公司的任何条件，则应被视为被动外国公司。
3.2.2 被动外国公司实际管理机构（POEM）的确定
- 对于被动外国公司，POEM 将通过以下两个阶段的过程来确定：
- 第一，确定实际为公司整体业务经营做出关键管理和商业决策的人员。
- 第二，确定做出这些决策的地点。
- 在确定 POEM 时，做出管理决策的地点比执行这些决策的地点更为重要。在确定 POEM 时，实质内容比形式更为决定性。
4. 确定 POEM 的指导原则
实际管理机构（POEM）的认定重实质而轻形式，旨在确定公司实际管理职能的所在地。因此，无法为确定公司的 POEM 设定固定的准则。
所得税部门明确了一些在确定 POEM 时需要核查的指导原则，例如董事会会议地点、总部所在地、授权委托情况下的所在地等。
详细的指导原则可在此处阅读。
