POEM GUIDELINES Flashcards
WHAT IS POEM
“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.
BACKGROUND OF POEM GUIDELINES
Section 6(3) of the Income-tax Act, 1961 (the Act), prior to its amendment by the Finance Act, 2015, provided that a company is said to be resident in India in any previous year, if it is an Indian company or if during that year, the control and management of its affairs is situated wholly in India. This allowed tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and
management outside India.
To address these concerns, the existing provisions of section 6(3) of the Act were amended vide Finance Act, 2015, with effect from 1st April, 2016 to provide that 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
“active business outside India”-Guideline 5
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
(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.
“Passive income”
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;
Exception to Passive Income
However, any income by way of interest shall not be considered to be passive income in case of a company which is engaged in the business
of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation.
Determination of POEM
The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
For the purpose of determining whether the company is engaged in active business outside India, the average of the data of the previous year and two years prior to that shall be taken into account. In case the company has been in existence for a shorter period, then data of such period shall be considered. Where the accounting year for tax purposes, in accordance with laws of country of incorporation of the company, is different from the previous year, then, data of the accounting year that ends during the relevant previous year and two accounting years preceding it shall be considered.
Guideline 8 of POEM
In cases of companies other than those that are engaged in active business outside India referred to in para 7, the determination of POEM would be a two stage process, namely:-
(i) First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.
(ii) Second stage would be determination of place where these decisions are in fact being made.
Place v. Decision Implementation
The place where these management decisions are taken would be more important than the place where such decisions are implemented.
For the purpose of determination of POEM it is the substance which would be conclusive rather than the form.
Some of the guiding principles which may be taken into account for determining
the POEM are as follows:
(a) The location where a company’s Board regularly meets and makes decisions
may be the company’s place of effective management provided, the Board-
(i) retains and exercises its authority to govern the company; and
(ii) does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole.
It may be mentioned that mere formal holding of board meetings at a place would by itself not be conclusive for determination of POEM being
located at that place. If the key decisions by the directors are in fact being taken in a place other than the place where the formal meetings are held then such other place would be relevant for POEM.
As an example this may be the case where the board meetings are held in a location distinct
from the place where head office of the company is located or such location is unconnected with the place where the predominant activity of the company is being carried out.
If a board has de facto delegated the authority to make the key management and commercial decisions for the company to the senior
management or any other person including a shareholder, promoter, strategic or legal or financial advisor etc. and does nothing more than routinely ratifying the decisions that have been made, the company’s place of effective management will ordinarily be the place where these senior managers or the other person make those decisions.
